GOP Has Been Compromised by Protectionism, Sen. Jeff Flake Says

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course, on the Bloomberg The Morning on Monday, the thirty one of July. This is Bloomberg Surveillance on Bloomberg Radio. David Gura in New York with Franci Lakway in London. Today, Tom Keene is off the staff. You're instructed to alert me if they get any messages from Tom. In Manhattan, we were in Michael Cheryl. Now we're having a great conversation with him on Bloomberg

Television just a few minutes ago. He's the chairman and CEO of market Field Asset Management. He joins me and our eleven three oh studios here in New York and Michael, let me just take a step back from from the news we were just reporting a moment, go, how does this say? How does this environment look for deals like the one we're seeing announced this morning. You know, it's pretty good. I know. I think people feel culportations, feel fairly good about the prospects and and willing to pay

prices that sell us you know, find attractive. So I mean I think that you know, typically with the mature point of a bull market and the chure point of the economic cycle, you would expect to see m and a accelerator this at this point, and that's been happening this year. Michael, What have we learned from from earning

season thus far? Here we are seeing a lot of companies report their second quarter earnings, and were financial companies last week, in the week beforehand, some tech companies last week as well. What are we learning about the state of the market from these companies we've reported thus far.

I think it's been a pretty decent earning season. I think that that we needed one, given the the s P was up at an all time high, and you know, I think the fact that it's it's been a fairly quiet season in terms of the sponsored markets to it. I think that's I think that's fairly positive. You know, where there have been disappointments for markets taken action. But equally on on the other side, you had a you know, a company like Boeing completely blowing out and the market

responding though positively to it. So as I as I said on on on TV earlier, I think this is very much for sweet spot of the economic cycle. It is the point at which you would expect earnings to meet and beat expectations, which you know, which they're able to do. And in most sectors we don't yet have the sign of of sort of chronic over supply. There's a couple of sectors that that we'd start to be worried about going forwards. But but you know, in most

cases businesses are still undergoing sensible expansion plans. And you know, you may say they're paying company is paying too much for company B, but at least you can understand why they want about it in the first place. Michael, you say there are a couple of industries that you would worry about, what are they? Commercial will of state in the United States is the one that the the you know, really has our attention. Where where I think there are

signs of chronic over supply. And you know, even the news this morning that that Ang Bang is possibly going to be forced to divest it's it's recent US investments, a lot of which in were in real estate. I think that that's a market where supply and demand maybe

starting to to really be problematic. You have a lot of new supply hitting over the next twelve to eighteen months, and a lot of the demand has been none US demand for commercial real estate, and you know, partly because of a weaker US dollar and partly in China's case, because of different government policies towards investments of board. I think the demand side maybe weakening just at the point

that supplies accelerating. So you know, if there was one part of the domestic US economy the fankly we would expect to deteriorate over the next twelve months, it would be commercial will estate. Michael, do you worry that as there's more of a shift towards passive investment, it means, you know, almost automatically, that hedge funds take a bigger role, which means that there are less players are the markets, which actually means that you could have not disruption, but

that you could be miss pricing things. I think certainly passive investing towards the ends of ball markets involves chronic mispricing. Um, I think you know, we're we're heading towards that, you know. I think it's something that I think is going to define the next bear market, which is which is likely to be much worse than economic economic conditions. Actually actually wanan't but but look, I I mean, I think that

every investment cycle is a product cycle. Um that product tends to demonate dominate towards the end of this cycle. But there's no point in in in fighting the fact that people want passive investments and they're going to work very well at the index level, you know, until this this cycle heads off, you know, heads off a cliff. But um, I think it's something that that you do need to be aware of it. I think that understanding what's in indexes at this point in time is is crucial.

I'm always amazed at how little people who use indexes and E t F actually understand the way of h change, you know, across the course of the cycle. I think that's for the most useful thing you could do today is at least understand what's in the index that that that you're investing in, and I think in many cases you get quite a surprised Michael, let me ask you lastly.

We'll come back here in just a moment, have a minute left, but let me ask you about emerging markets right now, what you're seeing there in dinto where you're particularly interested right now? When it comes to emerging markets, We're very positive on emerging markets. I think they have several forces going forward. And first of all, a generally better global economy I think, in particular, much better domestic Chinese economy, which has really started to have an impact

on on on Asian markets. And then at the index level, this sneaky rewaiting towards technology. Either the MSCI Emerging Market Index is now more tech weighted than the SMP five hundred and and you know, it's really been technology returns which have been pushing emerging markets higher this time. You know, commodities haven't been very helpful to emerging markets. If that changes, that will be another know, another push in that direction. And the final pieces is a weaker US dollar involves

stronger emerging market currencies. And you know, currency returns in many cases have been almost as high as domestic stock returns. So this is one of those years in which you really want to have a decent exposure to a m and I think that's going to continue to be true. We were having a nice chat with Michael Sholl of market Field Asset Management as he is CEO there on the markets, and Michael, you were pretty confident that actually what we've seen so far is a trend where indices

go higher, keep on going higher. What could reverse that? I'm seeing the dollar gaining a touch, but actually, given all the geopolitics out there, can that reverse quite quickly? Um? You know, I mean with with markets, it's it's difficult to see an immediate catalyst which is going to make

them go down. I mean, you could have, you know, a bigger version of what we saw on June ninth, when you know, the NASDAC for no apparent reason went down, and you know, I guess it could accelerate off that and you know, could have a five percent pullback before

you know it in a couple of days. But you know, I think that would be noise in a in a in a fairly in a fairly calm environment, and and you know, I think if you're if you're waiting for something more spectacular to the downside, I think you're gonna have to be You're going to have to be patient, and you're going to have to wait for this cycle to deteriorate in some way or other. I mean, I think we, you know, right now, twenty seventeen looks like

a good year. My guess, is going to go into the history books as a as a very good year, potentially the best year since two thousand and nine for most of the world and for the US potentially the best years you know since too, since two thousand and thirteen. And if that's going to change, then it's going to be because of new news. The news sitting in front of us today, the existing news. It doesn't look that damaging to anything, and it's easier to see markets go

higher and go lower at this point. But you're not worried about some kind of big policy mistake. And I feel like I ask you every ten minutes, but you don't really know what the distortions are until you take away that safety blanket. I think there's no doubt that central banks will lose control of this cycle, but I I think they are either too tight too long or too loose too long, and it looks like the latter

is going to be the case for cycle. So I I do think that by the end of this year, global inflation is going to be moving back to where central banks want it. And the wire for next year would be does it continue to move higher and does it undermine the ability of central banks to to keep in control of monetary policy, you know, in say twenty eighteen. But it's it's it's going to take time to get there.

I'm not the sort of person that believes that central banks have sort of you know, become alchemists, have solved economic cycles. I think, I think this will end in in a in a period of chaos, But it takes time for chaos to emerge. You know, two thousand and eight didn't suddenly start on a on a sunny June morning when when the Bear Stearns funds blew up. It

started eighteen months eighteen months before that. And the technology cycle ended in March two thousand, but it ended with a couple of quarters of massive inventory build ups in in in in in key areas of a of a technology sector. And right now it's difficult to see that process of excess getting to the point that you actually should be worried about it. You can understand that the markets aren't meant to levitate them the way that they

have been doing. You know, I'm sympathetic to someone like Howard Marks who's trying to sound the medium term alarm. But if you're asking me, am I worried about where the market's going to be on August first, or September one or October first? You know, factly, I'm not like now, you know, it might change, but if it changes, it will be because something different happened. Michael, you mentioned that the prospects for k I see the inevitable prospect for KAS.

What are you looking at for indicators of when that that comes? What? What? What are the data that you pay the closest attention to. You know, as I say, in key sectors, supply and demand numbers matter, Inventory matters. As boring as they are, you know, do do matter? I think that that you know, measuring market cap is starting to become important understanding how large markets are. I mean, you know the SMPS. You know how many trillions of dollars is that? What is a temper cent move in

the SMP how does that? You know, actually, matt Against what what what central banks? You know what central banks are doing? So that's what that's what we you know, sort of really struggle with the data. Obviously, you look at it when it comes in. It hasn't generally been very surprising, and and you know, if it started to move in a in a new direction, then when you'd start paying more more attention to it. But I think the the question I have two questions in my mind.

One is is what is what happened in commodities three years ago when supply and demand got badly out of balance and provoked a deep correction in that area? Could that happen in other sectors in the global economy? And and number two, at what point is the size of market cap of fixed income and equities itself problematic? At what point is our markets so large that the overwhelmed the generosity of central banks? And you know that's going to be a very difficult question to answer, but at

some point it's going to matter. Michael, great to speak with you. Thank you very much for the time doing both the radio and television with this at this one. We really appreciate that Michael Shell, he is the chairman and CEO portfolio manager as well at market Field. I said management, I was writing through the president's schedule, just a moment to go busy day in Washington, as I said, here to help us understand what's going on today and here as we push ahead of the rest of the year,

is Wendy Schieler. She's the chair of the political science department at Brown University. Joins us Professor Schiler. Great to speak with you once again that this is being herald is a new day, at least within the confines of the White House. John Kelly taking over for Ryan's previous who has been the chief of staff since the beginning of this administration. How radical a change does this promise

to be? Do you think? Well, I mean, it could really be a very very strong decision by the President if he allows John Kelly to get the White House in order. Let's not forget you know, Dwight D. Eisenhower, who was a general, really created this position. Truman had a sort of pseudo chief of staff, but Eisenhower really thought, you need a chief of staff. Government's big, the White House is big, and it has to be a chain of command. And this is a military guy at General

who's used to that kind of organization. Will Trump respect that kind of organizational skill. I don't know. I don't think we know. If he does, I think things get much better for him in the White House. If he doesn't, I think things remain really chaotic. Question about history here, Professor Schiller. Have we had an administration like this before where there spent so many factions within the White House itself?

A lot being made this morning of the fact that uh, Jared Kushner and Ivanka Trump, the President's son in law and daughter, respectively, senior advisories, both like John Kelly, think he's a good choice for this job. Have we seen a as fractious an administration as this one? I think I think you have, particularly in the first year. I think you've seen pretty chaotic administrations. And let's not forget

Bill Clinton's administration. The first nine months of that, I mean, I would argue, even until you get to NAFTA in December of nineties three was a disaster. I mean, it was couttern appointments flying left and right, not making it through, and and the House was mad at dam and then

the Senate was mad adam. He lost on stimulus. I mean, there was a disaster that first year, and I think that was because he had voices, lots of voices surrounding him and hadn't settled on a couple of people he trusted. You need an agenda as a president, though, to want to listen to people to tell you how to accomplish it. We just don't know if Trump actually has an agenda, and that makes it hard for everybody who works form in the White House, whether they're fassionately fighting or not,

what do you want to try to get done? And if you're not on the same team on that score, I just don't know how everything else doesn't fall apart. Professor Schiller, what exactly does it chief of Stuff do? So you either take, you know, a bet that this is a command and control managerial task, which means that John Kelly, he's a retired general, would do quite well. But if it's a very political job, does he really

have any experience in these kind of things? Well, I think you're pointing out just a really important facet of the way that each individual president chooses to sort of decide what people who work form will do. Right, So, sometimes the domestic counsel or the advisor to the president is the political person, and the chief of staff is literally the organizational gatekeeper, and that manages the president's time, the flow of information to the president, and the president's agenda.

But if you're somebody who doesn't have anybody else doing the politics, then the chief of staff takes on that additional role. So I think it depends on what the president is good at and not good at, and how much that president can see that the chief of staff can balance out his weaknesses and strengths. I don't think President Trump, at least at the moment, has actually self reflected on that yet. So right now it looks like just to get the White House in order, staff up completely.

You know, the White House, even the President's staff is sort of half full right now. You've got tons of positions throughout the administration in cabinet departments that are going empty, and you know, there's one way to slow the federal government down, but some jobs have to be filled. So I would think that would be first on the agenda for the chief of Staff very quickly. Does John Kelly have the support of Congress and does he need it?

I don't think he. I don't think they know, yeah, I think Congress always respects people who have a long, uh successful military career, But I don't think he needs that quite yet. I mean, remember were serious is best friends of Paul Ryan, and he doesn't have a job anymore. So I'm just not sure how much that will matter to the Trump administration. But you do want to have open lines of communication. So he does want to be available to Congressional leaders when they want to talk to him,

and he wants to be open in hearing them. And I think if he does that, he'll cultivate a good relationship with the leadership. Professor Schiller, let me ask you about something you mentioned a few moments ago. You're talking about a lot of the positions that have still gone unfilled in this administration. Uh. We heard from Anthony Scara, much of the new communications director, that his means of combating leaks would be to fire everybody. What does the

pool look like a perspective members of this administration? How how how much of a deficit are they operating with at this point? And how much do you think that John Kelly could write that well? I mean, David, you're pointing out something that's so important to a functioning White House. You know, the government, centeral government is very big. If cabint departments you have, you have tremendous amount of oversight

of how policy being implemented. And if you want to change that policy, you have two people in the chairs at the desk doing their job and they don't have that yet. So if you have more people who lose their jobs in the White House, then you've got to replace them, and you've got to go to security clearances and a lot of questions are asked. So you've got to replace them with more establishment people who maybe have

served in white Houses prior to the Trump administration. And that's something Trump doesn't have any knowledge about in terms of connections. You know, establishment Republicans are not going to work for Donald Trump, at least not at the moment. They haven't been offering themselves. They're turning things down. People don't really want to go there. And John Kelly's job is to make it a more attractive proposition to bring in people with some prior government experience, particularly places like

the State Department where you need diplomacy. You need this to be functioning, and that's I think the big problem. I think nobody wants to touch that job or any job right now who's in the Republican Party. They're just thinking ahead. The geographic gulf between the White House and the Capital, I would guess is about a mile and a half wide. When it comes to how each of those places understands one another, where are we How much of an understanding of the way Congress works does this

administration have? Uh? And is the Congress getting better and understanding the motivations of the White House? Well? I think that Donald Trump understandably expected that the Republican Party, even though they had been factionalized and fought his nomination really almost to the end, would embrace him, would accept him and embrace him, and that he would have a lot of mojo among the base to push them in terms of grassroots movement. If they didn't do what he wanted,

he'd go out he rallies. And then is the people who like Trump would pressure the Congress to do what Trump wanted him to do. It has not turned out to be that way. The Republican Party has not really turned a corner to embrace him. And because Trump's approval ratings are so low, he just doesn't have enough juice politically among the base in enough areas around the country to pressure enough Republicans a couple of them here and there, But he doesn't have that wide swath of you know,

bully pulplic popularity. And that's something that's traditionally been a very important and strong weapon for the president, particularly early in his term with his own party, and Trump seems to be completely missing that. And the longer it goes that he has a bad approval reading and he doesn't seem to be generating any support, the more Republicans are upper re election in November eighteen, will say we don't

trust him, we want to distance ourselves. We've got to go our own way, because he could a throw us under the bus at any time, and be he becomes so unstable that he becomes a real liability. Would the President be able to push through a tax overhaul this year if he were to focus on that. I don't think he. I don't think we need the president to push the tax bill. I think the Republican leadership is

desperately wants to do a tax reform bill. Uh. They want to cut corporate taxes, they want to cut you know, income taxes, you know there's two things going on here. They think there's obviously too much taxation, that's the Republican Party platform. But to just as Ronald Reagan did, they want to squeeze the revenue stream. Because if you squeeze the revenue stream, and you cut the revenue stream, you

can cut spending, particularly entitlements. You know, Paul Lyon has not forgotten about his desire to cut Medicaid and cut Medicare and really transform the entitlement state UH into something very different and much smaller. And you know, the first place you started to squeeze the revenue line. So I think that's the big part about tax cuts that's really ideologically important to the leadership in the House and Senate.

So they're going to write a bill that they want and they're gonna hope that he signs it, and I wouldn't have any expectation that he wouldn't. Great, But I don't understand why the president doesn't focus on that. If you want to win it's smaller big, he can focus on tax and get it through because he seems to be just just a speculation, you know, obsessed with anything

that has Obama's name on it. He just seems to want to prove that he can erase Obama's legacy altogether, and that means erasing something called Obamacare and replacing it was something called trump Care. It seems to be a personal obsession of his and the only people can talk about of that. I think the people are the people who are closest to him, who can say, listen, you've got a long time line here, let's just move on and get a success and then come back to Obamacare

when you have more political juice. You know, you keep going at this thirty approval rating and you don't get yourself out of that. Eventually voters just decide, we're just missing you. We're not going to be able to restore our confidence in you. And that's where the president is. If we're talking about this in December, in January and he's still at he may get reelected, it's possible, but he will have no juice or cloud with the Congress going into next year, and so that means obsessing on

things that they've moved on from. It's just going to be spending his wheels. On Friday, I had a conversation with Tim Phillips, who's the President of Americans for prosperity of conservative group that's backed by the Koch brothers, and they're going to be investing a lot of money and resources in tax reform. And I asked him how he reacted to the joint statement we got from Republican leadership

in Congress and the White House untaxed. For my sense of it was, Uh, it was still pretty thin if you compare to what we got from the White House a few months back that was a page long. This was maybe a little more than a page. Of course, there was a definitive news that the border adjustment tax has been dropped. And I asked him if that was a good thing, that that you don't have a whole lot of details, if that makes negotiation easier, and he

sort of indicated that it was. Are you surprised by how little policy detail we have at this point and do you think that's necessarily a good thing or a bad thing. Well, I think you have to have people who really understand the tax code to have a very complex conversation, and I don't think Trump is staffed up enough either at Treasury or even in the White House

to have that kind of conversation. And I'm not sure the president really understands all the round vacations of all the changes that he may or may not support in the tax code. And the other thing is it's still a tough political issue for the president because he never released his tax returns, So it just will dog him, dog him everywhere he goes. You know, there'll be a question, Oh, you want tax reform, you want to change the tax code. Hey, how about we see your tax returns. So I think

that's the problem with the president. If he could just release them and get that out of the way, I think you have a clean slate on taxes and publicly could promote or object to things that Congress wants to do. But I think that's the other problem with the Republican Congress.

They don't want to get their message clouded by constant calls for asking the president to release his tax returns, which will inevitably happen when you're talking about tax reform, pressor Shela, let me ask you about the debt limit.

This comes around time and time again. I think for people who are listening, who are investors, economists involved in the market, this is hugely important, and I wonder who you're going to be listening to for guidance on how this administration, how this Congress is going to deal with it this time around. There's talk again of having a clean debt ceiling increase, there's talk of tethering it to spending cuts. Who's going to be taking the leadership role?

And who are you listening to? Well, I pay attention to Mark Meadows, who's a congress for pub converressman from North Carolina, who's the head of the Freedom Caucus. You know, they're about thirty six official members. Give her take. Uh, They've got some really interesting party discipline subparties has been going on in the Freedom Caucus. And I'm listening to him, I'm watching him. I'm thinking about what is he's saying about the debt limit? Does he want it clean? Are

they going to support it? He's already indicated he doesn't want to see a government shutdown over it. But these are the most fiscal hawk ish members of the Republican Party, and I'm looking to see what they want to see happen, because Paul Ryan can't get it through without them. So that's who I'm watching to figure out what's going to come out of the House. And I think right now. McConnell's trying to regroup in the Republican Party in the Senate and try to find a way to move forward

and be solid. You know, you just can't bring another proposition to the Senate floor for the majority party and lose again. You know, that's what started to happen to Bayner, and he needed the Democrats to get things done like the debt ceiling and opening up the government again. And McConnell just can't afford to do that this early in

this unified party government, particularly going into next year. Push again here to that October first at Denverine will continue to watch what we hear from the Treasury Department and the Congress, from Mr Meadows and others. Wendy Schiller, thank you very much for your time this morning both on Bloomberg Radio and Bloomberg Television as well. That's Wendy Schilder of Brown University and Providence, Rhode Island. She's a share

of the Political Science department at Brown University. Brunch you by Bank of America Merrill Lynch. With virtual reality, virtually everything will change. Discover opportunities in a transforming world. VI of a mL dot Com slash VR Meryll Lynch, Pierced Fenner and Smith Incorporated roscasters joints here. As I mentioned our Bloomberg eleven three studios, he's ahead of the globalcation portfolio at black Rock. Great to have you with us here. Thanks for taking the time to come in. Oh Dave,

thanks for having me. Let me start by asking about volatility. We haven't talked about it that much this morning, and you look at volatility still hovering around U these loads. Talk about the particular challenges you face navigating this low vall world. Well, I think the biggest challenges everyone's waiting for it to end. Uh. We've seen the VIX go from load to load to low. It's not just in

the equity markets. We see the same pattern in bond markets as well, and this left everybody justifiably nervous about how much longer can go on, which has meant there's been a lot of focus on hedging. There's been a lot of focus on downside. But in an environment which economic volatility is low and monetary accommodation is still very much present, not just in the US but also throughout the world, markets are just marching quietly on. What are

you most worried about Russ. I would say, there are a couple of things. You know. One thing that does have me a bit nervous. One of the side effects of low volatility is you see a lot of investors really having to lever up, getting crowded trades to kind of produce returns. And we hear about some of the leverage in the hedge funds space, particularly in market neutral equity long short it reminds me a little bit of

what the world like ten years ago. We also at the low volatility environment and a lot of hedge funds we're levering up in ways that produced a very fragile market. And again, in that type of environment, it doesn't take a big shock to produce some very bad results, at least for a short period of time. So as are you saying that hedge funds have too much space in

these financial markets? And does that really lead to distortions? Now, it's not that hedge funds have too much space, it's that are particular types of hedge funds that in a low volatility environment or doing what what they need to do, which is to level up to try to generate a target return, and that creates a risk. It creates an additional risk, Uh, if many of those players are focused

on particularly crowded parts of the market. And again we've seen, for example in US equities, is that leadership has been somewhat narrow. It's been very much a market dominated by some large cap tech names. Uh. And that's the type of thing you always want to take account of. Ask a couple of questions about about currency. Here is a

proxy for political risk. You look at the week dollar, you look at all of the political dulations coming out of Washington, d C. How different is this environment that the currency market right now, given what we've seen in terms of political risk here in the US and in Europe as well, well, I think the currency market is is discounting a couple of things. I mean, certainly politics is have an impact, although I think it's less about political risk and more about a reversal of the Trump

trade which dominated in the back half of sixteen. And as we remember, you know, at that time, there was optimism, their expectations for significant fiscal stimulus for infrastructure, for tax cuts, and clearly, as of now, none of that has actually occurred. So what you've seen is that many of those trades the run up in in value, the run up in financials, uh, the run up in interest rates, and of course the

dollar have all reversed. Now the dollar has been the most violent reversal, and I think in some ways that reflects the fact that not only have we seen some disappointment, uh from the administration, we've also seen a moderation of the U s economy and surprisingly a particularly strong economy in Europe, which means that rate differential, the fact that the FED was going to lead other central banks, that's not quite as strong of a narrative as it was,

which is why the dollars pulled back so dramatically, particularly against the euro rus. Do you have a sense from this administration of what its dollar policy is? We had, of course, the the Reuben strong dollar policy for so long. There was a lot of talk about to where this administration wanted the dollar to be from many officials within the administration, including the President himself. What's your sense of

what this administration wants when it comes to dollar strength? Well, I think, like everybody else, uh, you know, I we don't have any strong insight into the administration's policy on this, but I think what you can derive both from comments from the President himself up also from discussion about potential successors to Janet Yellen or even reappointing UH miss Yelling to to the role of chair, is that the administration is somewhat comfortable up with a dollar that's either a

bit softer in the trading range. And that's one of the reasons I think the dollar has pulled back that this is not an administration at least so far, has signaled they're looking for a strong dollar policy. Does a soft dollar mean a soft economy? Actually it doesn't. Up in some ways, it it actually means the opposite. So if you take a look at US corporate earnings in

the second quarter, they're actually quite strong. We're seeing earnings growth of nine or ten percent, We're seeing revenue growth around five percent. UH. This is much better than expected, and I think a lot of that can be attributed to the fact that the softer dollar has provided a tailwind for many US multinationals. In addition, if you think globally, UH, a stronger dollar is a de facto monetary tightening. UH not just in the US, but globally, is particularly hard

on emerging markets. I think one of the reasons global markets have done as well as they have here to date. Is that while the Fed has nudged up interest rates, uh, the weaker dollars actually kept monetary conditions more accommodated. But for us very quickly, if you have a weaker dollar, it means that the FED doesn't see an economy strong enough to withhold normalization. That's not good thing. Well, the

FED certainly is being cautious about normalization. And I wouldn't argue with the fact this is not an economy running away, but it's an economy, for better or worse, where it's been for the last seven or eight years, which is generating very low inflation and steady but uninspiring two percent growth. So I'd say it's it's no better or worse than what we've had for most of the last five years. Rust Cast, which is with us here in our Bloomberg eleven three oh studios in New York. He's the manager

of the Global Allocation Fund at black Rock. Here with me in Francine Lackwell, who is in Free tom to day and Russ I wanted to ask you about energy. We're gonna have a conversation in a few minutes about the oil market in particular. But when you look at when you look at equities, when you look at other other assets at this point, how much is energy driving markets at this point? Not as much as it used

to Obviously energies driving energy stocks. But if we think about the impact of oil prices relative to where they were eighteen months ago in early sixteen, uh. If you remember back, that was a time when lower oil was really scaring the entire market, particularly the US high yield market. And today we see resiliency relative to the price of oil. Now, I think there's a limit to that. If we were to see oil slip well below forty into the mid thirties, I do think you'd see some stress both in bond

markets and equity markets. But in the mid forties we've seen is that many energy producers in the US can be profitable and close to those levels. Rus do you believe OPEC are still in control of the price of oil? Well, fenceeing. Clearly OPEC is not in control the way they were let's say thirty years ago. We've got a major player

in US shale producers. The US is now producing over nine million barrels of oil per day, and the key thing is that for many of these producers to break even, as I mentioned, a moment ago is lower and they're very nimble. They can bring production on and off again much quicker than was the case two decades ago. And this means that it has resulted in some loss of control, some loss of pricing control for the OPEC cartel, right, what can they actually do to keep the price under control?

As you say, there's so much competition from us. Shall their meeting I think in Abudabi next week on the seventh, to try and make sure that there's compliance that will do almost nothing, will it? I think OPEC would have to pull back on production much more than they've been able to so far. And again the last agreement, UH their exceptions for Libya, for Nigeria, this is where a lot of the marginal productions occurred over the last six

to nine months. So whether or not OPEC is going to be able to have a draconian enough cut, I think, as you suggest, that's just not clear. Let me ask you have China a little bit here, can put it towards Asia for for the last few minutes that that we have with you, uh, we we watched as the Chinese government convene this one belt, one road for him, I talked about the prospects for a lot more investment, not just in China, but in the region as a whole.

How does that stand to change the region? I think there are a couple of things. One, obviously, we are seeing a multipolar world, which which is the you know, the the obvious observation, uh in how that's going to play it? I don't think anyone knows. The other, of course, is the significance of Chinese growth, something we're all focusing on much more than was the case ten years ago. And I think that's one reason the global economies in

decent shape right now. China has been able to avoid, at least thus far, the hard landing that people were very concerned about in early sixteen. Growth is stable. We think it is likely to slow, but slow at and measured pace, and that means that China continues, at least for now, to be a source of stability for the global economy. Friend, and I had the pleasure of talking with your colleague Isabel Mateosi Lago a few a few moments ago on Bloomberg Television. We talked a little bit

about industrial overcapacity in China. Recall going with the US Treasury Secretary now former US Treasury Secretary to Beijing, and this was something that he was hammering on a lot. China's need to reckon with this and do more about it. We saw steel production reach I believe a record level here on a month month basis last month or earlier this month. Is China finally reckon reckoning with the fact that it's it's producing too much steel, too much of

other metals. I think it is, Although you know, as you as you know, this can be a very long process. But we are seeing some changes anecdotally. We're hearing of the closure of many, many small inefficient minds and and factories.

We're also seeing a change of the macro level. If we look at the difference between producer prices prices out of the factory gate in China today which are now positive versus a few years ago when they were consistently negative, it does suggest that China is slowly starting to come to grips with their overcapacity problem. First, what worries you about China the most is it's that you have I guess, the the holy the unholy trinity of you know, reserves

going down. They need to stay blast one. At the same time, they have to make sure that outflows don't get worse. I think the the the capital account is definitely a source of concern. So far, they've been able to manage that. I think my my bigger concerned friends see and again, I don't know when it becomes an issue, but certainly the build up of debt over the last five or ten years in China is worrying. Uh We've seen similar build ups in the past in other countries.

It hasn't ended well. Now. That doesn't mean that China is facing a Western style banking crisis. It is a different system, but it does mean if bad debts accumulate, that can be a drag on China at a time when when the rest of the world is very dependent upon Chinese growth. Could it be as ugly as a financial crisis. Well, I think it really depends on how bad you think the bad debt situation is, and the

truth is nobody knows. I'm a little bit encouraged by the fact that most of that debt is held domestically by China uh in that China does have significant resources to address it, whether or not they're going to be ultimately successful, I think is one of the big risks we're all facing over let's say, the next five years.

Russ grates to please with you. Thank you very much for joining us here on Blimberg Spilience Frestcast, which manager with the Global Allocation funded black Rock here in our Bloomberg eleven three oh studios pleasure now to be joined by Dennis Gardner, the editor, of course of the Gartment Letter. Dennis, great to talk with you, as always, uh A few people can do this as well as you weave in the political risk with the market volatility that we've seen.

Let me ask you first of all about how markets have reacted to the second intercontinental ballistic missile test we saw last week. Of course, we're watching to see what the fallout from that is going to be on the diplomat and policy up front. How's it playing out in markets? What is it? What does it portend for you? Well, first of all, the response has been rather temp at heaven. That's gold has gotten a bid, but not a dramatic one.

And in past times one might have expected gold to be up fifty five dollars and then it's up eight or ten dollars instead. The dollar itself is a little bit weaker, but the operative wards here are a little bit so the responses have been strangely quiet. It is as if there is no real problem whatsoever, or if there is a problem, it is certainly manageable. So I think some people might well be surprised by the tepid

nature with which many of the markets have responded. Right, But then it's I'm also looking at iron or right, and that's riley quite significantly. In fact, we're looking at almost like you know, a bull run. And this is after we had some pretty strong China manufacturing data. Well, I think that the first of all, you you had a bear market in iron and steel for a long period of time. Now all of a sudden it's turned. They both have turned much for the better. Base metals

across the board have turned for the better. And I think that is exemplary of better economic environs here in the United States, but more importantly, better economic environs and and and they hope for better economic environment in the future in China. I think you have to be impressed by the fact that that iron and steel prices are doing as well as they are. If there are economic data points or anecdotal economic data points that I'm going

to pay attention to. Shipping is one. Iron ore and steel prices are another, and both of them are starting to turn for the better. Can can it go higher? If you look at what China is trying to do? So they're you know, trying to I guess, fight over capacity um and rein in some more unruly events by cutting production. Well, I think that you're you're common about how how swift has been the increase in iron ore

prices and iron prices themselves, and steel prices. Perhaps after a very short span of time, they're a bit overbought, might develop a bit of weakness, but I would suspect any sort of weakness that one gets, one should be a buyer. So what do I think the trend is? I think the trend and iron ore prices and steel prices and even shipping values are for the better. We would is talking with Michael Whitner of Suction about oil.

I want to get your take on on oil as well as we look ahead to this OPEC non OPEC meeting in Abu Dhabi next next week. What's your sense of what's driving oil prices at this point. Now. Well, first of all, the thing that I'll pay more attention to when it comes to oil is the term structure. What is what is the is the contango narrowing, is the backwardation widening, and the fact that we have moved.

And let's begin by saying that until about three weeks ago, I had been manifestly barish of crude oil, clearly, no, no, no equivocation. But then about three weeks ago I started to watch as the front months, as as the backwardation began to narrow, and discussions incumbent in the markets that perhaps we might even move to backwardation, which is a very strange, very material change over the course of the

past several years. That shifting nature of moving from a contango to a backwardation tells us one either supply is diminished, which is not true, or demand is increasing, which must be true. So I I look at the Coude oil market, and having been manifestly overtly bearished for a long period of time, finally I have to say to myself, maybe higher prices lie ahead. Now after the last two weeks, when prices have gone up rather swiftly, would I be

a buyer here. No, But just like the discussion of iron ore prices, any weakness, perhaps a dollar dollar and a half two dollars from here, then I shall be Dennis Gartment. How worried are you about the week the weekend dollar? It's been weak now for a while. How worried about that are you? Not? Not? Particularly? Uh? If if we walked in several times and we watched the the euro trading above one and doing it in a very short period of time, and doing it on a

flash upward, I might be concerned. But the fact that it is quietly, laboriously the dollars quietly, laboriously moving lower, the euro is quietly rather or in an orderly fashion movement fashion moving higher. It doesn't bother me that much. It does mean that we will probably do better as far as exports trade is concerned. And if you're a corn grower, if you're somebody in the in the wheat export business, a week or dollar is something that you

would applaud. But let's not be too concerned. It has. It has weakened, no question. The fact that we've gone from one oh five euros to one fifteen euros might be some of some concern, but it's done it over the course of three or four months, so it's been orderly, it's been slow, it's been laborious, and I therefore know it is a great good deal of sleep over it all, right, Dennis, What is actually impacting the price of oil more the

dollar or OPEC? I think it is a combination of bolt and I hate to take that the middle of the road attitude, but I think it is a combination of both. OPEC is clearly worried about its ability to get crude oil, to get w t I above fifty, to get Brent above fifty two dollars and keep it there. They need to keep it there. They're going to try to keep it there, but they need to restrain. Well, let me back up. The big problem that OPEC has is in just a few of its members, Nigeria, uh

Libya and perhaps even angle Ala. Nigeria and Libya have been left out of the quota system. In both Nigeria and Libya have been extraordinary and increasing production, to the dismay of the Emirates, to the obvious dismay of the Saudi Arabians, and they need to bring them back into the fold. They need to in this next meeting, they have to find some way to put in Nigeria and

Libya back into the quota system. Whether the Nigeria and Libya, who will even allow themselves excuse me, to be put back into the quote as another question for another time, but obviously the Saudia's would prefer seeing it done. Can they do it? I don't know. Looking forward to that another time with Dennis Garman. I hope to see in New York sometimes soon. That's Dennis Gartman. He's the editor of the Garment Letter. Joining us on our phone lines.

A pleasure to have here in our Bloomberg eleven three studios in the York. Senator Jeff Flake, the junior Senator from Arizona, Republican Senator from Arizona, author of the new book It's of a Conservative, a rejection of destructive politics and a return to principal. Great to have you here with us amid all of the political news out of Washington over these last few weeks's thanks for having me on. It's nice to be out of Washington just a little

bit anyway, I'm sure. Well, let me start with with what transpired here over these uh, these last few days of course, the debates that led up to the vote on a piece of healthcare legislation early in the morning a few nights ago. Describe that process for us. I think there must have been a lot of people who are listening to the show who who wondered what happened between the procedural vote and how this happened on such an accelerated way walk us through? Uh what what? What

went on on on Capitol Hill over the last few days. Well, I'm not sure it's fruitful to go through the whole thing. It was a kind of an ugly process. It always is when you get a big piece of legislation like this that we're trying to move through quickly. There is a bit of an urgency to it, and that uh, you know, the insurance markets out there are unstable, and the exchange around the country, the Obamacare exchange is altering.

In Arizona, we have fifteen counties. In fourteen of the fifteen counties, there's only one insurer, and you know, there's there's a risk of losing that insure. So there was there was, you know, urgency to go through it. We just didn't didn't keep it alive. I wish we had. I think that for those in Arizona, for example, two hundred thousand people wake up this morning without health insurance. They've paid the fine, but they can't afford to get insurance,

and so we we desperately need that reform. But I think if we learned anything from the past couple of months and certainly last week, is that there are limits to what one party can do alone help us understand the degree to which the thing is still alive and the role that the White House is playing here. I spoke with the Director of the Office of Management Budget last week, mcmulvaaney, and he said it was his hope that the Senate would still vote on something related to

healthcare over the weekend. He clarified those comments further, saying he thinks that Senate shouldn't vote on anything else until they another vote on health care. Are you content to to leave this behind for now and and focus on other parts the legislative agenda? Where is this something you're still going to be you and your colleagues are still gonna be trying to work on Well, we've got to continue to work on it. But I don't think that any new vote before the weekend is going to be fruitful.

I mean, what would that vote be on a motion to proceed to something? A motion to proceed to what? Um so I we don't have enough of a consensus on the Republican side to move ahead. We are going to need to sit down with our colleagues from the other side of the aisle. I think that's going to happen. We all knew that we would get here at some point. For parts of the reform there there are only so many things you can do under rules of reconciliation where

it only requires fifty one votes. So we we just got there sooner than we thought we would. And on the relationship, but with the White House, I was on air on television when that President Trump convened his lunch with Senate Republicans at the White House, And and if you just look over these past few weeks, there were a few occasions that among them he tried to to wield some influence, some political influence, to try to sway some on the fence votes to to vote for this

particular piece of legislation. How effective was that? How healthy is it to have that kind of relationship between one branch and the other. Well, I don't know that that in itself moved the needle much. Um. I know there there's concern among some of my colleagues that, you know, the House got through the process, the President had a big signing ceremony, and then a few weeks later he

referred to the House product as as mean. And I know that doesn't inspire a lot of confidence among my colleagues that that you know that the same won't be said of a bill that we would pass, and so that that that makes it difficult. Let me tell you, it does make it difficult that relationship. Centator, how would you describe the relationship between the Republican Party and the President right now? Oh? It's you know, on some things. Let me just take the positive. He named a great

super Court justice. We worked with the president on regulatory reform. We passed I think fourteen so called c r a S or Congressional Review Act, where we paired back regulations that were straining the economy. Um. The President, we think most most Republicans in the in the Congress think he has good instincts on tax reform, lower the rates, broad

in the base. Um, that's the Republican orthodoxy. So there are some things that we will work with the President on, but many of us are very concerned with one, the kind of the chaotic atmosphere that's going on at the White House, whether whether it's has to do with domestic policy or foreign policy. It's profoundly unconservative to to uh, you know, have an unsteady, unpredictable uh, you know, policy. And so that's concerning. And then uh, things like trade.

I'm very concerned and many of my colleagues are as well that we're being left behind by other countries who are moving ahead. And and then also um, the kind of plane to the base, uh, making it very difficult for us to grow the party and speak to a lot of our larger audience. Is there enough trust between the presidents and the Republicans and if there isn't, how does the president regain that trust? Well, I think, you know, we'll have to work on some other issues. Healthcare was

a tough one to start with. It really was. Health Care is a big, complex, any issue in and of itself, but it's it's personalized for people, and you know, obviously hindsight, but it would have been better to start with something else. So I think maybe with tax reform, if we can build some trust there. I think they are more shared values there perhaps that we can work on. Um. But but a lot of it has to do all so

with with tone and demeanor. Um. You know, we in the Senate have rules that you know, almost always require us to work across the aisle. It's not just on piece of legislation, but just to move you know, the Senate business. It's done by unanimous consent or by supermajorities. And and when the President is referring to people on the other side of the aisle as losers or clowns, and um, you know it just that that doesn't help matters,

It really doesn't. Well, let's come back here in a couple of minutes talk about some of those that rules. Of course, the President proposing in these recent days that new kind of nuclear option here going with a simple majority. Eager to talk to you about that. And uh Andrew new book, conscious of a Conservative, rejection of destructive politics and a return to principal. Eager to see how conservatism

fits into the Republican Party today. Senator Jeff Flake with us here on bloom brick surveillance in our studios in New York's Republican Senator from Arizona Junior Senator from Arizona joining us here on bloom Brick surveillance. Let me ask you, if I could, Senator Flight, just about what it's like

to be a conservative in the Republican Party today. When I talked to members of the House in particular, Uh, it's not uncommon if the Republican members, but then to be affiliated with the Freedom Caucus or some other caucus ideological caucus within the Republican Party on Capitol Hill. How tough does it make things to have such a maybe not fractured, but uh, different different parts of the Republican Party. How do you get them to to cohere? Well, that's

a lot of what the book is about. That's why I wrote this book, Conscience of a Conservative kind of borrowing from the from Verry Goldwaters of you know, Seminal Tome of fifty six years ago, where he recognized that the party had had kind of been compromised by the

New Deal at that point. I think the party today is being compromised by things like protectionism and uh um um and also this this kind of demeanor that we have where you have to be matter than everybody else and and it it's not a good combination if you want to grow the party. So I am concerned with with where the party is and where the White House has been, and and that's really what the book is about.

And it's not not an opportune time to write a book like this when I'm in my reelection bid, but I felt it was important enough to to spell it out as to where I think conservatives need to go. We need to embrace traditional republicanism and conservatism, which is limited government to economic freedom, free trade, um and and not looks for short term gain. I looked at the White House is a bit of a microcosm for this.

Of course, there's all the palace intrigue. But you hear about those who are the so called globalists butting heads with the conservatives, Steve Bannon types, what what what have you? Uh? And I we just read Josh Green's book about Steve Bannon, the role he played in the President's election campaign and now in his administration, to my mind, at least to my reading at least, sort of wants to blow things up in a different way than you just in your book.

How does that complicate matters to to have people within the party calling for a wholescale invention. You're calling for it in one way, he's calling for it in another. Uh. Can there be a coming together? Can there be a unified Republican Party? Do you think? Well? I think our first obligation is Conservatives, is to be honest with people. And it's far easier for a politician to point to a shuttered factory and say, oh, that's just a free trade.

You know, Mexico took your jobs or China did, when it's far more complex than that. And we have to realize we're five percent of the world's population, of the world's economic output. If we don't find new markets for our goods, we simply don't grow economically. I recall, you know,

the term globalist I went during my last campaign. There was a blog post in Arizona at one point that said that Jeff Flake was seen in the company of globalists in Paris, frances I thought at that point, I thought, well, you know, what else do you find im Paris? Or what's the alternative to be called the provincialist or localist

or I'll take globalist if that's the case. But I think we have to recognize that Obviously, we need to address the concerns of the factory worker who may be out of a job because of automation um or because we've simply found a more efficient allocation of capital. That's what capitalism does, and we need to be sensitive with that and work with job training programs and whatever else

to deal with it. But we shouldn't tell them that that some of those jobs are coming back um in certain energy sectors or coal mines or whatnot, when when you know that's that's just not the way we're headed. And so I think we owe it to ourselves and certainly to the country and to the Party to be honest about these things. But Senator, how does the party

regroup and refocus? Does it just only really have to be the president refocusing and maybe regrouping, and that mean that the parties is on a better track, on a better footing. Well, this has been this isn't just the president's problem. That we've been adrift for a while. I in the book, I talk a lot about coming to Congress along with Mike Pence. We both ran free market

think tanks in the nineties. We got to Congress at the same time, all full of them and vigor and wanting to have these great debates over you know, whether it should be a flat tax or a consumption tax, and and quickly found that the party was kind of slipping away in our These great debates were kind of in the past, and we became the party of of earmarks and and corruption, and so much so that in

two thousand six we lost the White House. I'm sorry, we lost both houses of Congress, and then in eight lost the White House, and frankly we deserved it given what we were doing at that time, the overspending and everything else. I'm just afraid that unless we get back to traditional insipoles of limited government, economic freedom, free trade, and a politics that isn't mean and course uh, then we're going to be in the minority again. Are there

any circumstances where you see the party splitting um? You know, I don't think that that's the case. I don't think that that's needed. I do think that we have to have a recommitment to conservative principles. That's what the book is about. But I do still think that the Republican Party is the vehicle for conservative policy, and and I

think it can remain so. But it's going to require recommitment and to to stand up when whether it's the President or somebody else who's trying to take us down a path that that simply doesn't hold up or won't work in the long run. You know, this is a populism is you know, it's called populism because it might be popular in the moment, but I'm afraid we're on a bit of a s a high now and when

we come down it'll be particularly unpleasant. You can look at this present through prison that he's a sort of populist proxy for frustration. Uh. And I think there's a lot of frustration with how slow things seem to happen

or not happen in Washington. E see you see that play out with this president when it comes to our relationship with China, in particular, he met the President in Florida in just a few months later, he'd expressed some frustration that things hadn't moved along faster with with China's willingness to show some might towards North Korea. You're seeing his frustration play on now, And imagine a lot of Americans frustration play out now when it comes to this

healthcare vote and the rules of the Senate. We've seen the President tweet over these last few days about changing the way that the Senate votes on things, to make it to move it to a simple majority fifty one votes as opposed to to sixty. Do you do you understand the the the impulse to to make that change and sort of what kind of effect would that have on policy making, on legislating and Washington if we were to see a change like that, uh, in the most

the world's greatest deliberative body. Well, let's keep in mind that we failed to get fifty one votes, let alone sixty for the realism you described just a few moments ago. Right, So I don't think that would change anything immediately, but

I think for the long term it would be extremely detrimental. Uh. If if we were to move to assistant where the Senate was just like the House, where we responded more to populist sentiment, Uh, then we would be lurching, I think back and forth as we have been with regard to healthcare. Democrats were able to do it. They had sixty votes for a short time back in two thousand eleven, and and then we have Obamacare, and now we're trying to repeal it just with a very Republican majority. Um,

and you know we'd be lurching back a couple of years. Uh, you know, towards another extreme. We're far better off when the Senate works the way it has. When we reach across the aisle, the requirement of sixty votes almost always require is bipartisan approach. And let's face it, if you want legislation to endure the test of time, it's best

when you reach across the aisle. And most importantly, as I talked about in the book, UM, the most important things we've got to solve in the future dealing with our debt and our deficit. We're we've got twenty trillion in debt. We're going to soon be back at trillion dollar deficits. At some point, the financial markets are going to respond and just say you're not such a good bet anymore. In order to fix that, we have to

sit down with our colleagues across the aisle. Because no one party, Republican or Democrat, if that party controls both chambers in the White House, no one party will tackle it alone because they share or they don't share, any of the political blame. You've got to have the parties

as we've done in the past couple of decades. Every good budget agreement we've had over the past forty years has been done when we had divided government, where both parties sat down and said, all right, let's share the political risk. And so, as I explained the book, that's the approach that we've got to have moving ahead. Center Fake Thank you very much, don't be a stranger. I'd love to have you back on the show in the future. That Senator Jeff Flake, author of Conscious of a Conservative

Rejection of destructive Politics and a Return to Principle. That book out tomorrow. This is Bloomberg Surveillance on Bloomberg Radio David Gura with Francine Lack with Tom Keane back in our studios tomorrow. 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 Keene, David Gura is at David Gura. Before the podcast, you

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