Surveillance: EM Story Isn't Overplayed, Santos Says

US and China. And Gabrielle Santos has been following this. She of course, is a vice president Global market Strategist for JPMorgan Asset Management. UM, thank you so much for being here. She is in our Bloomberg Interactive Broker Studios. Gabriella, what did you make of this record credit growth that we saw in January out of China. So China has this balancing act they're trying to to play here right there, trying to do some structural reforms. They've acknowledged over the

past couple of years that they have a credit problem. Surprise, UM, we can clearly see a big, big increase in corporate credit in China, most of them have credit problem. They tried to double down on that and you know, try to try to do something about it. And now we're just seeing them say, all right, actually leverage is great. No, no, no, And so that's the balance the act they try to play, right,

So it's long term, we've got to fix this. Short term, we have to guarantee social stability pretty much UM, meaning have a decent economic backdrop. So it's a bit of a push pull. Long term they want to eventually wind down that credit piece. Short term they're happy to step on that lever um just to guarantee some stability. But what's interesting about the Chinese stimulus is that credit is

just part of it. They've been relying on some other stimulus that's new for them, which is actually reduced saying income taxes, corporate taxes. So they have been trying to be a little bit more creative UM at the same time that unfortunately they have to revert to the old playbook from time to time. And yet, Gabby, we've had five reserve requirement ratio cuts since early and still growth

has not stabilized. What is different about the character the nature of the stimulus this time around, and why the economy isn't stabilizing as it has done in response to these kind of measures in previous years, Well because it's not a bazooka like they've used in the past post global financial crisis, or even they were doing broad based monetary easing, broad based stepping on that credit lever This time they're doing a little bit of that, but they

are aware of that structural issues. So they are also trying to deal with fiscal uh stimulus, which takes a little bit of a there's a bit of a lag

until that plays out in the economy. Alright. So the reason why this all matters, right is because first of all, China is the second biggest economy in the world, but also we have a situation we're invests are racing, they're tripping over themselves to go into emerging markets, debt and equities that I have to wonder how much this really hinges on the idea that China is going to remain a powerhouse come hell or high water, no matter how they have to get there, and including adding leverage and

basically sacrificing their future for the now. So there's very much an expectation that China will succeed in stabilizing their economy, so it's not that bazook of stimulus, so it's not an acceleration and growth, but it is an expectation of stabilization and growth. So that's very important of course, as

you mentioned, because China is a huge economy. It has links all over emerging markets, and it has an impact on developed markets as well, Europe directly, as as as as a big trading partner, but even in the US right for US companies, So it matters in so many different dimensions, and that's why we have to actually see the effect on the data of that stabilization. So let's think about the spill over, the potential negative spillover, because

here are the fears. This morning, you get a decelerating PPI reading, perhaps falling back into deflation. There the fearies industrial profits will be lower, companies already under pressure from a weaker economy. The fear is that the export prices are going to roll over, and the fearies you export disinflation into the rest of the world. Feels a little

bit like early perhaps with the volume turned down. Is that a decent comparison, that is a decent comparison that was that time that we were worried about a Chinese hard landing if we recall and all of its negative spillover effect on emerging markets developed markets as well. Um So, I do think we need to see that stability in Chinese data, but that perhaps the old China is not where we should look. Right as we were mentioning there

is more of a fiscal stimulus push. I don't think we should overlook the tremendous amount of stimulus they've done through their reworking of income taxes. Right, So where we should look for that stability is actually on the consumer side in China. From an investor perspective, Does this mean by Chinese bonds, by Chinese equities? From that perspective, I would say it's by you know, emerging market So you don't think it's been overplayed this whole em But I

do not think it's been overplayed. Even though the Bank of America Mary Lynch for Manager Survey actually says, for the first time in its history, the majority of clients think that that the E M long trade is the most crowded trade out there. You know, when I actually look at flow data for emerging markets, I think the best source for for that is the i a F.

The Institute of International Finance. They do a great job of tracking flows to e M. You did see an increase in the fourth quarter of last year, but I mean it's it's barely a wrinkle in the water. So maybe people are saying they're feeling optimistic about emerging markets. Frankly, I haven't seen that in the flow days. The market seems to be positioning for this reality, just in terms of price. I mean, we're up seven and a half percent on the Shankai come through en. We're on for

another week of games for Chinese equities. Gabby, I just get the fitting in the market is already behind your point of view. The market is already invested to capture upside once China stabilizes, and I think the real fear and I get a lot of messages about this on any given day. Now what happens if we get a

trade deal and the economy still doesn't stabilize. So, yes, we're up seven percent in emerging markets this year, but that's after we tanked fifteen percent last year, right, So when we look at valuations in e M, still below average on a price to book ratio, which is our favorite valuation metric. When we look at emerging markets earnings estimates, they've been downgraded by seven percent in two months, so still very low bar there for earnings, especially in China, Korea, Taiwan.

Um So, No, I don't think that e M story is overplayed, and I think it has further room to go. How much is the M e M story uh contingent on the dollar continuing to weaken or not strengthening further here, that's a really crucial point. It's e M has always been very, very highly correlated to dollar moves, not as much as in the past because it is less commodity focus now, but there is still a strong correlation of about zero point seven. Um So, it very much needs

the dollar to weekend. And I'm somewhat can sarned that the dollar has started to strengthen again. Um So, to be fair, that's a wrinkle in this positive story that we've been discussing. Um I think for em the dollar very much trades on growth differentials versus interest rate differentials. That's more of a developed market story. Um So. Again, going back to that point, if we need to see the data stabilized in China, which would get the rest of em going well, Lisa, you mentioned the Bank of

American Mary Lynch Fund Manager survey. The interesting thing about it wasn't just the number one most crowded trade, It was the number two most crowded traits. The number one was long EM. Number two was long the US dollar. There's some tension between number one and two. The market has positioned for a stronger dollar. It's positioned long EM. How of those two things reconcile. No, those are contradictory ideas. Very much needs the dollar to weekend. It cannot outperform

if the dollar is strengthening. Gabby sends us great to have you with us JP Morgan Asset Management, Global Market Strategists. So the two most crowded trades in the market, according to this of contradictory ideas, and most people would agree with Gappy. That just makes sense. I just wont to how those two traits are going to reconcile in the coming months. It shows me just how much confusion there is out there. I mean, honestly, right now, uncertainty is

sort of the key word. You hear sort of a bell go off any time anyone says uncertainty, it's saying, you know, basically, we don't have conviction because it's really hard to know what's going to happen. So who knows. Isn't it just a nature of financial markets that there is always something to worry about? No, I actually think that this is a change. I mean, yes, of course,

there's always something to worry about. But I think that for a number of years there was a don't fight the Fed, don't fight the central banks kind of mantra, and if people went along with that, they won. And I think that there is not the same macro story anymore. So essentially, what you're saying is the fedist backed away and that is sufficient. That is used to be sufficient to stabilize growth and stabilize risk, But now that's just

the prerequisite and no longer sufficient. No, you're taking the morphine away. People actually have to price the market, they actually have to figure out You think that's what we're doing now. I mean a little bit more than we used to. Months of rough market dates and the federals of does a full one eight right? I mean, we could talk about, you know, whether the morphine actually has been pulled away, but that's like guess a conversation for another time. I thing, we're still loaded up. We shot

some more thing worldwide. We can talk about that through this. Let's talk about our morphine addiction. Let's not I wanted to really dig into the dollar because this seems to be one of the biggest conundrums of twenty nineteen. Is it going to strengthen or weaken? Joining us now is Bip and Rye. He is c IBC head of North American Foreign Exchange Strategy, Viben. Thank you so much for being with us. Really, this is an area that I

hear complete lack of conviction on. You've got some people saying the dollar is going to weaken because of a devilish fed. You have other people saying it's going to strengthen because everybody else is going to be more dovish. Where do you fall on this, Well, we're on the

side of the former camp. We do think that's rategically the dollar is overvalued by some twelve to fifteen percent, and over the longer term, the trend is going to be for the dollar to weekend, and of course that's reflective of like you said, it dash fed and also because of you we we would term is irresponsible fiscal

policy and as a cyclical deceleration in the U. S. Economy. Now, of course, you know tactically that hasn't really born fruit, and our view that's because really there's there's a lack of alternatives out there worth investing in when you when you judge from a fundamental perspective, and that's really what's kept the dollar inflow in view for the first month

or so in two. The argument over the fiscal story for foreign exchange that I've heard a couple of times, many times over the last couple of years is that the fiscal deficit is going to get so big to fund it, either you need much high treasury yields or you need a much weaker currency. Been why does that story play out anytime soon? That's that's probably going to be something again, and that's going to weigh on the dollar more longer term as opposed to anything short term.

And again, when we look at deficits or even sorry, fiscal deficits versus the dollar, that tends to be a fard of five quarter lag. And again you know that that was something that was implemented last year, so we still expected to be more of a late two eighteen early story. And again, you know, the key question to ask is that you know you you run the risk of running a deficit, a large deficit. Now, what happens when the US encounters a recession? Does that depthit blow

out to say, to nine percent of GDP? We do think that that's going to be a little too much for foreign investors sy stomach. So you think the reaction function of investors, the central bias of investors that has existed for a long long time now is going to change in the next down term because typically BIP and what we used to is if the global economy turns to lower, you buy two things, You buy treasuries and you buy the US dollar. You think that changes next

time around. We think that there is a good chance because again with the tax cuts last year, what ended up happening was a cyclical decoupling of how the year zone economic picture it grows, and also how the Japanese economic picture goes. And also now with the U s economy going undergoing a downturn, I think what's been underappreciated is that we're just entering the US cyclical downturn now, whereas the euro Zone, Japan have already been going through it.

So we would expect the years on the Japanese economies to come out of this cyclical downturn much sooner than the US will. And in our mind, you know, the investors will punish the the US fiscal situation because of that. Again, you know, that's not a it's not a slide against the U S dollars role as a reserve currency. At this point, we do think that's much more of a

longer term theme as opposed to here now. But we do think it's going to be more of a story about the the decoupling of the cyclical pictures and some of the other larger economies in the US. It's so interesting because we do talk about the deepening deficit in the US, and we talk about, uh, some of the concerns around the dollar as a reserve currency, and yet there is zero evidence, certainly with rates that people do punish the US for borrowing a lot of money. I mean,

you see people just flooding back to treasuries. So I guess where where have we seen any evidence that there is any recognition by investors that the fiscal backdrop is weakening? You haven't seen it yet. No, that that that's something that's going to take a longer time to play out. And and again you know you're right. I mean, where's liquidity, where's the yield? Right now, it's in the US dollar, And that's part and parcel for the reason why the

US dollars still remained somewhat firm. But again we caution that the investors to remember that which which economies are running the current account surpluses and where are we seeing the portfolio investment really flow out of. And that's of

course your surplus economies like the Arizone in Japan. So what happens when we start to see domestic yields and those economy struck to rise when our economies are out of from in the US, you would expect to see some reversal of portfolio flows that we've seen over the last couple of years. So that would be movement out of the U s economy and out of US securities and back into potentially Japanese, your European or other surplus economies.

And again that's quite a way on the dollar to a certain extent, I want to get your view on the prospect for a trade deal. The headlines have dropped across the Bloomberg in the last or so and one of the headlines that jumped out to me amidst all the happy talk about progresses this line right here. The United States is focused on technology transfer and currency in these talks. But then, how is the currency going to

be a feature of these negotiations? Well, I mean, there is the risk that the Chinese could weaponize the rem and b and and and let it depreciate even further. And again they if I were the US, I be somewhat concerned about that, given the implications for trade, and of course we've seen ratcheting up of rhetoric from the Trump administration on that. But you know, at the same time is the end goal for the Chinese is still

to liberalize the currency. The only issue is they can't do it that quickly because if you were to too quickly, you would expect to see massive capital outflows from the Chinese economy. Then you get a weaker ribbon be anyway, So again, I mean, it's it's kind of a fine balancing act for the Chinese to do that. And again, the focus on the currency, in our view is still very much an important part of the Trump platform when

it comes to China. But I would argue that the technology answer is probably, at least in the near term, the more important feature to keep an eye on on the currency specifically, though, and then we can get too technology transfer just quickly. I find it difficult to see how we can push for the Chinese to liberalize the currency because, as you say, it will end up with a weaker Chinese currency. So what do we effectively asking

the Chinese to do not to liberalize the currency. I think there's still a misplaced, misplace rational among the Trump administration that the Chinese are managing the currency to be weaker than it really needs to be. In the review, again, the current accounts are plus a shrunk over several years, and that again alludes to the fact that, you know,

the currency needs to be somewhat weaker. So again, you know, we would chalk it up to somewhat of a misplaced view amongst the Trump administration in regards to what the Chinese are doing with the currency. It's quite the opposite of what we had in the middle part of the last decade, where you could make a reagionably sound argument that the Chinese we're keeping the currency artificially weak. We

don't think that's the case anymore. In fact that we do think that the Trump administration needs to uptake their view on and the Chinese currency and how they're managing it. Bib and rye of C I b C. What is your highest conviction trade this year? Well, we're some where we are bullish on surplus currency such as the Japanese yen and UH and the Swiss frank to a degree.

And again those aren't yield plays naturally, they're more of our an expension of our view that liquidity will continue to wane and we will be and trading more or less of a risk of the environment going forward. We do think that this equity rally was overdue, given the

fact that we we overshot in Q four. But but going forward, I mean, given the fact that liquidity is slowing, and you can draw a reasonably sounded relationship between the flow of liquidity UH and both process of volatility, meaning that you know, liquids liquidity does decline. That tends to lead to a lot more process of volatility, particularly in the f X space. So we expect the Japanese and the Swiss frank to have perform in that environment versus

the US dollar. We're also not entirely optimistic on commodity currencies, including the Aussie and and and the kiwi uh weed, more or less expect them time to perform. And again, you know, if we are looking at the Eurozone, we're more or less waiting until the political water has become

much less uh much much less muddier. Of course, we've got the parliamentary elections in May, and of course we've got the Spanish election has just been called for on a and then you've got the entire the break situation, whether or not that represents a shock to the euro Zone. However, we remained somewhat optimistic on the Scandinavian currencies, including the Swedish chronic and then central bank there's is looking set

to raise rates going forward. So again it's really a story about surplus currencies in our mind going forward, and we think that's about perhaps the safest that to play in the in the effex markets. So safety above all else. Pip and Rye, thank you so much for being with us. Pip and Rye, c IBC, head of North American Foreign Exchange Strategy. Well, talking about the trade story. Uh, let's go to Washington, d C. And talk about what's going

on there. Let's bring in Isaac Boltanski covers point, Director of Policy Research. Isaac, let's start with trade, since that is what's moving markets more than staving off another government shutdown. Do you think that this time we're actually going to get some sort of agreement? Is the happy talk out of Washington, d C. And Beijing different this time? Good morning. I think this time is different in the both sides as you were just discussing, I think are incentivized to

find some way to Yes. It's still unclear what exactly that's going to look like. It's still unclear what the enforcement mechanisms will be, which is perhaps the most important part of this whole story. But I think that pressures on both sides of the Pacific have led us to where we are. We have continued negotiations, which is always positive, and the President made the biggest point this week, which was at least signaling a willingness to push the next

deadline further if there is progress. And so I think this happy talk is different and that it's going to at least give us another punt. I would just like to also say that happy Talk has a trademark on it from Jonathan Farroh, who has absolutely coined the term so far, just because I abused it this week doesn't

mean it's mine. We're gonna give it to you. I do have to wonder Kyle Bass of Having Capital Management writing a Bloomberg opinion piece in the past few weeks talking about how President Trump should double down and ask for more from China based on the happy Talk trademark registered mark. Based on what we're hearing, do you think that President Trump will take a hard enough line on China and solidify ideal that is appropriate for what some of the concerns are well. This has been one of

the interesting dynamics the battles within the Trump administration itself. Um. And whether that's blight heiser versus minution or you can go straight on down the line. I think that what we're going to get is a document that broadly outlines all of the goals that we've been talking about now for the past year almost um. But in terms of if it's enough, I don't think there will ever be enough.

It will simply be a few steps in the right direction towards opening up China's markets towards um narrowing that trade gap and hopefully providing again this enforcement mechanism where this time can indeed be different as long as we are able to get some clarity into what those promises

look like and whether those promises that were made are kept. Isaac, I'm really fascinated to get your insight on on how you think this story is playing out in Washington, d C. And that's Amazon abandoning Long Island City before even arrives. There seems to be more broadly a backlash against big business on the left of American politics right now, increasingly so over the last year or so. What's your read

on how you think this is going to play out? Sure, well, I can tell you that the the read from d C can sort of be bucketed into two separate reactions.

The first is worry that traffic here in the DC metropolitan area will get much much worse because of it, and the second is simply that I think this is one more indication, just one more data point of the just herculean battle between governments and these these large tech companies that are operating in some ways like clasi governmental institutions and so It's not just going to happen here. We're going to see it in the halls of Congress with hearings in big tech. We're seeing in California and

even Germany with some of the taxation proposals there. This is just one part of a much broader battle between governments trying to reassert themselves and large tech companies that I think have grown almost unabated over the past decade. Isaac, you're saying that you worry about traffic increasing. I'm surprised that you say that. I would think that there would be a collective cheer uh in Arlington, Virginia and the Washington D C. Metro area because it one, it was

the number one headquarter. It's not going to be split between two. I'm surprised to hear. Is there more pushback to you in the region against the headquarters coming. No, Look, that was that was largely tongue in cheek. I think that the reality is that the DC just worried about senators getting around the city. That's so sweet of you carry on. I think, yeah, No, Look, I think DC is happy to get it, and they will be interesting

to see how the rest goes. But the bigger. The bigger battle here, I think is going to be in the halls of Congress because what we saw here was the progressive left in some ways, and this we've talked about before. The herbal Tea Party got a big win here and representative of causeyor test is really I think the main victor. And this is something that she can take from, you know, this battle that was just in

Queens now to the halls of Congress. But there is a big problem here, and that's literacy around certain financial issues, Isaac, the belief that if you take away three billion dollars of subsidies to Amazon, that you have a parlor cash to give away to do something else with um. Is the Left trying to sell a pony here and given everyone a free pony, or they just misunderstanding what is going on. I think I think it depends member to member UM in all honesty. But but your your point

is a fair one. And I think politicians on both sides of the aisle have used misinformation and and and and I think a broader um mistrust of different entities in society to further their cause. And what we have here is slaying on a mistrust of big business and big tech that is really only just beginning. I actually am surprised that you think, uh, that Alexandro Casio Criteles can bring this to the halls of Congress as a win. I actually that was not my reaction to this. Necessarily,

there is a lot of backlash to this. You think this is going to be viewed as a win or do you think that this is going to weaken the far left position? I think I think her reaction indicates that she believes it's all in, that her supporters believe it's to win, and I think it's one where Um it's whether whether it longer term is positive for the city,

No one truly knows, and only time will tell. But at the moment, I think it will be spun undeniably as a win for uh that particular brand of progressive politics. But it was certainly outcomes she wanted, and she can turn around and say it was a win as far as her objectives were concerned. But I guess the point you're trying to make least is that the outcome isn't

going to be positive. I mean, and I think that that's sort of a consensus across the board, is that I mean even local politicians in New York City and Long Island City have said off the record and on the record they kind of were looking for more from Amazon. They weren't looking for Amazon to just up and walk away from the table. Yeah. The other issue as well, Isaac, and I'd love you thought on this, it is the

battle between cities in America. It's almost been encouraged. Do you think that's something we need to take another look at good point? Yeah. Look, I think that we saw during this entire bidding process a degree of disdain and and um and I would say overall sort of discord.

That is concerning given the state of our local cities, given the need for broader sweeping infrastructure spending and ideas like that, and so instead of perhaps having cities battle wants battle against one another, we should have a broader, sweeping agenda that actually handles some of these concerning issues. It's great to catch up with you on some really important stories in the last couple of days. I sat Boltanski, do you want to us from Washington Campus Point director

of Policy Research, Lisa Jonathan. I think you made a fantastic point, which is this whole idea of cities battling each other, whether it's for budgets, whether it's for companies an Amazon fueled that was trying to play the game big time, big time, and I guess that I'm wondering when the backlash is going to come from that. I mean, ultimately, I mean not to be al Kumbaya, but if cities benefits, shouldn't have benefit all the cities under the same umbrella.

I don't imagine you singing, come buy on. I could send Comby. I want to go there. I will take your past. Tom Kaine's not here are past? Tomkin is the lead singer and DJ alright, alright, I will let him continue to all that. Mansel. Paul Sweeney joining me in the office here in the Bloomberg Interactive Broker's studios. Paul, really interesting to watch what's going on in Nigeria. It's being called a bell weather for African democracy. That this election has more to do and not just with Nigeria,

but the fate of democracy in the entire continent. Joining us now to discuss Amaca Aku Eurasia Group Practice Head for Africa. Amaca, can you just set up for people who are not following the African elections. What are we looking for? Why are they so crucial? Great? Great? So this is my guys, fixed elections since it returns to democratic grew in the last two have been fairly competitive, the last one incombat off to the opposition who is

now the president, Mohammadbuhari. This one is also very close and Buhari now stands, you know, faces of challenge from Atiku Abubaka and people are watching to see, you know, will just be another scenario where and incombat users. But if, if, if the opposition doesn't win, will there as certain results. So there's some tension in the air right now. Think how this goes down? Not so Amaka. Obviously this is

an important election. Nigeria is the is Africa's largest economy. Um, what is the impact do you believe from this election on the broader economy in Nigeria and maybe the region in general. Frankly not much. So we had at the AGA Group behind Nigeria on a COP ten Global Risks for in part because we were making the point that you know, there was some optimism that the opposition candidate was to win, it might hear out some drastic change

for the economy and you know, more publive outlook. The truth is that they're really sort of to not so great choices before Nigerians tomorrow, and we don't see the opposition candidates being able to significantly improve the country's outlook in the next four years. And that's because he's dogged by sevit allegations of corruption. He has no record of really tackling sort of the main problems Nigeria faces, which is revenue generation. It collects of one of the littlest,

smallest revenues on the entire continent. Um so, so both are the main issues, and then of course we have a huge infrastructure that deficits. Those are the main issues that we just don't think that either candidate has either the energy to creativity or the competent. Really, yeah, Amaca NCU, thank you so much for being with us. Amaca Ku is Eurasia Group practice head focused on Africa and talking

about the Nigerian elections. Really interesting to think given how big this economy is, given that this nation has more than a hundred billion dollars of debt and has been borrowing a lot in recent years, and given the fact that it is setting the tone for democracy in the entire continent. Definitely something that we are watching very closely, uh, just to see if this does show that democracy is not necessarily on a back foot in the continent. 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.