Immigration is the American Dream, Gutierrez Says

joined Peterson Institute for International Economics. Many of you will know Professor Irwin of Dartmouth, perhaps fewer very Lovely of Syracuse University, who is absolutely definitive on intellectual transfer across nations, and she joins us this morning with the Peterson Institute on tariffs and such. Mary, what's the number one thing we get wrong in our tariff analysis or discussion two

thousand eighteen vintage. I think the biggest misconception is the extent to which the trade between the United States and China happens via multinationals by a foreign firms operating in China. To a large extent, it is uh supply chain trade. What does that mean? Is that just more amorphous or harder to get our hands on that it's within the menu facture of products. Well, it has a lot of implications for how the us UH is either helped or

hurt by these tariffs. First of all, when we when we place tariffs on these types of goods, we're not we're almost indirectly trying to get at the Chinese were first off, hitting mainly our allies operations in China. Secondly, we're hurting our own corporations, the companies that employ people in the United States by raising their costs. Because the overwhelming majority of the goods that were hit with tariffs

are inputs to our production processes. I mean, Katherine Rampole in the Washington Post has made this huge distinction, folks, between finished goods and inputs. Give us an example of what an input would be is that like a distributor in a car. Absolutely, it could be a distributor to car. It could be semiconductors that we originally exported to China coming back to us after they've been tested and packaged. It can be auto parts, although primarily it's not. Primarily

it's electronics. Let's go right there. We make a semiconductor in California, it gets shipped to China. Or what do they do? They bless it and pour holy water on it? What do they I doubt if it's holy Water town. What do they do? They test it, they package it, they send it back in a suran rap thing. It comes off a thing in Long Beach. And that's the input that's taking jobs away from America right Well, in

the rhetoric it is. In reality, it's not firms that that have off short have added jobs in the US. The problem is that there are different jobs than the jobs that are that are destroyed by changes in the global economy. So the jobs are moving towards the more highly skilled folks. They're moving away from sort of the use of physical labor. But at the same time, we're seeing exactly the same changes happening with changes in technology and firms and and we've all heard a great deal

about coming robotization of the factory floor. So technology shocks are hitting us at the same time that China has opened up and also made it easier to offshore to them. So Mary, you say China's opened up to what extent has the Chinese economy opened up over the last decade?

The Chinese economy has opened up quite dramatically. They lowered their tariffs quite a bit uh to well below ten percent with the agreement that was made between the US and China for them to join the w t O. They've opened up in terms of decreasing the number of sectors in which you have to participate in a joint

venture to invest in China. We hear a lot about joint ventures and how they're the conduit forward technological theft from the United States, but in fact they've decreased dramatically the number of sectors in which you need to have a joint venture. And recently uh Sheet and Ping mentioned or offered to open up the automobile sector to wholly owned subsidiary Mary. Would it be fair to say that they've opened up things they've started to dominate. For instance,

the auto sector is a great example. For many manufacturers. They've had to take the manufacturing position to China to avoid the import tariffs, and now the Chinese are looking at removing import tariffs or at least luring imports tariffs on imports. It's not as if those manufacturers that have already moved to China and now going to move back to Europe or move to the Nazis States as it that's stuck that. Uh, well, I think they want to be there. I think they want to serve the market.

As far as are they dominating the auto industry? The US imports only about a billion dollars worth of of of vehicles from China, and yet we export more than ten billion. So are they dominating autos? No? I certainly don't want to trade in my car for a car that's made holy in China. So I think this idea that they're dominating already is getting way ahead of ourselves by several decades. Your core research is on intellectual transfer

between China and US. Give us that dynamic. Right now, They in droves are sending their kids over here at different levels of brightness to study. Do they all go home? No, they don't, although you know more will go home with the changes in uh US policies. But there's lots of avenues by which technology transfer is happening, including what we

call intellectual attorneys. Not only the return of of students who have received you know, a Bachelor of Science or a Bachelor of Arts, but of course PhDs and highly skilled professionals. So This is happening at all levels, in all sectors. It's happening in my own field, which is higher education, where the Chinese are wooing back very skilled people. Um. There's no international laws against this. You're able to, uh, you know, offer higher salaries or better housing subsidies to

people if you want. So that's one way. Other ways, or of course they're enticing corporations to bring technology to China. This is something we don't really want to talk about. We want to talk about theft and other things. But many corporations do transfer technology voluntarily. The Chinese offer you know, ready fields for factories or for you know, high tech businesses. UM. And the the opening up, the growth of the market

there is very attractive. Let's say it there you so much great, appreciate it, very lovely with the Peterson Institute. From our studios in Washington to this morning, Douglas Peebles is with us with a B alliance Bernstein in fix ting What do you actually do? Do you? Are you running money? Are you are you in the mail room clipping coupons? What do you do for a B? Well those two things are sort of one and the same these days. Um, but yeah, I'm the chief investment officer

for the fixed income group. I've been at a b UH and its affiliates forty one years. I know that's where I wanted, exactly where I wanted to go. You and I remember when fixed income at trouble competing with CDs and other manipulated coupon products, and then there was a point where everybody was a genius and total return was easy. He's easy with your wonder for three decades of experience, what's the mood this year? They just clip the coupon and say thank you? Well. I think two

thousand eighteen is really a transition year, UM. And we've had the main influence on all financial markets over the last ten years has been monetary policy. And and the reason I call it a transition year is we have a transition of monetary policy. And the Fed has two levers now in which they tighten policy, and they're using both of them. They're they're now shrinking their balance sheet

and they're obviously raising interest rates, which we saw last week. UM. I think what happened globally last week of importance is that Drag and team decided that they were going to be more dubbish for longer, and and I think that that kept the fixed income markets under wrap, and that will probably continue to do so for the for at

least for the summer um. But this transition is in place, and you know, we we tom we we look back and say, okay, I and when the ten year note was was ten eleven, but the five year note today is just under three percent, and I think that that's what the new normal is in terms of what is a respectable return and can two or three percent compete for capital? Are there any signs of credit stress right now? Well, I don't think there's any particular signs in the marketplace

in terms of credit stress. But that's the worry, right, I mean, we have we have certain signals. UH we use a combination of quantitative and fundamental factors. The fundamental team has been saying rightfully so that we are late in the credit cycle for a long period of time. We have very very highly levered, particularly investment grade companies relative to history. And then a very important signal that

we follow is the flattening of the yield curve. And that flattening of the yield curve historically has meant UH rain in on risk because that's not in good environment for risk taking. I've heard this a lot right in on risk. Do you actually see that in the positioning of west some of these fun zon right now? Because people will come on the program with me and they'll say, it's conte day risk. Because you've pointed out there's a competition for capital. You can just buy treasuries at the

front end. You don't have to take as much duration risk, you don't have to take as much credit risk. I hate that cooler law. People actually acting on it well. I think if you look at the mutual fund flows, the fixed income flows are in outflow mode right now. I'm not sure what they're doing with their money. My my guess is they're not buying CDs. I do think that they're they're actually more often than not moving out the risk spectrum, but not in the fixed income world.

The only place where they're moving out the risk spectrum in the fixed income world is in the floating rate. The bank loans the the new nirvana at the moment, if you will, And and that's because they're so afraid of interest rate risk um And I think that when people look at bond markets and their bond investments. They really have to break it down into between what is my risk reducing bond portfolio and what is my return

seeking bond portfolio. And bank owns, for example, are in our opinion and should be in the return seeking don't worry about duration if you're a high yield investor, right, what you should worry about duration, which is the interest rate risk if you're a risk mitigating investor. Now, one thing that hasn't changed in this environment is the negative

correlation between treasuries and risk markets. And and are recommendation to people is with this transition in place from the central bank, particularly the FED move back into more balance. So don't be so afraid of duration. I don't think. I don't think that that's the fear that most people should have, even though they do one thing. We john correct me if I'm wrong, but we're way too full

faith and credit focused. And then we look at high yield, and then there's the in between the investment grade paper. What's the in between risk look like? Well? I think the in between risk looks fine as long as the economy is strong. So, for example, if you look at the investor grade market, the investment grade average credit quality has never been as low as it is right now. So why is that. It's not because the economy has

been doing, you know, so awful. It's because the average CFO in the marketplace has now decided instead of running their balance sheet at a single A rating, they want to move it down to a triple B. Yeah, they're they're issuing bonds to buy backstop. Is that what Comcast is doing? But they're not going Yeah. Look, I think each and every company is different. I'm looking at it as a as a macro position, and from a macro position, the CFOs have been rewarded for doing this, right, I mean,

that's that's That's just the way it's been. Will that continue? We that's why we want to reign inst case a really interesting point. You write an important concept. You've said we're nswering the latter stages of the cycle, and we can have a separate debate on where we are on the cycle. But let's assume that's true. At this point, we've got the government livering up and you've got corporate

America adding leverage as well. What does it mean when the government and corporate America at leverage this light in the cycle well, I think there's two things. I think that this when we look at the cycle, we have to separate the credit cycle and the economic cycle, and we are, one could argue, fairly early in the economic cycle, but late in the credit cycle, and that is something that we haven't seen before. And the laboring up on the government side is the second half of this grand

experiment we talked about. Monetary policy is the first half. The second half is we've never seen fiscal thrust to this large in an economy that's already operating at full employment. So I would imagine that we're gonna, you know, continue to do okay until the economy doesn't do so well, and we don't think that's for a while yet. Dug one final question, if we could in terms of the

actual assumption of fixed income you mentioned three before. There's still a lot of people out there they just say I can't live on that. Well, again, he goes back to how much debt has been issued, and so if we have real interest rates right now that are at one percent, or nominal rates at three percent, we would think that with so much debt outstanding, the old assumptions of let's say a four percent real rate or of five or six percent nominal rate. They probably don't work anymore.

People think you so much. Mr. People's with a B fixed income this morning, without question, this is my interview of the day. I might point out it maybe my interview of the week, and even Carlos gudierres I could suggest it could be my interview of the year. Four or five years ago, long ago and far away, the former Secretary of Commerce and I did an interview on short notice the day a one immigration debate in America collapse, and I clearly remember Mr Secretary speaking to you at

that time, and we do it again today. Is one first lady Mrs Bush, and another first lady Mrs Trump, say stop. Have you ever seen anything like what we're doing at our border? Carlos Gutiers, I've never seen it. I've read that if we go back far enough in our history, we've had moments where families have been divided. We know that happened during slavery, it happened somewhat during some of the Chinese immigration, but it never, ever, ever

is something that we can get used to. The images are heartbreaking, and it's just hard to imagine that this is the US. Your father was an enemy of the state of Cuba. How did you come into this country and were you separated at the border? We flew in, We who in as a family on a Pan American airlines into Miami, and I'll tell you we felt so welcome. I felt like people wanted me to be here, and people wanted me to succeed. Conservatives in those worried about

the future of America. In one way, I would say that's fine because the Good Years were educated, etcetera, etcetera. But so many of these people that are at the border and the language that used as appalling, they're not Carlos Goodyears. Can we make a distinction at the Texas border between that the smart, the haves, and the less fortunate and make a separation of parents and children. You know,

I don't think history makes that distinction. Uh. So many immigrants came over uh from all over the world, starting in Europe. Many were he literate, many had very low schooling. But you know what, their kids went to school, became lawyers, and became tweachers and became business people. I believe that happens to every generation of immigrants. Full disclosure, Folks, my middle name. They came over in handcuffs. It was a few years ago, John Farrell, there was a small civil

war in England. I believe it was at the time. It was back. Thank goodness you came, Tom. I know, I look at look at that call us. What would we have done every morning with that Tom, that's a great example of the power of immigration. Or a few years and as some listeners thinking, that's a great example as to why we shouldn't let people in not be a good argument. So tell tell us, uh, Mr Secretary,

what your Republican party needs to do. There's two pieces of legislation in But what leadership do you need from President Trump? How do the Republicans make this their constructive issue? Well, yeah, the Republican Party is almost indistinguishable. We look more like a right wing European party. Populus, not to concerned about business, anti immigrant, you know, every everything that the US has not been. UM, and I do think we need to get back to where we have always been. The American dream.

Immigration is the American dream, free enterprise. Business, businesses can't find enough workers. That's just that's the first reason why we need immigration. But um, it is indistinguishable, and we have to get back, and I think this is all about leadership. Tom Uh. You know, the Democrats had President Obama, he changed the party, that looked like he had changed the trend of history. Well, now we have President Trump. Uh, it's all about leadership, and it's not going to happen

inside the party. It's going to happen through the leadership of one person in the coming days. Do you think that this could rupture his relationship with his attorney general, who has led the charge on this. Uh, it could, it could. It could happen, because you know, it's interesting that everyone but the president is taking responsibility for this. So if he is looking for a scapegoat, there's no one better than Jeff Sessions, given that they already have

a a very strained relationship. But I just don't see how this can continue. And the photographs will continue. We've all seen some of the photographs that will come out today and that's you know, it's going to be the cover of magazines all over the world, the cover of newspapers. This isn't good for us. Give us an update. One final question, if you wouldn't, we're saying with the politics with Carlos goodyears on Cuba, and the transfer from a

generational castro regime. Are you optimistic the Cuba can find a place beyond the two Castros? Yes, I believe that Cuba is going through gradual change, but it is change, and they will continue to go down that direction. They will continue to have to allow private businesses. I think that's pretty much irreversible. The irony is that, you know, we're trying to make friends with North Korea, but here's

Cuba going U in the in the right direction. Economically, They're ninety miles away, and we've got crippling sanctions on Cuba. So uh, it's very contradicting. Greatly honor to have you with us today, Secretary Goodiers, thank you always use the commerce. Just a timely and important discussion on these issues. John. I can certainly say the combination of the morning note from Mr Velier in the morning note from Mr Allen

was stunning. The two together, it was absolutely stunning, and I think it was domestically speaking, this is something that's sort of I've had taken everything else I would take tried for sure, very quickly on Friday and through the weekend till that was a wonderful conversation. You can hear Carlos Goodiers. We'll do that on our podcast out in a bit. You can talk to Paul Sweeney for somewhere between two three and even four hours today on any

number of topics. I want to touch on a couple of topics here and then get over, of course, to the business of Fox, Disney and comcause, Paul, the soccer on TV is incredibly controlled by FIFA, the video and they pay huge fees Fox and Telemundo and all that. Is that going to change by the time the next

World Cup comes around? No? I think the you know, World Cup rights, sports rights globally, but certainly the NFL and the US and Premier League in the UK and then World Cup rights across the globe continue to go up in value. You know, I think the rate of

increase might be slowing. And the reason I say that is because the pay TV business and much of the Western world is slowing, and so the feet you know, the fees that these networks can charge consumers are passed along to consumers I think are peaking, if not completely peaked as in the U S. So how much more can ESPN or Fox for to pay for US rights?

I think remains to be seen. But you know, we've certainly been in an environment with tremendous rights inflation, and uh, you know, we just don't really see any end in sight at the moment. But you know, you could certainly look out over the next four to five years and and expect to see it at least the rate of growth slow. I mean, I saw Germany Mexico, the Germany in Germany rather they had share, which is a number I can't even fathom that that that's so it's so high.

Is this where the stupid money comes in? The Amazons and the rest of them with jillions of inflated dollars, do they come in? And I think, did these typical carriers, Yeah, I think you will. I think you know, Amazon dipped their toe into the English Premier League. They've dipped their toe into NFL, and as Facebook and some others, and you know, I think the belief is from a certainly from the leagues around the world, is to extend the

espns and the Foxes. The world stepped back a little bit because their businesses are challenge income will be that the technology companies with bottomless pockets, and I think that's the hope for the leagues and the players and the teams and all that. Okay, next team before Disney, Fox Comcast, The Incredible is brought in a hundred eight zillion dollars. You know they're gonna bring in double triple that over time. I don't know if it's going to be the biggest

movie ever. I'll let you decide. Well, who gets that money? When they say The Incredibles two brings in a hundred and eighty million, how is that divided up? Yeah, well, roughly half goes to the theater distributors in the US. Outside the US, uh, probably more than half goes, probably goes the theater distributors. The remainder goes to the studio, and then the studio takes the money and then the

creative Hollywood accounting comes in. And it's always a question if you're a star and you have back end of the movie, how much do I get if for a movie that made a billion dollars? And um, But that's where it kind of gets split up between the theater operators and the studio operators. So you know, you know it's been a This Incredible too was just you know, it was a good at first movie, A long time between the first and second movie, and they were really

surprised about how strong the second installment was. And so the ninety million that you're presuming in the US went to quote unquote the studio. I believe Disney Pixar. You as a pro really don't know how that's divvied up,

do you. It's it's it's it's tough. But the the studio at the Walt Disney Studios has some of the highest margins in the industry, so they're able to you know, uh, they financed most of their deals themselves because they're very, very sure in the long term profitability of those things, and that allows them to take higher cuts of the movie. And so what we've seen over time is that Disney the studio is one of the more profitable studios in Hollywood. Conversely,

Paramounts one of the least profitable. A good colleague of ours and giving us wisdom is Brian Weezer over Pivotal. He goes to a cell today and Disney Paul Sweeney, I don't want you to do buy hold Cell. But the idea of Fox moon Shot, they're the one in play Disney moon Shot. Relative to come cast let's go to the other side of the equation, is Comcast dirt cheap?

Uh Comcast is pretty cheap. But one of the reasons, particularly a free cash flow basis, but one of the reasons it is cheap is because investors are concerned that they are going to overpay for content, most notably twenty

century Fox and maybe Sky. They're using all cash um and I think the concern is that's going to lever up their balance sheet, really retard their ability to invest in their core business going forward, and certainly reduce the amount of money they have for buying back stock, which

is what Comcast shareholders have really become accustomed to. How do you and Bloomberg Intelligence respond to hear from the Cell side in this case Moffatt and Nathanson that you know, that's great if you're gonna lever up, lever up and just either go private or you know, buy back a ton of stock. How do you respond to that? Yeah, it would certainly be more creative. One one could argue buying Comcast down here than than buying uh Century Fox.

But of course, if you're Brian Roberts, you're thinking very long term, You're thinking that you're companies can be one of the two or three companies out of the media world to really compete against the the Netflix is and the Googles and the facebooks, and it's it's it's really between him and Bob Iger and uh, you know, we'll

see who went at the end of the day. So there there in an auction room like a soth of Bee's or Crispi's Fine and Christie's and and there auction in Comcast has clearly made the decision, as you say to lever Up, is that Disney's wild card. They go the Comcast way, and we have a balance sheet free for all. Yeah, we've actually modeled out the current Disney deal, the all stock deal for Fox, and we actually have

it a little bit dilutive to Disney's earnings. And it's kind of the weird math here is that the more cash that they put into the extent they want to put in cash, it actually becomes less dilutive and actually becomes a little bit of creative. The more debt they put on UM. So I think Disney has a lot more flexibility three point for Century Fox from a balance

sheet perspective. So and and and again, I also make the point that even though Brian Roberts is a obviously a very credible buyer and really wants the assets, I think Disney and Bob Bigger want them just a little bit more. I mean, this is fascinating, folks, and want Mr Sweeney goes to there was, you know, not my informed back of the envelope, but my hunch. And at the real surprise here is they can be the same and just lever up. And I mean to be clear here,

Disney's got tons of room to lever up, don't they. Yeah, they really do. So Comcast is a little bit more levered. But and if they were to do an all cash deal as currently structured, to take them north of four times at the cash flow, which is higher than where they like to be, higher than where the market likes them to be. They like to be down around two times. Even if if Disney were to put half this deal in cash, it's still be just about a little bit

less than three times at the cash flow. So they have much more fanatical muxibility that I think they have strategic comparative a little bit more. But you know, you can't discount Comcast at all. Brian Roberts is in a very aggressive strategic thinker, and I don't think he'll walk away. I think there will be several rounds of bidding here. But at the end of the day, I think Disney walks away with it. Why why are there several rounds?

I mean if you extrapolate out, I mean, is this just you know, linear algebra, folks on a log of rhythmic y axis. You extrapolated out, Paul, and you come to a terminal value point and you just say, look, here's our stupid bid. I mean, why goes through multiple tranches of bidding. Yeah, that that might happen. They might put their you know best and final offers on the table.

I think there might be some discussions behind the scenes about maybe carving up some of the assets of one Century and Sky that might, you know, allow them to walk away each with a little bit of victory. But I don't think that's going to be the case. I think both of these bidders here want the whole Enchilada, including sky Um and so I think there's going to be lots of mechanicians back and forth. So so are you leaving today, Paul at one to watch Tunisia England?

Like everyone else I'm actually in London as we speak, so you're going to be in an evenings. I didn't know you were in Pharaoh. Pharaoh has a doctor's appointment and he does. Paul Sweenie, thank you so much. Evening viewing of Tunisia England, and probably over at the net which is like right next to our gorgeous offices and I'm sure that's where Mr Sweeney is. Wisconstin as well.

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 before the podcast. You can always catch us worldwide. I'm Bloomberg Radio