Surveillance: Free Trade's Future

China Watch. He has been involved with government, including writing speeches for Secretary Clinton, and has now been annointed with the worst job in diplomacy, which is filling Gideon Roses Shoes at Foreign Affairs, where he has been named editor. Daniel Kurtz Phalan joins us at this morning. Daniel, I want to go to the United States. I know Lisa's very much focused abroad. We had Adam posing on with his nostalgia of America. Are we drive owning a nostalgia

right now? I think you see this across across both parties. Right now, there's so much focus on how we get back to economic strange to pass that there are ways in which families to realize the opportunity with the future that's out of opposing piece. The price of nostalgia focuses

on the trade aspects of this. There's been this really fascinating shift against what it in a pretty strong free trade consensus across across both parties for some time, and the narrative you tend to hear now is that we have done too much trade, integrated too much with the world,

and that has reinforced an equality displaced workers out. Imposen's argument is that in fact, for the last twenty years, when we've seen this period of rising inequality and stagnating wages increast a lot of industries, we've in fact been retreating from the world, and trying to to retreat further is only going to reinforce those trends. Daniel, in honor of John Williamson dying here in the last number of days.

The nostalgia of the Washington consense is everybody wants to go back to when it was cozy, when it was comfortable. What does our new Washington consensus look like. So you can see some of the outlines of this. In the Biden administration, there's much more attempt to to have the state, have the government that directs certain portions of the economy.

There's much more focus on the international competition. I know you were just talking about the United States in China, but much more focus on how what country controls different parts of the supply chain, where semiconductors are manufactured, where

green technology is manufactured. Uh, those are going to be the battles of the future, out imposing and others in in this package that leads the major initiative foreign affairs try to take a look at this that is not about just pulling these things back into our own borders or making these all kind of domestic industries, but really think about how we shape the global economy in a way that addresses those security concerns but also realize the

economic gains both for Americans in a broad based way, but also that really shapes the bubble economy. That's a lot of work to dig down. So let's pick up on that word consensus. How you established consensus on an issue like the Chinese Communist Party right now, how you get the European allies to come along with you. So this is I think the kind of key tension in the Biden China policy. The Biden administration, I think in

the way that has surprised a lot of people. Came really out of the gate trying to set a pretty hard line on China's I think one of your your previous guests said they made clear as they came into office that they were not going back to some pre Trump consensus on engagement with China, but really continuing the hard line there there change the thing that they're trying to do differently than the Trump administration is doing that with allies, whether that's Japan you saw you saw Japanese

Prime Minister in Washington Friday, whether it's with our NATO allies, with with the Quad, the India, Japan and Australia, and our partners in in the rest of Asia. The problem is that a lot of these allies have different views about how you compete with China. So you saw this on Europe most strongly. Europe was striking an investment deal with China at the same time that the United States was trying to craft this allied front against against the

Chinese Communist Party and against Chinese influence. So it's very very delicate balancing act where the United States one just wants to sustain this hard line, but it wants to do it with as many allies and partners as it can, and that creates a certain tension. You know, this is really the strength United States, and I think the Biden

administration has has tried to keep this in mind. We go into this competition with China with an incredible range of allies and partners both in Europe and in Asia and elsewhere. China doesn't bring a lot to that fight when you think about it in those terms. Well, let's build on that tension. Though. The issue is, you know, through economic history, at the center of a global system

is a hedgemm that brings everyone else with them. Right now, we can't get the Chinese Communist Party to come with us, and that's the issue. The major miscalculation of the last several decades, and arguably laced with arrogance, was this idea that the Chinese Communist Party would want to be more like us, to embrace the system that we've all been

as from and down. That's not gonna happen. So I guess the issue that I have every time this comes up, and I'm always asking this question, what kind of system can we in our allies embrace. If China doesn't want any part of it, doesn't want to play by the same rules, that that's a great point in look, I wrote a book about US policy towards China in the nineteen forties, and you can see exactly that that mistake, going back really towards the beginning of the American relationship

with the Chinese Communist Party. With Communist China, this notion that with just the right amount of trade, the right amount of diplomatic engagement, the Chinese would really come to see the world the way we do. And you know, back when I was writing about about George Marshall in the nineteen forties in China, that was an illusion that

we we clung to pretty bitterly. You see that in some of the China policy of the nineteen nineties and the in the two thousands, this notion that with just the right amount of you know, capitalism or or trade or diplomacy, the Chinese would come to really see the world the way we do. And and that illusion, I think has um has has fallen apart over the last four years. I think the question is, can you use competition, can you use pressure from that coalition to bring to

bring the Chinese along. We're seeing something like that with climate change right now. The by An administration is going to hold a climate summit at the White House on Thursday, and they've tried to say, look, we want the Chinese to come along. We realize that China is the biggest admitter of carbon in the world right now, the US the second. Only if these two countries are able to do something meaningful on climate change, is the world of

any hope of of being this challenge. But we can't we can't try too hard to bring to bring the Chinese along. We need to bring a kind of competitive edge to this where we show leadership, we show an ability to to to shape the global global action on this question or working with our allies, and that kinda feels really pressure to come along for its own interests, not because we expect that with the right amount of diplomacy, the Chinese are simply going to see the world the

way we do. And the global warming discussion is a bigger one that we're gonna be having throughout this week. I do want to go back to the US China tensions, paired with this disenchantment with the way that globalization really worked for a lot of people within the United States and elsewhere. What is the modern version of globalization that economists that you quoted and had in your magazine seemed

to think is the path forward? So one one really interesting element of this, I think when we talk about trade, we tend to think of you know, traditional manufacturing and steel, maybe services. There's there's one essay in this set of pieces on trade by Matt Slaughter and David McCormick. Dave mccormicks the CEO of Bridgewater, Matt Slaughters at Dartmouth. They were both senior economic officials in the George of the

Bush administration. They make the point that when you talk about global trade increasingly increasingly we're talking about about data, about data flows, which have grown something like a hundred times in the last the last ten years, and that's really the future of global trade. That's a lot of what we're talking about, and we're talking about these these conflicts over trade going forward. China's working very hard to

shape global governance of data. You know, they have this kind of techno authoritarian model which applies domestically but also shapes the way they engage with other countries. The kind of economic model the Chinese are trying to bring to the rest of the world, And as Slader McCormick argue, the US really hasn't gone that far in trying to

put forth an alternate vision of global governance. So when we talk about the trade battles of the future, there's likely to be about data as they are to be over you know, steel tariffs and the the traditional trade battles that were all pretty familiar with. And the question is which of these global countries is going to go out and shape some kind of global policy about this.

And this applies to everything from you know how these are tax to um to to privacy and all the issues that we're familiar with domestically, those are international issues as well. And only if the United States goes out and tries to put forward it, tries to build some kind of coalition, tries to some forward some kind of global rules to define data trade going forward. Otherwise other countries are gonna are going to step in and do that themselves. And that's probably not going to be a model.

It's probably not going to be an approach that we're going to be especially happy with. Just quickly here, I'm wondering you're saying that people think that the US is behind China and coming up with governance of global data. Meanwhile, Tony BLINKLN Secretary of say so that the US was behind China when it came to taking advantage of new job opportunities resulting from fighting climate change. Is the presiding sentiment that the US is falling way behind on a

lot of the most important issues. I think that's been the view over the past few years, whether that's on data, whether that's on the technology that goes into UH, into renewables, kind of green technology. This is I think at the heart of some of what the Biden iministration is trying to do with this infrastructure package. You know, we're having

this debate now about what infrastructure looks like. Some of that is twentieth century infrastructure, that's you know, roads and bridges, but I think most of us think of when we look at infrastructure. The Biden aministration is trying to make this case that this really should be about UM, how you UH renovate buildings to make them more energy efficient, how you invest in these future technologies. That's a politically

fraud issue. You know, we can go back to the cylinder controversy of the Obama administration to see what happens when you make some of these investments that go wrong. But the case they're trying to make is that when we think about infrastructure, when we think about investments in ways that are going to be key to the competition with the future, whether that's on data and technology, whether that's on on renewables, that we need to think about

these questions much more broadly than we have traditionally. You and I and the tame We're gonna be talking about this for a long long time. Dan Castrod in their Foreign Affairs editor Greater catch up with you, sir, to make care Morgan standing Investment Management, fixed income portfolio manager, Jim, let's start with credit, shall weight some of these companies? Some of this universe is actually stronger than it was twelve months ago, Jim. Some people struggle to see that.

Can you just explain it for for us? Yeah, it's all about cash flow, right, So effectively, what people were able to do in the last twelve months is with rates so low in the aid of QI, is that many corporations were able to refinance their debt for longer terms and at lower interest rates. And we also have to recognize is that as the economy recovers, you get this cash flow that starts to come back into the market. That cash flow for a bond investor is key because

that's what's going to keep default risk down. So as the economy is growing and we expected to grow this year, next year, in in the year following, and as that cash flow stays very very positive, and as long as we don't expect interest rates to rise substantially consistently over the next several years, and that means that the refinancing risk of all the debt that they've taken on is still going to come at a very very low rate.

And right now spreads are tight, as you've been pointing out, and as long as that doesn't widen so much, it basically sets up for um better interest coverage rates, meaning the amount of payment that you have to pay on the debt that you have outstanding. So they'll start to look better, especially with the backdrop of an expectation of a better and growing economy with more positive cash flow. So that's why credits doing well. Jim, I want you to synthesize the x X as it's HSBC on it today.

Rollen Center has been great, man Hornbox has been great, etcetera. I want you to synthesize the game of guessing the win of this and the duration of some of these arguments about we're gonna see higher yields, we're gonna see lower yields. How's the x X is playing well? The way that I think about it is that the tails are fat on both sides, so effectively, Yes, we have a lot of monetary expansion and there could be some inflation risks and all of those risks have gone up

because of what we're doing. But on the other side of that, what we have to question is that have things structurally really changed where we were prior to the pandemic? Is that we had structural disinflation, and the reason why is that we had aging population, which is demographics, We had technology and all the other factors that have been pushed prices lower. Has that just magically gone away as the aging population has the technology and everything else. Is

that really gone at this point? And if the answer to that is no, then those structural factors are going to reassert themselves and do at least keep yields from rising out of control. Or excessively high. Now, if we start to get you know, over the next twelve months, if the data starts to you know, slow down, which we do think the rate of growth will start to slow down over the next twelve months, but still stay positive, will it be enough to generate consistent de anchored inflation.

And that's the question that we have to ask ourselves. It's not is inflation a risk, Yes, it's a risk. It's always a risk. Can rates go up, sure? But is inflation becoming de anchored where we expect growth rate of prices to consistently move higher over this year, next year, or the year after, the year after that, in the year after that, And once that gets ingrained in psychology, one can think that, you know, yields could stay high. But until that starts to happen, I still think that

we're in a relatively low yielding environment. And I can't dismiss a tale of two percent move in the tenure Treasury, and I can't dismiss a tale of something closer to either. It really just depends on how all of this unfolds. And Jim, that's the great story, going back to the credit story, and I'm really glad that John brought up Netflix. It's a great story and frankly it has survived and

thrived during the pandemic. There are also the stories of United Air, which came out yesterday and said it would stop losing money only when business and international travel recovered to sixty of where it was back in two thousand and nine, team, which seems like a tall feat given the pace of vaccinations. Would you say, overall, on average, the majority of companies have a better balance sheet now than pre pandemic is at fifty fifty. How is the

overall profile based on where it used to be? I think it's just like you said, it's very idiosyncratic, right, So it depends, you know, if you're looking at the cruise lines, if you're looking at the airlines, you're looking at some very very specific, uh, sectors of the economy

that we're very very hard hit by the pandemic. When you look at say the broader industrials, when you look at say paper packaging, when you look at other areas, we could even look at leisure, all of these areas can start to actually get um, you know, better balance sheets to extent that they have been able to. Many companies have been able to refinance their debt for longer

terms and at lower interest rates. So in that sense, there there there's a cohort of companies that are out there that do have stronger looking balance sheets, and that's mainly in the investment grade sectors. And I would say that many of the financials actually have come out looking like they have a lot stronger balance sheets. But then there are other sectors still, like the reopening sectors, that

the sectors that get the hardest hits. So these are as you pointed out, the airlines and some of the cruise lines and things of that nature, that you know that's really going to depend on the vaccine, the rollout, how quickly that happens, how quickly people are willing to get back on an airplane and start traveling, which, by the way, I think will be pretty quick. I think the speed at which people return to that will be faster than most people think. Jim, it's gonna catch ups.

As a wise Jim can Morgan Stanley Investment Management, Fixing comport Folio manage it right now? And this is a joy. Benjamin Laidler not only has done it once twice, but indeed three times in a row. He's made a major bullmarket call and been right, right right, holding cord at hsb C for years and then onto a different projects. We are thrilled that Ben Laidler gives us a first interview with eat Toro Yanny s. He is Israeli operation.

It is big in digital and moving over to the equity markets, and Mr Laidler will provide global market strategy for uh TOROL. Ben Laidler, can you reaffirmed now you're very lonely double digit equity return for two thousand twenty one? Yeah,

I think. Sorry, I don't think it's a forecast anymore though, I mean we're up for the year, so I think it's really a question so hanging onto what we've got when, which is is going to be you know, pretty historic, right, I mean we've had I think only twice in the last fifty years if we had this sort of three in a row strong equity markets. So yes, I think we do. Valuations are very high, but I think earnings

are just going to keep keep surprising. I think first quarter, which we're obviously in the middle of reporting right now, is going to be um, you know, the latest, I think. But I still think with these sort of top line growth numbers being revised up and all this operating leverage that this earning story is going to keep is going to keep delivering, and that I think really is um you know, the fact the foundation here, given the Laidler bull market, what is your experience or guestimate of what

they will do with all that cash. We're already seeing buy backs being the flavor, the favor of the moment, flavor of the moment. Yeah, I think you're going to see more of frankly everything right. I mean you're seeing more buy backs, You're seeing more dividends. I mean sort of dividend and buy back strategies have you know, recovered from beginning to recover from how badly they did last year.

You know, you're going to see a pick up in CAPEX as well, which I think is really important to keep an eye on because I think, you know, we're talking a lot about this year, but really what we should be caring about is what next year begins to look like. Right, I mean consensus ove percent early go for next year that seems a little bit pedestrian compared to this year. You know, we want to see more

than that. If if this rally is really going to continue, and I think CAPEX is going to be you know, capex is going to be an important part of that. And I think how consumers sort of spend down this sort of sort of access savings they have right now, Ben, you've been a stock bull. You have been right again and again. There is a question out in markets right now of whether a one point six percent treasury yields and the tenure is incoherent with the optimism that we're

seeing in stocks. Well, I guess there's ten years of inflation history that or you know, or thirty years of sort of bullmarket history that would sort of argue against that. But you know, to your point, I mean, I think bond yields are going to go up. I think, you know, one of the reasons I think markets are so resilient is we've just been hugely stress tested here right with this bondy or tantrum um and and sort of markets sort of survived. So I think bond yields are going up.

I think equities can survive that as long as it's sort of a moderate rise for the right reasons. I you know, growth at growth expectations continue to move higher and I fully expect that to be the case. And and just more broadly, um, you know, bondy yields are important, but it's not just about bond yields, right, I mean, bondy yields were at one point nine percent, you know, coming into last year, and markets were fine with that.

And you know, bondy yields are zero or negative and the rest of the world and that's not helping their equity markets. So you know, bondyles are important, but you know, there's a lot more to that, corporate profitability and the earnings recovery, all of which I think is is very very healthy here. Corporate profitability and earnings potential. Is that isolated to the United States? Are you seeing the opportunity

set shift to Europe or perhaps even beyond? Absolutely? I think this we've been in this sort of global rotation trade. I mean, it's arted off with China, so first in first out, you know, best performing major market last year. You know. Now we've had this sort of US exceptionalism with the sort of vaccine rollout and and and and the stimulus, and obviously U s sort of led the world among major markets in the first quarter. I think the story is sort of looking into the second half

is the rest of the world. I mean, Europe is going to grow earnings probably twice as much as the US so in this quarter. If I look at where the economic surprises are coming from and frankic and they're coming everywhere, but they've been led by sort of Europe

and the UK. So I think as you sort of look further out this um you know, I think as Europe begins to get its act together on the sort of vaccine rollout, which I think they will ultimately, I think you begin to look for some sort of catch up performance there where you know, evaluations are cheaper, earnings more depressed, and and and you know there's a much bigger sort of cychnical component of those indicries. I mean, Ben so far a year to day d sp X

up eleven percent. And the big surprise there has been the reaffirmation of big tech and sort of the stories someone Ben Ladler was ready the second or the first time as well your third sound big tech? Do you participate with them? Or is the international story so compelling you've got to go there? Which is it? I think the leadership is going to be sort of international plus sort of value. But and it's a big butt. You

have to believe in tech. Right. If you don't believe in tech, it's just got so big, then equities just don't work. Um and I still think the equity tech equity story still works. It's a different story. I mean, it's just sort of this longer term structural story which I think is going to keep giving. I mean, growth is still going to be very good. There's big motes here, there's high profitability. None of that is going away. But here and now you know, the catch up trade is

the value. That's where you're getting this. You know, four or five times earnings leverage to what's happening on the to what's happening on the top line. M and Ben, there is a question as you talk about the global look for the opportunity, and you say that China is the first in first out, I want to bring you these headlines from a p B O c H member, basically that China has deficient equity capital. It is insufficient long term capital, and this is why they have such

high macro leverage. This kind of feeds into the People's Bank of China's effort to reduce leverage in this system. Moving in the opposite direction than a lot of other central banks around the world. How does this affect your view on the assets in China, which we have seen underperforming pretty consistently over the past month at least. Do you think that that underperformance will continue based on where they are in the tightening cycle? So, so you're absolutely right.

I mean, there are a different point in the cycle, right, I mean the central banks just held rates sort of four for one year. One year, right, I mean, look where the rest of the world is, right, So you know that there are a different point in the cycle. But I think there's sort of two things going on here. I mean, similarly, there's this sort of cyclical story, which I think incrementally is going to tighten, but there's a

long term sort of structural story. I mean, they are going to keep opening up that capital market, both on the equity side, you know, and on the fixed income side to attract more foreign cap and I think that's going to dramatically expand the sort of bottom up opportunity set for sort of fun managers going forward. But I want you to address what I call the Friday gloom crew.

There's a cottage industry at least in America. I don't know if you see it over in the pond, over in London, but there's a cottage industry that wanders out Thursday evening into Friday and reaffirms and rerationalizes the walls of worry that are out there. How do you respond to that industry? It's not I want well, you know, I want that wall to worry. Right if it didn't exist, then you know, it was your incremental buyer coming from. And I actually think markets are becoming more secure, not

sort of less secure here. And I guess what I mean by that is, you know, the breadth of this recovery is now dramatically different than it was sort of last year. I mean it was all tech last year. Now sort of everything. It's sort of this everything rally right now, which I think is sort of much more sustainable. You know. The threats to the rally, I mean, the FED making a sort of policy mistake. You know, I think they'd be very consistent in their sort of messaging.

So I think that risk will sort of come down a bit, and that sort of investor over exuberance. Um, you know, I think the market has been very smart. I mean you said pull back in I p O performance pulled back in sort of ev performance pulled back in sort of solar. I mean, all these sort of micro sort of bubbles that the market was maybe getting a little concerned about, I've all sort of you know, pulled back a little bit. I mean that's not the

say I'm completely complacent. I mean, earnings do need to really keep delivering here with evaluations where they are. But you know, actually I think risks have been coming down a little bit, actually not not not not going up. Then, Layler, thank you so much. Congratulations for the new effort with the torial. Mr Laidler of courses enthusiastical about the market.

Leaf Ferrits joins us right now with State Street, head of America's macro strategy writer of really Cogent notes, look at the Liverpool Leaf ferryge in a moment right now, I want to get to your information of a one thirty car on euro Can Germany. Can Europe stand that strong of the euro um? It won't be easy for sure, But the problem they have is what do they do about it? I mean, the bottom line is that that

that the FED is not moving raids anytime soon. So what you have is a very very steep curve in the US, and that means for for for Eurozone investors, for Japanese investors, they can buy treasure is and they can hedge their effex right now, and Eurozone investor can buy treasury is tenure treasuries heads their effects for three months. They're earning a hundred and twenty basis points over buns, right.

They're going to do that all day long. That means the US current account deficit does not get paid for by the bomb market, so you have a basic balance shortfall in that world, the dollar has to go down. So we saw over the last couple of months, we saw this upgrade the US growth expectations. We saw yields push up short term momentum, traders bought the dollar. We had a big underwey in the dollar that got closed out. And now as things calm down, the default for the

dollar will be for the dollar to go down. If we haven't got more good news, if we haven't got rates going up, if we don't have a short squeeze, the default for the dollar will be this drift lower, drift lower, drift lower. And that's what we've seen over the last few weeks. And that's a game where we are now, and this is why for me, that's going

to be the default this year. We're abouts of dollar strength, but they'll be short lived and then the default will be this dollar drift down and that's how we get to one thirties. And just in terms of the deficit, can you help us understand why this dynamic is so different to what we saw in the previous cycle. Well, the difference is the ability to hedge. The previous cycle, the FED, you know, from seventeen onwards was leading the way in terms of hiking rates, right, so they were hiking.

No one else just hiking. So therefore foreign investors couldn't buy treasure is hedged because of the amount they paid on the hedge cost them all the yield premium they were picking up. So you attracted capital to the U s FX unhedged. If the FED aren't playing the game, If the Feder keeping rates down close to zero in line with everywhere else, the hedging works. So if the hedging works, the dollar goes down. And that's the difference.

This time, it's the reaction function of the Fed. They're are hiking into this strength like they were in seventeen and eighteen, which pushed the dollar up. If the Fed don't hide, the dollar goes down. So let's build on that. If you want to play that theme, what's the best way of expressing it? Right now? Right now in Q two, I think I think we are getting to the state. I mean, you know, I like Eurohire, I like Dolly and Lower, but their drifts that they're they're slow, gradual grinds.

I think we're actually in Q two in the stage where where EM starts to perform better again. You know, we've priced in a lot of good news for the US in an awful lot of good news in terms of growth. You know, yields have gone up, yields are now back in arrange, So you have this sort of positive growth outlook. You have yields in arrange, you're having no reaction from the FED. That's sort of an ideal

world for EM. But you've got to be selective. And you mentioned before about the COVID cases going up in various places. You have to be really selective. You have to be wary of of of domestic issues as well. We like max Max is at proxy to the US. Direct proxy obviously gives you some yield. Mex is one of our favorites. We also like South Africa as a sort of reasonably liquid EM proxy as well. But but

we're wary of others. But but there's there's value out there in EM just to push back against the weaker dollar story. As we have seen the dollar strengthen this year on the strength of the economy, markets are discounting mechanisms. People are going to be looking to a FED that will be tightening at some point. How concerned are you about better data spurring expectations for rate hikes even as soon as two, causing the dollar to strengthen despite all

of these dynamics. That's what we've seen, Lisa, that's what we say. We've priced the first time at the end of two, we've priced another three stroke four three. What are the fat dots saying? The fat dots are saying they're not hiking through the end of twenty three and the rest root from the FED is not changing. They've got a highly growth forecast for the market for this year.

They've got six and a half percent, they got unemployment rate at three and a half percent in three and still they're saying, we're not hiking rates, and you have to listen to Powe. The reaction function from the feed has changed inflation. With average inflation targeting, they can ignore transitory rises in inflation. They can look through it. They're targeting the labor market. They're targeting maximum employment, not unemployment.

Maximum employment and maximum employment for all. They're looking for for underemployment to come down, they're looking for low income to go up. All the stuff we saw in eighteen and nineteen. Power wants to get back to and that's going to take time. Leefar is very direct. Chris Collins of Bloomberg News felt we were fair and unbalanced yesterday

with a focus on Manchester United. What's it like to be Liverpool where last night you were tied with leads and your team is wandering off to the Super League?

Were you medicated? And I will be if it carries on like this twite honestly, Tom, Yeah, it's it's it's not easy being a Liverpool found with this season hasn't been easy after after last year which was which was a gift, and then the super League news is not a positive in my mind, Lee, I'm not sure how many people out there feel sorry for Liverpool fans right now, I got that right. I've got to say we're enjoying it a little bit. It's gonna catch up Lee Ferrit's

Stay streetead of American Strategy. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine AM for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom Keene and this is Bloomberg