Putin to Come Prepared, Will Trump?, Kaplan Asks

I'm doing something different. I'm still carrying a small, knit, long exposure with a plan. Tom and John too short strengths as the SMP rises to what I believe to be the top end of the range, which is, you know, another fifty SMP points or so. Look, my forward looking

concerns are plentiful. Trade war is the message of the bond market, as well as the message of the bank stock market, the rising ambiguity of global economic growth, the possible repudiation of the so called synchronized global economic recovery UM, the rising geopolitical risk, particularly in Europe with the immigration issues dividing the EU and splintering some of the entrenched parties, and also most importantly, the possibility of policy mistakes at

both the White House and said as the latter what what what I want to talk about is the wall of dooming gloom literature that's out right now. The world's coming to it end. You read it like I read it. We both try to ignore it as we try to think about what we're gonna do with investment. My major thesis is corporations adapt like a Boeing doing a JV with you know, a dominant manufacturer in Brazil. Do you still see corporations adapting to the different economic and finance

its out there? Are they adapting in a constructive way? I think they're adapting. UM, But UM policy remains foremost in my concern on the front front burner. You know, history has proven that one trade parish gets another than another. Until you get a full blown trade war, no one ever wins. In the consumer seems to always get screwed. Currency wars offered lead to trade wars and vice versa,

which in turn can devolve into hot wars. So that cooperation which you described maybe UM in my view, rather short lived. UM. I told you in the past, and I've told John and Pin in the past that that I approach each day asking three important questions. As it relates to your example of boeing, we live in a paperless, in cloudy world. Are investors and citizens as safe as the markets assume we are? And my answer is no. Secondly,

we're in a lab and interconnected world. Is it even possible for America to be an oasis of prosperity in the driver or a vengeon of global economic growth? And I don't believe so. And finally, most important, as it relates to Trump in the administration with the G eight political coordination at an all time low, getting back to what Kaplan was talking about in the last segment, how slow and the nept will the reaction be if the wheels do come off? And what does it mean for

global trade and economic growth? Doug is something that the United States economy could be insulated from. And I'm just wondering if you become more defensive, just in terms of your investments, what is the most the optimal way of being defensive? And can you keep along on the SMP five given that over the last couple of months it has been somewhat resilient. Yeah, I understand, but we're to me we're in this vortex of uncertainty and certainly in

a new regime of volatility. Um Monetary policy around the world has suppressed volatility, and that's that's changing. We're gonna soon see the end of UH. The E C B S QUI by your end with with it being cut half in half and three months. This is a really big deal, John, as liquidity becomes a train both here and over there. So I think the summarize last year, two thousand seventeen was a year of hope in which the SMPS index valuation experienced almost a three handle valuation

increase and basically Wall Street triumph over Main Street. And this year is a year of reality in which we're seeing contraction, compression and multiples. Main Street is triumphing over Wall Street. It's what happens, you know. Charlie Munger had a great quote. He says, it's not supposed to be easy. Anyone who finds it easiest stupid. And I think a lot of people that are looking UH and saying there's an absence of uncertainty are really applying first level thinking

and not second level thinking. Where this Douglas cast of Sea Breeze with a short term perspective most of us and are you know in our lives we're not trading or positioning? Is maybe Mr Casses, but it's always interesting to get the whims out there. Doug, what is your interpretation of the media event Fox Disney Comcast? How do you interpret that? How do you screen that? Well? I have two exposures. I've been shot at Disney, UM, but not because of that event, um, not because the possible

acquisition of Fox by Disney. I have been shot Disney because I thought that the company's secular growth rate was probably half of the eight percent historical rate when Wall Street consensus was still looking from the mid teens sort of annual growth. UM. And I'm long Comcast, and I bought it after Comcasts fell from about forty three to thirty one on the basis that Roberts has you know, who has all of his family's net worth and comcurse.

Comcast is not going to totally shoot himself in the foot. Yeah, but if he goes out, Doug, what's so interesting here on a net present value? And folks, I hate to say this, but Cast is really good at moving the numbers around. He'll never admit including the red Sox one game ahead of the Yankees. But Doug, what I would point out here is the private equity slash sovereign wealth plug that Mr Roberts may get is essentially free money,

isn't it. Yes, it is. I mean it's like a plug in, John, This is really important in the Newtonian mechanics of this game. It's like a slug or plug in of just cash, right, Doug. Yes, And I do think that the that the incremental free cash flow whether Comcast or Disney gets Fox is enough that Um, while the near term UH debt to enterprise value that they're paying is large, it will be paid off in a

reasonably short time. And remember Roberts is using he's not using a forever perspective like Warren Buffet, but he's you know, he's thinking intermediate John, He's not day trading Fox exactly. But John, what's so important here is Mr Roberts may have forever money, which is what sovereign wealth funds are like. Yeah, maybe, but the short term date traders so to speak, or the investors in the stock right now. Every time this deal looks less likely, um, Comcast rallies. What does that say?

I don't think that I, as as I said before, John, I don't think they're robbers. Is going to shoot himself on the foot and pay a ridiculous price. I think that that Comcast ends up with Sky, Disney ends up with Fox, Comcast shares trade back up to the high thirties, and Comcast initiates, reinitiates, UM re establishes it's buy back program. So that's why I'm in Comcast. That's spout out quite clearly,

Thank you, Dusk. And just going forward, you see more companies like what we're seeing in media at the moment, leverage the balance sheet. And do you think now is a good time to do that? Yeah? I think they were, John. There are two industries that have to be rationalized, the media business and the consumer package good business. And you see it in Nelson Pell's going after Procter and Gamble. You see it in Dan Loebe uh and others attracted to Campbell Soup, which I mentioned in the past to

Tom as one of my holdings. UM and UM. All these businesses have to be rationalized. Uh. You need synergies, you need cut in cuts in the fixed cost structure in order to survive the secular change in the case of media, you know what the changes are the court cutting. In the case of consumer package goods, Um, it's just

moved towards healthy products and generic competition and Amazon. You dug out one final question, and you've always been very collegial about the battle of you know, the struggle of making and losing money. Mr Einhor in The Great Fun Investors really had a tough goal of it. Is it just simply non diversification, you know, like on a c F a kind of chat, most hedge funds are just underdiversified.

I think, Um, yes, I think that's partially the case. UM. But in in a world tom of suppressed volatility UM, in which you're being paid management or thereabouts of the profit in order to deliver alpha, there's a need, there's a need to be non diversified and concentrated making your best bets. I'm very fond and friendly with David Einharn and I have the absolute most respect for him as an investment manager and as a poker player. I am both as well, and I think he's currently in the

World Series of Poker in Las Vegas participating. You can watch it on ESPN live tonight. UM and um you know he plays the odds. He's very, very smart, and I'm totally confident, even though he faced the performance problems which we get redemption problems, that he will be a survival, as will Um, as will the others that have faced pressure, like Acman Duck Cast. Thank you so much for a Thursday brief and greatly appreciated. Doug Cast, of course always

supporting the dreaded Yankees. A major shout out to all of you the huge response we got two days ago in our interview with Russell Shorto and his new book Revolution Song on six people in the Revolutionary Ward, including Mr Washington, and also with Gordon would of Brown University. That was a real special moment, and we thank you

for your comments. We drive that conversation forward now with Robert Kaplan with my book of the Summer, the Return of Marco Polo's World, Thin Gorgeous twelve or so essays that will make you brighter about the cacophony we're living in. And Robert Camplan. I want to dovetail these two books together. There's the moment in Shorto's book where Washington meets Lafayette.

I had no idea for starters at Lafayette was twenty years old went or twenty three rather when they met, and we forget about the relationship of the United States with England and France. Now that's away from what you've been doing recently. But the president's gonna vault over to

John Farrell's United Kingdom. How's he going to be greeted or critically, how should he be greeted by the British Normally, uh an American president going to the United Kingdom would be greeted as an ally, as a tried and true, trusted ally, going back to the late nineteenth century, because it was when the British Navy went downhill that weet Britain slowly started to hand off global responsibilities to the United States. So there's no greater historical relationship united by

language culture in the world. But now we're in a different world, where in a world where the American president has rhetorically disdained Britain and other European allies, and where Britain is completely um you know, you know, is completely absorbed with its own nightmare over leaving the European Union. So this is not going to be a meeting or this is not going to be a greeting in a

in it that makes any sense. Historically, going back about a hundred and thirty years, it was in Prime Minster Main one of the first, if not the first, to to visit the White House. Um. I believe she was, and I believe that she and world leaders all over, particularly the Chinese, find whereas we may find Trump vulgar and and in every a distasteful for leaders who have to do world leaders who have to deal with an American president, they don't know how to process him, particularly

the Chinese. Uh, you know, how how to analyze him, how to predict him, which is something that world leaders do with each other all the time because they're all members of the same elite who have been to similar schools, have achieved what they have through normal meritocracy. And so when, for instance, of Trump says to Uh, Trump says to shijin Ping, let's be friends, will make will make a deal on the basis of friendship, the Chinese don't know

how to process that. In their culture, friends don't make deals. You make deals with based on your personal interests that intersect with another powers personal interest that has nothing to do with friendship. But just in terms of the politics. They sort of couz a friendship with the global elites. Isn't that part of the problem. Well, that's part of the problem, but it's nothing new. If you go back to the early nineteenth century, the late eighteenth century, you

look at Metternick, Tallyron Castle, Reay. All of these people represented different powers, but they were all members of the same elite. In the early modern world, before the modern world, which is the world between the Renaissance and the Industrial Revolution, everyone was related to each other through royal families, so you know, everyone had some relationship to Queen Victoria. So so they're the global elite was even more into what

I'm trying to do. It just got a better understanding of the Prime minister's relationship with the president given the fact that they given the fact that the Prime Minister was the first leader from the West to go into the wine house, I don't think it helps her, not because he has no loyalty to anything or anybody. Everything is a zero sum. Everything is a zero sum issue for him. One of the things that changed your Robert kaplan is it was Tillerson and now it's POMPEII. Here's

the first of his class at West Point. I guess he's getting high marks from everybody just to rebuild State. How's he doing? And will Pompeo make a difference in Helsinki? Uh? Yeah. First of all, Pompeo was treated with the suspicion at the CIA, but got high marks when he left because he has a history of caring for the agency. He leads, you know, listening to advice. Uh So, Pompeo left the CIA, you know, with a very high reputation and and it's state.

He's seen as much better than Tillerson. Um so that Pompel himself is an improvement over the beginning of the Trump administration. But it always comes back to the president decides. That's the American system. If the president has an instinct for something, the secretary of State has to go with that. Because the secretary of State is not like the Secretary of Defense. The secretary of Defense has a lot of equities. He can have a bad relationship with the White House

and still be a successful secretary of Defense. It's not true at Foggy Bottom. Let's forget the main thing with primus to make and the speculation about whether he'll be well received or not and get away from that and get to the meeting with President Putin. Now, traditionally, as you know, when two heads of state meet, it is incredibly orchestrated. What they're going to talk about has already been decided, The outcome of the meeting has already been

decided before they have the meeting. We now have reports suggesting that we could have in a room just the President of the United States and the Russian president and nobody else. How unpresidented is this, um, it's unprecedented. Keep in mind that Putin is always well prepared, well staffed for every meeting he has. C e o s who have met with him say they have never met a more prepared, impressive person. Whatever the issue you're going to talk to him about, he studied it for at least

a half an hour before meeting with you. All right, So Putin is going to come prepare. The question is will Trump based on experience, He's not. He's not going to be nearly as prepared. And there's a context problem. The context is it's fine to have a cordial meeting with your adversary, provided your clothes, with your allies. What are we going to give away if the president slips up. I think we had a good idea of what he gives away with North Korea? What do we give away

with Mr? Putin? At this point, I can't see anything because the Russians have interfered to a greater or lesser extent in our electoral process allegedly. Um and um you know Ukraine, Uh, Syria, Crimea. You know it's it. It were in a weak position. We don't have much to give away at this point in the time we got left. I'm sending four or five books to a student who will do international relations at New York University, and it's

the usual nine, Power and Independence. I threw in in a week moment, I threw in a Kaplan book as well. Uh into this, I did William Easterly's Great White White you know Bill Easterly's classic. Blah blah blah. What's the book right now? Are our listeners should get that? You just say, is so immediate? What's the book right now? Where Robert Cappens has just shut up and read this? I said, talking about my own books. Your other people's boss, all right, I want to know what's out there that

needs to be read right now? Um. Henry Kissinger's first book, written when he was twenty six years old, A World Restored. Fascinating because I've read Diplomacy. Yeah, this is when it was a young Kissinger, absolutely brilliant with twenty six with the mind of a seventy year old who has no assistance, nobody editing him. He does it all in his you know, in his dorm room or so. No, that's why it's

urgent um. And what it's about is how elites from different European countries constructed a world order at the end of the Napoleonic Wars. And the lessons it teaches about conservatism real is him are timeless. This is fast. I mean, I mean my book of the Year a couple years ago is his on world Order or whatever those essues. Um. The thing, this is where you get the real young brilliant twenty years without handlers, without handling. This is kissing

your without handlers, without editors, et cetera. Fascinating. That's great, Jeoffrey. I have to read that. Yeah, I want to see Tom Kane without handlers. Right. I fall apart, I mean I completely fall apart. What do I do? What we asking? When the show began, Baby wipes, don't don't want it was you know you the turret that we're in. I wanted the desk clings. Just Robert Captain, have you seen this side at Tom King? Does he not show this on Saving? I think it happens when he comes into

They use Q tips on TV? Is that Robert Capping? Thank you so much. Just wonderful book, The Return of Marco Polo's World. Really can't say enough about it. Eight twelve essays, including too fresh and new ones on the ever changing relationship of China and across Eurasia as well, Mr capitants with Ian Bremer at the Eurasia Group. Right now as we talked to Robert Caplan moments ago with Euraise your group, this is a joy to revisit where we are with Ben Steele with a Council on Foreign Relations.

He's their director of International Economics, which means he he tells me what to do when I do panels there, uh and and and stuff. And right now the panel that would be great with the President traveling to Europe is the idea of a new martial plan to your wonderful book, The Martial Plan Dawn of a Cold War. If we needed a martial plan right now. Would this president have done it? No, I would go further than

just looking at the money. Tom. It's not just that this president wouldn't play Santa Claus, which is probably how he's thinks about the Marshal Plant, but so many of the institutions that we take for granted today as pillars of the post war liberal order. For example, the World Trade Organization UM created seven as as an accompaniment to

the Marshall Plan. The European Union and NATO were direct offshoots of the Marshall Planet's It's actually inconceivable that we could have an EU and NATO today without the Marsha with within. This is his desire for the Europeans to put up their fair share. I saw a bar chart that clearly shows most of them are not. How do

you respond to that? Is a president onto something? Well wait, wait, without question, I mean we've we've been pressuring the the Europeans from for many years to to boost their UM commitments on defense spending. This certainly preceded this president and he's right to highlight it, but the way he does it is is dangerous because the so called Article five

security guarantees Um. That so we are extending to our NATO allies in Europe are are critical to the effective functioning of that alliance, and you should not be undermining. But as you, as you point out, Bend, I mean we should. Let's maybe not refer to as the Marshall Plan just for this conversation and refer to to what it was called. It was the European Recovery Plan. It was because Europe was on its knees. Um. Europe is not on its knees. But to your point, they haven't

been spending enough on on military spending. So what is the right approach to get them to do that? Well, it's a it's both a combination of of friendly cajoling Um and making clear to the Europeans that their own security is at stake here. With Russia clearly UM ratcheting up its aggressive actions on NATO's borders, particularly in in in the Baltics. UM. I think this can be done

without undermining the cohesion of the of the alliance. I think right now President Trump is really playing being into Putin's hands by doing that, so certainly up my job to take a position on this. So this is really just a question. But The approach that he's taken right now is basically saying just that you've taken the Knights guarantee for grants it. You haven't spent enough on the military. You know that we will um, and therefore you've taken

the whole institution for granted. UM. Have they? I know? I don't think that would be fair. The Article five security mutual security guarantees have only been invoked once in the Alliance's history, and that was after September eleventh, two thousand and one, when this country was attacked in America's allies invoked Article five to support US, and they did in Afghanistan, so they did step up. It would be wrong to see them as free riders. They haven't been

on trade, have they been? No. If you look at raps broadly in the developed world, Canada, the EU, the United States, UM, um, they're they're roughly equivalent um. President Trump rightly emphasizes that um auto tarraps in the United United States for cars coming into the United States are considerably lower than those in the EU, But he doesn't like to talk about our own taraups on trucks, which are massively higher than those which back I believe to

the Chicken texts exactly. So we're talking about tax there and he doesn't want to negotiate that. So there are there are good grounds by all means to for revisiting these things, and that could have been part of the productive discussion on a transatlantic trade treaty. We've been still with us with the Council on Foreign Relations. Of course,

we celebrate the Marshall Plan. It's made a huge splash in a timely splash looking back and six and seven you've got another book, The Battle of Bretton Woods, would basically won every award out there about the history of how we piece together modern central banking? Is our central banking independent at risk? Lawrence Cudlow had a tweet out the other day, not directly talking about rates, but linking inflation to jobs. There was why I I tweeted out

and others there was the first selvo. Is our independence of a central bank at risk? Look, some of Larry Cudlo's comments were unusual and crossed a traditional line or the administration typically did yes, did not comment on monetary affairs. Having said that, um, Larry is in some some sense pushing on an open door. What he's referring to his growing support among monetary economists for what's called nominal GDP targeting, that is, effectively targeting nominal demand rather than inflation UM

as a way of stabilizing the the economy. So that's that's not really a radical direction and cheese pushing things. I would not be surprised to see the Fed moving in that direction. You see more pressure coming down on the Federal Reserve though. I mean, one thing this administration has done brilliantly is nominate really good people to the f O m C and stare well away from getting

involved in monastery policy. And if you look at Trump's appointment so far, UM, there's no evidence that he's trying to steer rates in one direction or another. What he has done, UM looking at the composition of the FOMC now is put more of a deregulatory bias um into the organization that was expected and of course is very welcome in the industry. Do you buy the nominal GDP store. I'm thinking of Scott Sumner at Bentley University and George Mason.

I mean, the fact is Janet Yellen and Chair Powell and maybe even Richard Clarens by Chairman. They're not thinking in that top line animal spirit term, are they? You know? I think there's a there's great logic behind U n g DP targeting. One could argue that if we had pursued a policy along those lines in two thousand nine, UM, we would have loosened policy earlier, which was clearly called for. My big concern about it, Tom, is that I think the support on the left for n g DP targeting

is very soft. UM. That is, there's no inherent bias in n g T n g DP targeting towards loosening policy. Often it can tell you to tighten policy when an inflation to symmetric. It's yeah, exactly. And I think the moment an n g DP framework tells you to start tightening UH policy, the left will abandon support for it. And so you know, I'm not convinced it has legs. Bestil,

thank you so much for stopping by. And July Thursday, the book The Marshall Plan Dawn of the Cold War for those of you who trying to find the tapestry from World War Two forward, and of course with General Marshall, you can do no better than the Marshall Plan. Ben's Steals with the council on for relations. We need to talk tomorrow's jobs report. We usually start the two, three or four days ahead. I've mentioned at once. Diane Swack

solves the problem. Grant Thornton looking for another solid month of employment. Diane, the run rate on non farm payrolls is a hundred and nineties some thousand. It's not supposed to be. It's supposed to be like a hundred and twenty, right, Well, it's given our demographics. Yes, and that higher run rate is also what's been pushing unemployment rate down and continue

to see it new lows. So the good news is the more we have that higher run rate, the more we have hopes of re engaging those on the sidelines, which we really do have. Um will still on the sidelines, and we really want to bring them back in from the workwork like we did in the late nineties. Diane, I get the only thing I get more mail on than this is the Chicago Cubs this year. Other than that, it's people go. People like you say we're fully employed, and I get so much mail that says Diane swanks

out of her mind. We see that in our neighborhood, which is about full employment my comments on I get it on Twitter two and I understand it. I understand what it means that it's not the same three percent we saw back in April of two thousand. In terms of the unemployment rate, we do have more primate adults who are not engaged, people whose skills have eroded long

term unemployment has left them on the sidelines. And we also have some very deep crisis use that we have to address the opioid crisis we didn't have that we do today, where people literally in their prime age. Much of the reduction in particularly men participating in labor hood force that means twenty five to fifty four year olds, is because they're addicted to drugs, not just prescription drugs

but also now non prescription drugs. And these are really big hurdles that we have to overcome and re engage those people. And frankly, there's no magic wand to do it. Diane Swank, I'm gonna ask you to just go into the future a little bit, and if you were to look back at this time, let's say, a year from now, are we going to be saying that this is as good as it gets. Well, that depends I hate to say that as an economist, but it depends on what

we do with trade. We could have this expansion, make it to be the longest expansion of the post World War to era and surpass that of the nineties by making it into summer of nine if we avoid a major trade war. That's not where we're going at the minute, but we could late. We could you know, back things off a bit and avoid a major trade war and

get some longevity. That's what we need, is we need to pace ourselves in this expansion, because the longer the expansion is, it's like fine wine, it gets better with time. We more of a chance of actually bringing back those workers who have been left on the sideline that you've heard of Knesian theory. That's the Mogen David Um Diane.

Let's let's just rather than the hope, let's just UH sort of play out the scenario that there is a trade war, that the Chinese and the United States failed to reach some kind of consensus, or if they do, it is UH in a way obscured by price increases that are already filtering into the economy. What's your best case scenario? There? Best case scenarios that we get what we call growth recession, and that is that growth slows.

It continues, but it slows, and it fails to bring down the unemployment rate further and may even allow the unemployment rate to rise again. At the growth recession where you have growth but the unemployment, it's not enough growth to accommodate those people coming into the labor force and that still need jobs. The other issues, of course, that

would derail some of the wage gains. And you do have, of course higher prices tied to tariffs, tariffs or taxes and their higher prices, and we're already seeing them come through. The inflation is already beginning to come through. In these facts have been much larger than many people expected. Uneven marginal tariffs, and that's because relating the business cycle, we don't have all that excess capacity. Wounds had to absorb these kinds of shocks without it being passed immediately. And

the consumers. What is your twelve months forward g d P. We've got a broad range from all the different voices

we speak to. Are you more cautious? I'm cautious, UM cautiously optimistic that will stay close to two in terms of our growth potential I'm afraid of though, even without a trade war, we're set up for what's called a fiscal cliff in the third quarter of ten because of the way our government has decided to spend a lot of money today where it all ends in the end of the third quarter of ten, which would precipitate itself with recession at the end of And believe me, we've

seen recessions in election years before. Our government isn't that smart when it comes to figuring these pies out. And then in to your point buried in the News Soul last week because the CBO report, which was sobering greeting you said the last swak with Grant Thor and he's always good. She gives us such value, particularly on FED Day. We're thrilled to have her on the Scarlet Food and her FED coverage to give her perspective 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 Keane Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio