Surveillance: Brexit Is A Stagflation Event, Weinberg Says

global synchronized slowdown? Hi, Good morning, Jonathan. It's kind of interesting me being over here and you're being over there. Um, we're looking at certainly slower growth in Europe. We're looking at slower growth in Canada. We heard about that last night. Japan is doing actually a little bit better. China's numbers domestically disappointing the trade numbers, though people are taking this one off number uh and projecting it into a slowdown.

China's exports and imports are actually growing between ten and twenty percent faster than world trade. But that's the key theme, Jonathan. Let's talk about world trade. World trade in the third quarter slow to four point seven year over year growth of exports and that's just unacceptably slow. It's consistent with a slowing of the world economy, not a recession, but a slowdown, and it's certainly troubling. Well, let's talk about what's distorted and what is not. Quite clearly, last year

we saw some front loading ahead of expected tariffs. What are we going to start to see some so called clean data from China. Well, you're never going to see clean data from China. You really want, you really want to look at the six month, three month, and twelve month moving averages when you look at exports and imports, and they've been remarkably steady. China's imports, which is how it really affects the rest of the world, up thirteen and a fraction percent year over year for the last

five months. That's faster than world trade has been growing. China has been adding to the rate of growth of world trade, not subtracting from it on the export side, between ten and twenty year over year growth of exports

all year. So China is not the problem. In fact that the US and growing in terms of its exports and imports also faster than world trade, and China one has to be really worried about the rest of the world where the slowdown must be substantial in order to generate these kinds of slow numbers for the world as a whole. Well, Euros and industrial production dates also came out this morning, and that was pretty ugly as well.

I think the question for the US based investor at the moment, Carl, is to what extent, to what degree is the U S economy insulcted from everything that's happening worldwide at the moment. What's the answer to that, cal Well, the answer to that is that we're worried. Everybody from Fed officials to Wall Street economists are taking a look at the slowdown in the world economy and saying that's a threat to uh A, U S economic growth into

world economic growth. So we're watching the slowdown in trade. The slowdown in oil prices is kind of ominous because it takes a big chunk of the world a part of the of their produces oil and exports it and reduces their export revenues, and that in the past has been a negative for world trade and for world growth, And of course a lot depends on how far it goes.

There are some people who are looking at the indicators and saying, well, we should be looking for a bottom in Europe, I personally don't see it in indices like the European Economic Confidence Index, the IO index. Uh, you know, we're not seeing any sign of the bottom yet. But those indicries are at their current levels, pointing to a

slow down in growth, not to a recession. Really really easy to paint a ugly picture of ugly global growth on a morning like this morning, especially in futures come again by round about twenty two points on the SMP five hundred off the back of that, A little bit more complex to identify where this shows up in the U S economy, Carl. If you just take a real time indicator of the health of the U. S economy and look at initial jobless claims that's still hanging in

there around multi decade lows. If you had a dashboard of economic data points for the US right now, Carl, where would you be looking for this slow down worldwide to show up domestic? Like? Yeah, My colleague Jim O'Sullivan puzzles exactly this point in his recent edition of Daily Notes on the United States. You know, at high Frequency Economics, we're thinking that the US, the gloom about the U. S. Economy is probably a bit overstated, which doesn't mean it's

not the vogue right now in the markets. But you look at the I s M is still pointing to very very healthy growth. You're looking at in weekly initial claims, there's no real sign of a problem in those data. Um, so the U. S. Economy seems to be moving along

perhaps better than expecting. The linkage to the world probably isn't through trade as much as as itself, but rather through the fact that so many US companies, most US companies these days, including our own, do a lot of our business overseas and generating a lot of our profits from overseas, and that's where the tie into the equity markets is, I believe about yearnings on the SMP five coming from abroad, there's plenty of gloom out there this morning,

the data, plenty of gloom in the politics as well. Our chief Brexit correspondent in the city of London this morning, Good morning to him. The cade just extraordinary, the Prime Minister I thought it was fascinating for those who we carried it fully on our global audience on Bloomberg Television.

Really the Prime Minister John Up at Stoke on Trent in your neck of the woods, seventy voting for Brexit, to leave the EU, and she gave a very brave speech, you know, given the seven pm vote scheduled for tomorrow night, if the right audience tom because what is she trying to say now that there's more chance of that being no Brexit, the no deal, if this is impostable? Is Wolf getting mancho said it was wonderful to have him

with us in the last hour. There's about five conversations going on here right now in Karl Weinberg of high frequency economics. You are expert at the conversational linking all this to the actual growth of a nation, the growth of the United Kingdom. Where is it, I mean, is it on the edge of recession? Well, at this point, there's not really a lot you can say about forecasting the UK economy because there are so many balls in

the air. If there were no Brexit, if everything just occurred in a straight line there were in all this uncertainty, the UK economy still would probably be slowing down. We look at the domestic indicators, you know, credit growth is slowing, industrial production is down. Services doing a little bit better, but not too great. Construction is doing okay, but a lot of that might even be Brexit related. So um, what we are in the housing market, of course is down.

So if everything, if nothing were to change, then the economy would probably be slowing down at least possibly turning a corner into recession. But then you add the uncertainty of Brexit, which in our analysis is a stag inflation event. It's going to generate a shortage of labor, which will raise wages, cause inflation, and at the same time reduce

potential output in the UK. A herd Brexit means a very very hard downturn with a good chunk of inflation coming its way, possibly on the order of magnitude we haven't seen before. And you know, I guess the magnitude before is going to rely on this vote tomorrow night. I mean, this is vote economically critical. I don't buy that well. I think that it narrows the choices. If this deal is rejected, then we're really down to two choices,

which is hard Brexit or no Brexit. I don't think that europe will return to the table to negotiate a deal, even in Parliament, a new deal, even if Parliament takes control of the process, and Um, I'm not so sure there's any politically attainable configuration within Parliament even if people cross benches, which I doubt they will, to do anything else. So I think it comes down to no Brexit, are heard Brexit, and I don't really know where which one

of those two ways it's gonna get. Johnny, I'm fascinating your thoughts because in reading the papers this morning at my uh my breakfast at um McDonald's. Um, you know, reading the newspapers this morning, the Telegraph approach is that there can be a smoothness after the short uproar. John, you have lived this in the United Kingdom. Camp the United Kingdom solve its many trade dynamics in problems just by working things out item by item, you would hope. So,

but how many items are there to work out? Eric Nielsen made adamant there's there's there's uncountable trade agreements. It would take it would take a long long time, and for what I've seen so far, they've barely started. And this is the problem. Tom. If there is a serious conversation about no deal, then what kind of preparations have been done at the government level, I'm not convinced that enough has been done so fast we go into this

vote tomorrow. It's fascinating most people expected not to pass. I start gonna find anyone that thinks it will pass. And then the Prime Minister has three days to tell us what the plan be is and she telled us what over the last few months there is no plan be tom right, Carol Weinberg, thank you so much. With high frequency egos. Will the earning season here in the

United States do anything to boost confidence? And it begins this quarter with City Group taken the spotlight, with fourth quarter results due a little bit later, followed by JP Morgan and at Wells Fargo coming up tomorrow. Joining us to discuss is Fred Cannon, KPW Global Director of Research, and he joined us here in New York. Good morning to Fred, Good morning Joanes. So what are we looking for from the big banks as they kick things off a little bit later? We're looking at him to be

see if we can beat diminished expectations. I think it's a little bit regrettable that cities the first half because we're actually more cautious on City than JP Morgan and Wells and generally JP Morgan and Wells come first, but nonetheless it's really beating diminished expectations. So expectations in terms of the earnings have come in, but the banks have rallied into this as well, So it's kind of two different things going into the numbers. Is this a low bar or a high bar? What is it? It's a

low bar, no doubt. I mean, yes, they've rallied a this year, but look at where they came from, move pretty much last year, and remember coming into the third quarter, I think there was the market was down so much. There's a lot of expectations diminishing, both on earning estimates as well as as performance. City warned early we do expect capital markets to be soft. Fred, what's and I give John Ferrell a ton of credit, folks for identifying

the weak bank performance earlier this year. I mean, the depth of the bear market for JP Morgan was down twenty two percentage Right now, I'm gonna call it a negative off the summer two thousand and eighteen. Top What metric is most important? Is it a book value, balance sheet analysis or is it something on the income statement

that matters to Fred Cannon? What matters to me is that we continue to see credit be solid, because that's really what the market was signaling during the fourth quarter was, Hey, we're worried about a recession. We're worried about the underwriting and the credit because that's what really could destroy the orward earning estimates. If credit remains solid, uh, and the balance sheets are strong, and we get a little bit of help like we expect from loan growth, we think

we'll be Okay. How much patience is there in the underperformers, how much institutional Wall Street? We've been doing this for ten years, You've got to get it going. I don't mean Deutsche Bank, Commerce Bank. I mean in the US, the US underperformers, where we're just saying, let's go. Is that evident this time around? No, I don't think that there's that much uh. You know what I would call frustration with the with the big US banks and even

the underperformers. Clearly there's been frustration with Wells Fargo UM. But as we look forward, we see a situation where fundamentally these these institutions are making their cost to capital um. With the exception of City, they're trading above tangible book value, and they're cheap relative of the market with an earnings outlook. That's that's okay. So I think that the traditional value

investors are getting very intrigued by these institutions today. So let's spend a little bit more time at the single name level and get away from the sector just for a moment. Cities out in about forty minutes. You're not that optimistic. A lot of people keep saying to me, look at the cost story, look at the cost story

with City. What is it about the cost story is City that we need to pay attention to when these numbers drop, Well, I think that's gonna be take a lot of parsing this time, because remember, with trading investment banking down as much as we expect they are, and they've already said they are, it's very hard to control those costs for the quarter. Yeah, let me do to rub But John, I think you nailed it. It's all

about the cost story, John Farrell. Do you see John Farrell, and you're reading at all that anybody's talking about, Yeah, that we gotta make revenue, we gotta make money story. I think they are. But those revenue expectations have diminished so much going into the end of twenty and that's the problem, Fred, absolutely, and that's why it's hard to

control the cost. That said, what we're also looking for is a read through to the rest of the industry, and that is what's going on with loan growth, what's going on in n ertist margins. What because we do believe the large regionals and the small and MidCap banks which were positive ongoming in this quarter, could actually outperform. How many bodies will be shared? I'm gonna pick on City Group two hundred and six thousand listed. I'm sure it's less than that right now, but five years from now.

How big is a given two hundred thousand job bank. It's uh, you know, it's up to a lot of things. I mean, we'll ask value Act themselves. It's probably a better group to ask right now, to be honest, but given their position in it, but we have to think it's should be probably five to small. What bank are you gonna follow this week? What's a bell? Whether you care about Fred Cannon, I care about the fundamentals at Wells.

It's the most domestic bank. We want to see how that loan growth if they even though they're constrained, if we saw some fundamental loan growth on the balance sheet, and we want to see what that they're just margin does. Finally, credit, is there any kind of sign that any credit problems because that will hurt the industry a lot. Like Fred Great to catch you out, friend, Canon KBW glob Will, Director of Research. Let us focus, I guess on the

the Battle of Washington. We could look at London, we could look at some of the fractious governments of Europe and of course China. Always we do this with Leslie Benjamurrai of Chatham House, who does so much of their American coverage and with her work at Cambridge and at Ellessee as well. Leslie, good morning to you. Uh. We we spoke earlier in London about Washington and the dynamic that we'll see today. We've got a clear dynamic for Prime Minister May in Lynton, in In in England and

Westminster in the Commonwealth. What will we see as the dynamic in Washington and the next forty eight hours. Well, there's so much pressure right now on Congress, on the Republicans and McConnell in particular, to come up with a deal that that so that we can get this the US government reopened as we fall over the weekend. The polls are suggesting that the public is blaming the president,

and they're blaming the Republicans, not the Democrats. So I think there's tremendous pressure to cut a deal, but it's still unclear what that deal will be, other than perhaps more money for boarding security and a bit of a gift to the president. I mean, the summary of Brexit is maybe they're going to kick us the can in their own unique way down the road. Why can't Republicans and Democrats kick the can your respective of the president to get the government open and then deal with these

tangible border and wall issues. Well, you know, that's the proposal that we're seeing right coming from Lindsay Graham, saying, let's reopen the government and continue to negotiate on the wall, try to get some money, and come back to that in the next few weeks, because it really is, you know, this is the longest shutdown that we've seen were in the day twenty four it is. It is tremendously problematic.

But the Democrats are calling the Republicans tatask, and I think this has become really a battle about who is in charge in Washington that they're setting said, rolling a line in the sand. Um, And it's really about you know, whose authority will will continue to govern or will govern going forward? Leslie, As you indicate the president seems to be losing in the polls, is that tension point big enough to get him to pull a one A t unlikely?

I mean the other you know, the other thing to note is that in the past, what we've seen is that presidents recover very quickly from shutdowns, that that sort of very negative public reaction tends to disappear within a

couple of weeks. This is this could be different, Um, depending of course on you know, how much longer it goes on and how bad the optics are, because because you know, what we're seeing is that there's there's really no evidence to suggest that there's any kind of emergency, there's any justification for for closing down the government on the basis of you know, funding the wall in the short term. So I think if if we don't see some sort of resolution, this one might actually hurt the president.

But whether that's enough to get him to turn around, um, uh, there's no sign right now that that's the case. So Leslie, the idea that he is recovery right in the polls, historically speaking, could play out once again for the president of the United States, President Donald Trump is one thing. The economic data is the same story. It's a similar story. You get these shutdowns, there are hits to economic growth, and then we make it up later on the year.

So for market participants, leslie at Leaves, I'm asking a question they're familiar with. Why does this domestic political drama matter to us? What does it matter? Well, it matters, you know, if you if you think about the optics for anybody who's looking at the United States right now, you're talking about a government shutdown. That's that's a pretty

serious thing. Even if you think that in the moment, you know, you might be okay financially, there's so much uncertainty that that creates going forward, and it creates, you know, it also raises a very significant question about what the next weeks and months are going to look like on pretty much anything, because what we're seeing right now is

a Congress that isn't working together. Okay, I, I I. What you just said is brilliant And that's the great fear of anybody of any political persuasions that the view forward is going to be chairs just like this crazy shutdown that we're in. If that's the case, is there any desire to take away the enhanced executive powers which I'm going to signal back then in Watergate, I haven't heard that dialogue yet. Well that you know, first of all, there is an immediate crisis. People need to get the

government open again. And then yeah, Congress is uh forever going to be wrestling The Democrats are going to be wrestling with how can they constrain the president? What mechanisms do they have? But remember where you know, the Senate is still controlled by the Republicans, and they're so far the Republicans are by and large supporting the president. So unless that changes, you know that the real possibility of enacting tangible constraints on the on the president's power um

are are minimal. But as time goes by, And remember even for the president, right, it's in his interest for somebody to give him a win that he can take and move forward, because this isn't in his interest. Okay, that's well said. Do you do you see him actually indicating that he's willing to do that? To find an element or an item of wiggle room that allows him to quote unquote take a win. Well, this is the

crazy part. Right at the moment, it really looks like neither the President nor the Democrats have any interest in putting anything positive on the table. Uh, you know, Linda Graham is different, and that could actually lead to some That could be the sign that there's going to be some movement. It's going to have to come from the Republicans. The President is not going to back down to the Democrats.

The Republicans, I think, are going to have to come up with the plan that that allows the President to say, I've got the money for Board of Security, there's a bit of money here for the wall. Everybody sees that this is important, you know, and we're going to keep pushing on this. But that that's a very optimistic scenario at the moment. You know, there's nothing to indicate that the President's going in that direction. Well, Leslie, that's the

domestic story. Internationally, it looks like the President could get a win, and he could get a win on trade. I don't know what that wind looks like, Leslie, but with the latest data out of China, looking at that, it looks like the Chinese are having some problems, and I just wonder whether that increases the chances of US finally getting some kind of breakthrough with the US China try dispute, Leslie, what do you think, Um? It does?

It does look like there is you know, the desire and the part of the Chinese as well as on part of China as well as the United States, to to come to some sort of agreement. Um, whether that's significant and substantial enough to really alter the nature of that trading relationship, I'm skeptical, But whether it's substantial enough for the president to gain to gain a victory. I think that there is some some prospect for that. And remember he's you know, he's got a lot of backing

across both sides of the isle. The United States are taking this tough line at the same time, you know that the U s economies had a few bobbles. What what you suggested about China is exactly the case. And so I think there's there's a good will and there's an interest on both sides to have some sort of progress on the front. You touched on something important, Leslie, and I want to wrap things up that just a final question do you see this as a multi generational

issue between the United States and China? Oh? Absolutely, But I mean this is the key strategic relationship for certainly the rest of my lifetime and and the next generations and how it gets. You know, we're right at the beginning of really rethinking and re negotiating that relationships. We're going to be talking about it every week for a

very long time to come. Leslie Benjamuri, thank you so much with Chatham House of great perspective today in London on the challenges of Brexit and of course with her full time effort of review of the United States of America and shutdown in Washington. You know, Bloomberg Intelligence is worth its weight in gold. And John Butler has put together a story has done this with billion kim which

is just simply Apple, bull case, Apple, bear case. John Butler joins us now our senior Apple analysts in charge of concept product and heaven forbid, we'd actually talk about the financial ratios. Who wins bulls and bears? John Butler, I say, in the long run, the bulls wind um. You know, Apple really is a premium brand. Here. Uh, fast forward a year from now, they're going to be

up against easier comps. They'll have new iPhones out on the market, and um, you know, frankly, it's tough to predict politics, but I have to believe at some point the China trade situation begins to get better, not worse. In your granular analysis, folks, page after page after page, let's stay with the bull case. What are the Bears most misjudge. I think they misjudged the again, the power of the brand here. You know, Apple has a lot of cash to work with. They can expand the business

through acquisition if they choose to. If they don't. Again, they can really drive the brand to expand the services business. Other products accessories like the watch for instance, and air pods have done quite well. I think there's more to come on that front, and I think the Bears missed that. I mean anecdotally. I must admit I'm seeing more watches and more of the white things sticking out of people's ears. And I saw a year ago to say it's my

scientific and it's my scientific analysis, John Butler. When we look at this, it's always a risk. Well, they've got a lot of money, and their financially engineering by diving an increase and return of cash to share, buy back to shareholders. State the case that Apple is not financial engineering, Well, it's you know, every company to a degree does some financial engineering. Again, they have a lot of cash they can put to work. They are committed to buying back shares.

They've committed overall to returning capital the shareholders in that boost the bottom line. But it's not organic growth in the business, right. I think Apple's biggest problem right now to sort of kick into the bear cases. They are looking squarely at a mature market. This is the PC market five years ago, and you know they need to expand beyond that reliance they have on the iPhone. UM. So you know there are other elements to the bearcase there. But to me, that's sort of the main problem that

Apple has to deal with. On a partial differential basis, haven't forbid I would say that they would cut the cost of the fancy phones, bring down the monthly payment of the fancy phones by extending out whatever. I mean. They got room to move here to find out where the market is, don't they they do. It's a great point, Tom, Pricing really is a science. Uh I'm sorry, arn't as much as science and you need to find that right balance between maximum price and maximum volume, and um, I

think they're still trying to find that. This latest quarter tells me they sort of hit a wall on on price increases, you know, over the come on, I remember Philip Morrison, a pack of cigarettes was eighty two cents and one day it was a dollar twelve or whatever, and they hit a wall. You haven't beautifully done ITEMT iPhone price has hit a ceiling bear case. Well, there's like six ways to fix that, right, there are many ways to fix that. I think he hit on it

just a moment ago, which is expand the portfolio. You know, maybe you could even come out with more expensive iPhones, but at the lower end. Expand on the ten are and take it maybe a little bit lower, or keep the older ten hours on the market and dropped the price by a hundred dollars. But I do think they need overall to expand the market that the rim which is the premium segment, and maybe even extend down to

the high end of that sort of those mid priced phones. Okay, what's a tenor is that the x are This is like a cheaper phone. It's pretty colors. It's selling to who it's selling to, those people who want to step up to facial recognition but can't quite afford it. Uh tough to say. We'll know at the end of the month when Apple reports. The reports out of the supplier community would tell you that the n R at the x are pardon me, has sort of fallen flat in

terms of demand. I'm not so sure on that. You know, okay, but but this is critical, folks, and you know it doesn't mean you're an Apple. We try to avoid the fanboys stuff with Apple as much as we can. But John Butler, if the XR is there cheaper phone, is it that the kids, whether in China or the U S or Indonesia wherever, they're gonna eight and pay up for the fancy phone, or that the XR just can't compete with the eight phones out there that are cheaper.

It's hard to say. Again, the jury is still out on whether or not it's fallen flat. If it has fallen flat, it's fallen flat like the five C did. If you were exactly when it came out with a variant on the high end phone, and people, I think look at it and say, why don't I just wait six months and by the higher end phone, was that where we're gonna be? I mean the point here, that's the risk of where we might be with this. And again I you know, they haven't reported the quarter yet.

They've introduced Home, but we haven't really heard them way in on how it's selling. We're only getting anecdotal evidence from the supplier. This is way to Apple fan boy talk for me. Let's bring in Paul Sweeney listening very carefully to all my Apple Am I doing enough? Paul? You are my enough fanboy to keep the conversation going absolutely.

I mean, you can never talk to much about Apple when when I look at the Apple stock, John and the story, you know, it's always been what's really driven this stock, you know, really over the last ten years has been new products, new products, new products, and as you talked about, we're in a mature phone market, so investors have been turning their attention to the services business. Will that ever be a driver for this company and this stock or will this stock always be a product story? No,

I I it's a great question. In fact, that's that's the main question on this stock though right now, is how quickly they can grow that services business to the point where it picks up any slack in the iPhone business. There's a great hue and cry out there now for them to get more deeply into content. Paul, as you well know from your work in the content world, that's that can be lower margin, and I think that's Apple's

hesitation there. Okay, I'm looking at Google and I just type this in folks, because I'm not a sophistical like John Butler, Paul Sweeney. Is Spotify better than Apple Music? I mean, the world's voting, they're saying Spotify is better. How does Tim Cook and his crew make Apple Music have that pixie dust that Spotify has? That is a tough call. I actually personally think Spotify is a little

bit better than Apple. One one area where Apple is a bit weak is in the AI end of things, and the reason that's artificial intelligence, and that really fuels Siri, and I think to get advances in Siri and then advances in your services business like Apple Music, they need to spy on their users a little bit more. An Apple is huge on privacy, and I don't think they're willing to do that. So I think it's a matter

of doing what they're doing right now. Which is leveraging that great brand name and leveraging the installed base to try and get people to try Apple Music and then with it, John, I'm I disconnected, Sirie did Sorry? I disconnected, Sirialy. I don't blame you, Tom. She's way way behind Google system. She wouldn't talk to me. John Butler, thank you so much an update on Apple, And you know, Paul Sweeney, this all comes down to some of the parts analysis.

I haven't seen a good some of the parts on Apple. But you know, the financial engineering thing that it's still a cash flow juggernaut, isn't it. It's it's it's just tremendous to cash flow that they're putting out year and in, year out, and they continue to invest back in their business across the board. It's not like they're hoarding the cash. So when you're just for cash, you can make the argument that's just cheap stock. You know the world's coming

to an end. Two hundred and sixty nine jillion dollars a year ago and now it's only two d seven can jillion laying around by Sweeney Enterprises or Twitter or whatever they're gonna do as well. John Butler on Apple y 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