Surveillance: China's Engagement Positive For EM, Spence Says

seconding that? The mystery of where we are to Thursday with Judge Kavanaugh and the Deputy Attorney General as well. We will stay focused on one of the great themes. And we have a wonderful guest John this morning to begin this conversation on our trade war, on our terror, on our taxes, which I think is another word for tariffs.

Have I studied my Spence over the years. He is Michael Spence of New York University and of course of Laurea where the Acre Loft and Stiglets and a glorious your What was it like to get on stage with Acer Laft and Stiglets, were you guys on speaking terms? Oh? Absolutely, yeah, No, we don't each other for years and been colleagues at Harvard or Stanford. In my case with Joe um No, it was a joyful occasion. It's a joyful occation right now, President ge and uh Mr Trump, President Trump keeping up

good face. But the fact is, is your grievous rifts between China in America. What is your observation of the choice set, the set of ideas that the president has right now? Well, you know, there's considerable debate about that, but it looks like what the President in a fairly confrontational ways renegotiating the terms of engagement with China and

other countries. Professor, is always great to get your insight on things, and we're while aware that you also serve as a consultant and advisor to some really big asset managers like PIMCO. What are you telling them right now? What are you advising them about the vulnerabilities emerging markets off the back of this try dispute between the United States and China. Well, there's considerable uncertainty about um the impact that of the of the of the confrontation between

the United States and China on the emerging economies. And I think the reason for that is it's just simply too hard to figure out, or there's if you drew a decision tree, there's too many branches on it to kind of get to the end. But but it's certainly true that the emerging economies have gotten themselves out of balance, uh in the post crisis period with you know, things that I at least thought were you know, mistakes that wouldn't be made again, like borrowing and her and currency,

running large current account deficits, et cetera. Uh um, And I was wrong about that. So there's some rebalancing. I don't think it's it's it's fatal at this point, whether you know that. One of the reasons it's hard to figure out what the longer term effects are is one of China's objectives is to be a positive influence in the developing world. That's part of their game plan of becoming a more influential country um our nation around the world.

And and so they're well on the way to doing that, and China's engagement in terms of investment and other things could could be um, you know, pretty positive, and a lot of emerging economies, well, the ways they sort of optimistic time out there at the moment, Professor, that might be China shifts towards an easing boss and an easing boss which could stimulate the emerging world. Do you have

that confidence? Do you share that optimism? Um? I think it's there's some easing that's likely in the cards as they try to buffer their economy. But that but for the emerging economies, access to their technologies, like the digital technologies, which are very advanced in China, access to the Chinese market are really crucial things. So I think there's justified

optimism based on China's longer term objectives. Um, whether the easing the short term, you know kind of monetary and fiscal responses are particularly positive free ms, I'm not so sure. You are an important insight professor on television. I want to advance that forward on the radio. We've got the advantage of doing that on a radio. In hindsight, which is that we've gone awfully far in our multilateral world and people are rebelling against the multilateral outcome. Did we

go too far? In a way? I think we did. Um. You know, Danny Roderick is a very knowledgeable commentator on this, and what Danny says is that for most of the period where the GAT was the sort of the evolving government structure. Um the principle was nations agreed provided it looked like it was broadly beneficial by their own values

and standards. And at some point he associates it with the ascendency of the w t O coming into existence, the global the rules in the of the system became you know, inviolable, and then countries had to adapt, you know, to a system we agreed on, but you didn't get the tinker with that with that system. And I think that's the sense in which is how he would put

the proposition that we went too far. This is critical because Danny Roderick and Brad DeLong I would also put in this group have looked carefully at the bargain we made and we didn't follow through on, and that we said for labor that was crushed by international trade, we would provide domestic support, and we didn't do that out

of NAFTA and frankly out of other trade agreements. If that's a missing link, is there any political tone to help labor it's crushed by the advantage, the societal advantages of international trade. I don't see it. I don't see any political oomph to help out retail or to help out UH textile workers in in the Carolinas. I think

that's a fair observation. Tom. You know, I suspect we may see a change in that UM if a large contingent of Democrats get elected in the mid term elections, because this is this kind of thing is clearly on their agenda, and and we may go too far in the other direction, UM and start knucking up market performance. But but I think what you said is right. There's been a lot of talk, but not a lot of action on that front. Well, we gonna have to leave

it there. Michael Spence, thank you so much. The Laura from New York University. I really can't say enough about his work and Project Syndicate. I've made very clear through the crisis, his essays have been crucial to making us think for there on where we are within the crisis and beyond. Right now Christopher Rone speaks to us was fatiguous, Chris, there's like eight ways to go, always within technical analysis. But your call on oil is so important. We have

to start with that. How do you determine a breakout? You have a rising trend? I get that, But then how do you know that the breakout is there? Well, we have to put this in context of the trend, like you say, Tom, and let's remember the last six or seven months. Even as oil consolidated, it consolidated from the benefit of an uptrend. Oil sideways for six or seven months above the upward sloping Tuitter day moving average. So we are inclined to believe the validity of this

breakout getting up through brand. We think low nineties maybe the next target. Here talk in technological talk, what momentum means. I've never understood that. You know, Rowe goals, I'm ving all the other Newtonian mv we have. What does momentum mean? The chart people, momentum uh clearly is an academic term. As technicians we call it trend. It's simply rate of change. I think when you look back at different factors that have been proven to work over time, momentum is the

most reliable of those. What we know about momentum is it's very mean learning in the short term, right, It's very random in the short term, but very powerful over the longer term. John, what's so important about this? John Farrell? Is chrisop Ron nailed that, and that the trend is your drift function. It's your momentum, not a further inertial force from the trend. That's to me where a lot of people get this wrong. Was that enough physics, John?

That was really impressive. Tom, Thank you, thank you. Can we get to just how this old market has really changed Chris in the last several years. Several years ago someone told me think about the oil market as if it has a ceiling, that once we get to sixty sixty five, the crude comes online in the United States and it drives prices lower. And now I'm just hearing think about the crude market with a floor. We have a supply risk story in the market. Now, how has

it changed that much? Why has it changed that much in just a couple of years. Yeah, I would make maybe two or three observations. I would say number one, the idea that crude had a ceiling on it in the mid sixties or low seventies, I think became a very very consensus view. And as we know, what do markets like to do, they like to challenge consensus views. I think the big change from when oil was under a lot of pressure that was a credit driven move.

If you look at energy sector credit, it was under lots and lots of pressure uh during that two or three year period. That has been different over the last eighteen months. Even though the energy stocks haven't been fantastic, we haven't seen the systemic risk emerge from energy credit. I think that's a very important distinguishing factor. You've had energy. How yield spreads actually make new loads this week. I think that is support of both for oil price itself

and for the energy stocks in particular. So you believe there's discipline in the credit market now, Chris, that was absent a couple of years ago. It certainly reflects that. And at the end of the day, I am very reluctant to embrace the equities when credit conditions are weakening. So I certainly welcome the improvement that we've seen, most notably over the last six months. Even as oil was consolidating this year, credit conditions were still stable. That is

an asset for the stocks. Let's go back to the equity markets and the fundamental people will notice the narrowness of the market, only selected stocks really doing well. How do you fold that into technical analysis? You look at sectors, you look at individual charts. But how do you take the Apple Amazon effect into what you're doing? Tom? I have to say I think that's one of the most overstated fallacies of two thousand and ten. This market is not as narrow as commonly described. Let me give you

three iterations of the SPS. We know the cap weighted SMP is at new highs. That's the index we look at every day. Well, the equally weighted SMP is also at new highs, as is the reverse weighted SMP. So if all your large weights Apple, Amazon, Facebook become your smallest weights, that index is still making new high so it's difficult for me to buy. The market is dangerously narrow story when all these different iterations of the index

are actually making new highs. And what we did recently we looked at a distribution of Russell one thousand returns by market cap. Believe it or not, it's the second and third quintiles, the belly of the market that has actually outperformed this year. So that is not where you find your biggest stock. So I think this story, Um that it's only four or five names leading this market is just partently false. Chris, for anyone that might have

missed what you just said. Are you essentially saying that if you make every single stock on the SMP five hundred had exactly the same contribution to the overall index as the next stalk that disanquity markets, that a record high. Yes it is. And even if you take it one better, if you make Apple, Amazon, Facebook, Google, JP Morgan your smallest weights, um, the SMP is still at an all time high. So this idea that it's narrow, I I just think it is not supported by the facts. Tom.

I don't think people recognize that. I don't have many people come on this show with us at least and say that, did I No, I don't think so. I think that you know. The hallmark of what Chris is doing is just go through the data, go through the sectors. Where's the anomaly right now? Where's the distinction within the thirty page power point? Did you do? I think what's most timely right here, perhaps and maybe most underappreciated, is the extent to which the industrial stocks have improved over

the last three months. You have big bell weather names, whether it's Caterpillar or Bowing, or Emerson Electric or Parker Hanaffan, that has meaningful that have meaningfully improved over the last ninety days. I think that is underappreciated here by a lot of investors. I mean that's critical because these are not you know, fifteen price to sales, eight times cash flow,

you know, thirteen times eve Dost stocks. They're like, there's still are they They're not cheap, right, but I think they're Caterpillar at one point this year was trading six or seven times forward arting. So just to put it in a little bit of context, and you think about some of these names, at one point or another in two thousand eighteen, all of those stocks have been correlated to the emerging market trade. So the fact that they have botted and turn up, does that tell us that

maybe e M is poised to improve. You're a little bit something to think about going forward. Christopher Wrong, Thank you so much for strtigaus research today. Just important work, particularly that I thought an oil to ninety barreled. There is Facebook, there is Instagram, and then there's Sarah Ponza with a combination of these two. And it's not only two guys from Instagram leaving. A lot of are leaving Facebook right right. It is quite a shake up at Facebook.

But what's really standing out is Instagram because Instagram has just been such a growing area for Facebook and it has become more and more important. So people are saying that, Okay, well, if the CEOs or the founders I mean of Instagram are now leaving, what does that mean for the importance of Instagram going forward for Facebook? But either way, Facebook is down to percent this morning, so we'll have to

see more going forward. Sticking in the same type of space, if you look at Square, it's a mobile payment company. This is run by Jack Dorsey, who of course is also the CEO of Twitter. Square is actually up two and a half percent this morning. Now. An analyst over at Namura Incident put out a note saying, well, Square should probably be the newest member of the fan complex.

The analysts also raises Chrice Target. Yeah, so adding Facebook, adding Amazon, Netflix, Google, So they're saying that it's shaken up space. It should be in there anyways, helping the price. We've got a Scena, so one of the retailers that owns brands including dress bar And and and Taylor Loft Justice. Those brands might be better known ven A Sena, but the stock is up eighteen percent today. After reporting killer

earnings yesterday after the close that beat estimates. They also had its first comparable sales growth in three years, and then til rate. It's been in the news the past week or so, up sixteen percent, well until Ray this morning said it's successfully exported medical marijuana to Australia to distribute to children who suffered from epilepsy. So it was down the past three days. Investors are using this to snap those losses get into the stock. Hillery up six

percent this morning. A few upgrades and downgrades for you work Eva now. This is a company that provides cloud and mobile software. It's based out of Iowa. Up fourteen percent after it was upgraded at Bear to an outperform. Science Applications International also known as s A i C. This is an enterprise technology company, upgraded to a buy from hold at Jeffrey's. It is down one percent actually, and Heritage Crystal Cleaning cleaning services company. It was upgraded

to an outperformed from neutral at Beard as well. Thank you. Joining us now is Patrick Gregory of Bloomberg Law. He covers the Supreme Court for his Patrick you know, with all of this back and forth over the nomination of Brent Kavanaugh. It's possible to forget that the Supreme Court is going to be open for business in October, and I'm wondering if you could tell us what is on the docket and what should we be looking for. Well, um,

that's true. And even Thursday, we're gonna get some orders and cases that could grant review or deny review in some important cases. One case I'm covering involves a high school coach who was praying on a football field and was suspended for that. So that's the case the court could grant review in and then uh, in October. It's really gonna be It's not, um, a whole lot of hot button issues. UM need October term. But we'll have to see alright, So not a lot of hot button issues.

So does it matter then whether the Supreme Court has a full complement of justices? Um, of course it matters to the parties involved into some extent. But I would I would say that the real deadline here is going to be November midterms. Why is that Well, because if Kavanaugh doesn't get confirmed, you look at that scenario and you could really have, um, the Democratic voters be galvanized by a chance to block block the nominee. What do

they do with the next nominee? I mean, I don't want to, you know, create a news flow here and then Mr Kavanaugh. You know, I saw one person sayd I believe he's innocent until proved guilty. But assuming Mr Kavanaugh in some form steps aside, what would you presume from the next nominee? I mean, is the is the

process forever changed? I think we are certainly in new territory here, and that's why a lot of people say that there will be pressure on the president to appoint a woman, and there are a number of qualified women on his Supreme Court shortlist. A lot of people are talking about Amy Barrett and there, and there are a couple of others. As far as the cases that you described that the Supreme Court will be hearing, are they able to put off important or contentious cases until they

get a full complement of justice. They have a lot of freedom over over when they schedule oral arguments and things like that. So sure, again, looking at the Supreme Court and the retiring judges is well, I mean, it's it might right that in the history of the Court, this is an exceptionally fluid moment in terms of not only bodies coming in such as Judge Kavanaugh, but also the idea of what retirements could be just in the next twelve months. Absolutely, you know, Ruth Bader Ginsburg is

certainly getting up there in terms of years plants. Thomas has been on the Court since I was a kid, and yeah, it's you know, who knows what could happen. There could be another vacancy there and we just don't now. I'll thank you so much, Patrick, We greatly appreciate that in the Supreme Court. Pim Fox in time came from the Bloomberg Interactive Broker studios in New York. It is five thousand three or miles south out of New York, out of JFK or Newark, and you wander across Venezuela.

Then you really wander across the Amazon in Brazil down to Argentina. If you're lucky, you're on American Airlines flight. And nobody has done this in Bloomberg more than Eric Shatzka, who has spent major time in Buenos Areas. I want to talk about the Central Bank resignation in your interview yesterday with Mr MacRae, where I know he was managing the message and that how are the people of Buenos Aires and Argentina doing? I mean, they're the ones living

this crisis. Pay so out right now thirty eight point six four, We're gonna make another dash to forty. How are the people of Argentina doing? Uh? With difficulty? It's like tangible right. Inflation tom is at the highest level in Macari's presidency. The last monthly figure was almost thirty and it's heading up. Inflation is getting worse better, The

economy is getting worse before it's getting better. The best Mr Macri could do was to say that he was hopeful the thanks to the weakness and the pay so and the juice that it's giving exports, the Argentine economy might start turning around, might come out of recession in the second quarter of twenty But didn't. They just imposed

tariffs on exports of wheat and soybeans. There are some he calls them temporary emergency export taxes, but those are being put in place to try and restore a budgetary balance. This is you know, he is fighting fires. It's like it's like being in the midst of It's like being in the rockies. This summer right there, wildfires everywhere you look. Before we get to the central banker, what does Madame Legarde in the I m F want They're going to write a big check. President Trump will say America is

writing a check. Is a conduit through I am And to your point, Macary said that he has had a lot of support. This wouldn't be happening without American support. That goes without saying, of course, but that wants to get dinner Daniels tonight, what I want to know, Eric is, and this is critical, what does the I m F

want this time around of the Argentinean crisis? What's the I m F. What What we learned yesterday in the conversation that I had with Macary on television and we subsequently had with him for an additional half an hour behind the scenes on the record, I should add, is that this agreement that he is talking about, this new agreement with the I m F, which in theory is going to span the size of the program from fifty billion to something else and accelerate disbursements from the fund

to Argentina, is going to involve a change in monetary policy. Tom would and maybe this gets us to Luis Caputo resigning from the central banking Argentina. Would Argentina be changing the way that it manages the economy on its own or is this a stipulation? I think it's reasonable to ask, if not, to conclude this stipulation didn't go there? Are you going there and saying this is a stipulation from who? Investors?

Or I am f Well, what Macari told us yesterday the report and again this was I have to emphasize this was not on television. He did talk about a change in monetary policy coming, He didn't go into a lot of detail. He said subsequently that the central bank needs to revamp these are his words, revamped monetary policy, that the explanation for this would be coming in several weeks. But there was a wreck ignition that manipulating a single

interest rate was not effectively managing the Argentine economy. Is this a conclusion that Louis Caputo came to on his own? Remember this is an independent central bank ostensibly. Was this a conclusion that Federico Sturtzenegger, his predecessor who stepped down three months ago. Did he stepped out of his own volition?

We don't know. Um came to on his own. It's not clear now that we have the central bank governor resigning suddenly only three months into his job, in the midst of a negotiation with the i m F, during which we learned from the President of the country that there will be a new monetary policy agreed to as part of this expanded aid package. There are a number of dots that we can start to connect. Don't you

think pace was weaker shaker talks that's the effect? Well, Eric, I guess I want to try to connect this to the larger theme of confidence and credibility, because if you're going about an austerity program at the same time as you just described that that they have at least last measured thirty five inflation, they have a devaluing currency, they have a variety of challenges that were unmet under previous administrations. Where does this leave their credibility? Well, let's just start

with where the credibility is now. Let's forget about where the credibility is going to be after this I m F package is formally announced and the markets have a chance to react to it. The credibility is in tatters. Part of the problem in Argentine over the past five months is that the government has done such a terrible job sitting expectations. So not only has it set expectations too aggressively, it has dramatically underperformed the expectations it has created.

Let's begin with the fact that starting the year, the Argentine government told the people of Argentine that economic growth would accelerate to three percent and inflation would come down to fifteen percent by the end of the year. We know where inflation is now, running north of and probably close to forty. We know that the economy has entered recession. Yes, don't.

They suffered, in his words, the worst drought in fifty years. Yes, there was an emerging markets crisis that probably contributed to the dramatic weakening of the pace. So but to go to Tim's Pim's point, Tom about credibility Pim. On August Mauricio Macri, the president, was on national television talking to Argentine's about the need for an accelerated I m F program saying that we had it. He said, almost have an agreement, the agreement. Agree. Stop stop there, what are

you the former mayor of New York. You're talking Spanish now, I'm Bloomberg. Spence is only one guy that can do that, and his name's the building Eric Shatsker. Quickly here, this is important. Frame what Argentina is for our American audience. It's a million miles away. It's it's something out of Eva Parona and all that we are wrong and wrong, wrong in our stereotypes. What's the so what of Argentina? Is it a diverse economy? Most people's fair concept of

a Latin American nation. Why it's broadly educated, University education is free, there's a large middle class. Argentina is the second largest economy in Latin America, and if I'm not mistaken, the second the largest grain exporter. We know it because of its beef. But this is as European a country as there is in Latin America. Probably in you know, in the current brilliant it's probably looks a lot more like Italy than it does Brazil. Michael, are you gonna

do the news in Spanish? Can we can we do that today? I mean Shatsker is talking Spanish here, I can't. I can barely do it in English. Now we noticed recently, and I'll just offer this that in Argentina, at least in Buenos Aires, has the highest per capita number of psychologists per pose where you come up with this stuff, Eric Shatsker, Thank you for your continuing reporting, Mr McCree and the unique features of Argentina. This is Bloomberg. 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.