Surveillance: Global Order Is Shifting, Gallo Says

line from you. These are dramatic times and the entire global order is shifting, and I haven't even touched upon the broader European political backdrop. Steve. We just want me through that what it means for foreign exchange. Oh well, I feel like I've been banging on this drum for

a while. Now I'll repeat it again. The forces that we had been come had become accustomed to prior to the global financial crisis, and also in the immediate aftermath of the GFC two thousand and a two thousand and nine, when the set started quee those forces have been going into reverse in terms of US trade policies, in terms of the trend towards a smaller or in fact that the US will probably be a net exporter of petroleum petroleum products over the course of the next year or so,

UH in terms of the structural problems that are are coming to the service in China, in terms of reserve accumulation by major central banks, the big net exporting countries of the world, Germany, China, that they're struggling. So things are shifting. And this is a dramatic about face for

the global economy. And that's why the dollar is doing well almost mechanically by default, the dollar global did the world economy, global trade is dollar based UH and and and because it's dollar based, the initial at least the initial phase of this shift is destined to be are positive, even as you point out that the US manufacturing clearly is taking a hit now, though I would point out that that's only around a tenth of US GDP, so it's not as big of a problem in the U

s that it is for for example, Germany. UM. But but it's it's it's a mechanical, almost a mechanical appreciation of the US dollar because things are are worse, so much worse elsewhere in the global economy. So Stephen, in the here and now, the shock absorber in foreign exchange is the US dollar. That's why we seek dollar strength. And you say that's a mechanical response to what is

happening around the world. What UN depends a pivot away from that story, away from that mechanical response that feeds dollar strength. What UN depends that change. So you basically, I think what you're asking for is when does the inflection point come. I guess there are a number of

things that could cause this. You you could have a reversal of the Trump trade policy, so Trump could lose the White House UH in twenty The U s could have a dramatic and severe recession which causes enough fed easing to to to cause a flow, huge flow back into emerging markets again despite their structural problems which have come to the surface. But I tend to think I'm not I'm not banking on a Trump win in or

anything like that. And it's too early to tell, but I tend to think a lot of what has started is going to be very difficult to reverse because countries are being forced to turn more inwards. China is turning more inward, and and and you can be this in the data. You can see it in terms of what's happening to supply chains in the Southeast Asia region. Stephen go, I love the long term view. In the bigger picture,

I'm just trying to play pay for school supplies. What's the trade right now, given this mechanical dollar movement, what's a trade that's more most efficacious to make some money? Well for the time being, as we approached the fom C rate decision for September, or the debate about whether or not they do twenty or fifty, or they're even

more debblish than fifty, that's going to rate. So I don't think now at the time where I would be adding to my long positions in the dollar versus the major G ten currents or any currency, really i'd be waiting. We've also got the ECB in front of that, and they could disappoint as well. So there's a lot of policy noise coming over the next couple of weeks. But ultimately I wanted a cold long dollar versus G ten.

But I think in terms of the end crosses, I still think we're probably going to see broader based the end strength versus a number of currencies over the next few months, and to our global audience, we look at yen is a dominant currency with its own unique characteristics. Identify your belief in yen and identify the domestic why of your belief from a Tokyo standpoint, why does yen

do what Stephen Gallis thinks that will do well? Of course, you have the first on the on the first instance, again mechanical rally in the end when global rates are japanized or suppressed, right, so it's almost a mechanical reaction. And then of course you have the non non commercial or the speculative flow front running that move, getting long

yen in anticipation of lower rates outside of Japan. But I think Japan, to a degree, because of its very strong external fundamentals, faces the same problem that Switzerland does. Japanese investors and Swiss investors do not routinely invest enough abroad to fully recycle the current account surplus, and that means their central banks are always going to be resisting strengthen their domestic currencies when global forces turn against risk assets,

and we I think that. I think the problem is even more acute in Switzerland, which is why I don't believe the SNB when it tells me that the Swiss Frankie is overvalued. In fact, I think from the perspective of a Swiss investor, the Swiss Frank is undervalued because they want a stronger Swiss Frank so that they can go broad and buy more or foreign assets. They're too expensive at these levels. Why not just invest in the

domestic economy, which is exactly what Japanese investors do. Um so so I think this is this is part of the issue here that these central banks faced. Um there, their domestic investors don't want to plow enough of their capital into foreign assets to allow the current current account surpluses to be offset. Stevin Yellow, thank you so much,

cap Markets. As we get started on just a cacophony of new soil right now, it is important to identify who Steve saying is absolutely definitive on the reach of Hong Kong from the time of a colony, forward to the Great Transition and onto this modern age. He's at U l uh So as China Institute. He's saying, we are just thrilled that you could join us today. She saying, what do you take of this moment where a chief executive partially capitulates to protesters. Explained this moment in Steve

sayings Hong Kong. Well, I think it's a very positive step. That's the Chief Executive in Hong Kong, Carry Lamb has finally with joined the two bills, which was the trigger for the summer of discontent in Hong Kong. But I'm afraid that it is truly too too late for most of the demonstrators in Hong Kong. So that is not going to put an end to the problems we have seen in Hong Kong. I think there will be more people coming out in the demonstrations in the a few

weeks coming. How is she influenced in two thousand nineteen by Beijing. It's different than when you wrote a modern history of Hong Kong, isn't it. Yes, Now, at the beginning of this summer, in June and perhaps the beginning of July, it was clear that Carry Lamb, the Chief Executive in Hong Kong, was in charge of policies in Hong Kong. Sometimes in July it would appear that she no longer was fully in charge and that she was

by then receiving instructions from Beijing. So the latest move she has made in terms of finally agreeing to withdraw the two bills would have been acting on instructions or at least approval from Beijing. This is not just what Carry Lamb is doing. This is the Communist Party of China applying um a soft approach at the moment after having used a hard line, repressive approach that has failed to achieve the results they want. So, Professor, on a

daylight today, Carrie Lamb will be the full guy. But I just wonder, from your reading from your research, to what degree President ch Jing pingas overstepped in the last several months. I think we are talking about presidents she overstepping in the last six years or so. Explore that forest, Professor. There is an inherent tension in the arrangement for Hong Kong's to be kept as a special administrative regent in

China under the formula called one Country, two systems. For people in Hong Kong, one country, two systems is there to protect their wage of life for fifty years from until twenty seven. For the Chinese Communist Party has always been a transitional arrangement and at some stage Hong Kong will be properly part of China, and therefore for about twenty years after nineteen nearly twenty years, not quite twenty um.

Both sides allow for his degree of ambiguity. The Chinese do not push too far, and Hong Kong people accept that they really are not able to exercise the degree of autonomy that they would have they would have liked. After Sen being became leader of China, he started to push much more aggressively towards Hong Kong, requiring people in Hong Kong to demonstrate their support of the Chinese government

and of China more generally. And that's when you started getting the push back from the younger generations in Hong Kong, the generation of Joshua Wang and Actnes Joe, and these are the people who became leaders of the movements in twenty fourteen to push back, and they start off a school children, school kids in high schools, refuse things to learn uh Chinese curriculum. This is the pushback that slowly generated a very widespread discontent in Hong Kong over the

degree of autonomy as they have. And when the protest came up this summer, a lot of them feel that this is the last chance they have to come out and defend Hong Kong's where your life or they will lose it. So, Professor, this is one forum where we are seeing this pushback play out quite clearly and sometimes violently on the screens of our TVs and smartphones around

the world. I just wonder whether the trade story is also a story of pushback against China and China trying to exert its economic power on the global stage in ways that are not favorable to develop world into the West and the way of living that some people have experienced. The professor talk to me about that, how the situation in Hong Kong has parallels to the blowback perhaps that the president of China is experiencing on the trade front. Well, the events in Hong Kong in this summer, I think

was not really ties to the trade war. Um. It is tied to the approach that She Jimping has adopted in making China much more assertive, and in that assertiveness he's generated a change in the view of the U S establishments on how to deal with China, and the trade war is part of that pushback from the American establishment. So they are kind of in parallel and in that sense of link, but they are not directly related in a coursal way. Professor. One final question, what is the

professor saying to do list for Donald Trump? What can the President of the United States do to advocate for the people of Hong Kong. On well, for the President of the United States, I think the really important issue is to make sure that the US Hong Kong Policy Act, which gives Hong Kong special advantages and special treatment separate from that being received by the POC the People's Refubrict

of China, is being absolutely enforced to the latter. And in this spirit that Hong Kong must be maintaining is degree of autonomy UH guaranteed in the sin of British agreements of n for Hong Kong to continues to receive the advantages givens in the Hong Kong Policy Act, and we iterate that if this is being violated then the U. S Government will take it very very seriously. Indeed that may deter the Chinese government from overstepping them. Hong Kong

ste saying thank you so much, University of London. So as of course his classic twenty years ago, the modern history of Hong Kong is just an absolute extraordinary. At the time when d Serby with us David Serby of Van Kora all sorts of work institutionally with explaining why you don't have to buy Amazon and Apple to move forward. There's a few other stocks out there's if you ever seen the skew to large cap David Serby like we've

got right now. Is this typical or is this like never never before December was the last time we've seen this kind of skew of large caps trading at okay to earnings valuation in excessive small cap the same story and growth to value. So you do you go out eighteen months from December n nine and say it's gonna be ugly eighteen months from now, it wasn't. If you're a small cap value investor, you had positive returns in

a market that was on its way to decline. I'm looking at a sharp ratio for mid caps right now. That's pretty cool, and that is risk and reward. Let's identify those two right now. What's the reward in mid cap and small cap versus the up up up for large cap right now? Particularly in a small cap space. I think there's two ingredients. Number one is the ability to find stocks where five or fewer Wall Street analysts

follow the company compared to what stocks go up. Then if nobody's falling them, nobody knows they're there because they're under followed. You can do your homework on the company and identify value where the company is going up, where it's migrating from small to mid cap. You catch them early before they go into the Russell two thousand index.

That's a great formula. And as you and I have talked about repeatedly, the Bloomberg spinoff, the index back to two thousand and two, it's compounded at fourteen percent versus the overall market at less than ten percent. You've talked about that a lot on this program for our listeners that might have missed it. Talked to us about what

that actually is. It is It is when Jonathan, when a large company spins off a smaller company, they're typically doing it to unlock value to let the small company flourish on its loan that they don't have to siphon off their cash flow to the large camp beast. So as as an example, Sendance spun off Wyndham Hotels a number of years ago, Discover, which is migrated to a MidCap stock spun out of Dean Witter a number of years ago. We see spinoffs all the time. They're usually

twenty to thirty a year. We try to find the fifteen best, and the spinoffs are a great formula for long term alpha generation. They haven't worked since April of this year, but the long term success story is I think is very validated. Let's talk about what's been happening

over the last couple of months. Small camps on the performing launche caps, which is a curious story for a lot of people because the risk look international and you would think the multinationals will get hit more than inside of the small caps, which are exposed to way relatively better US economy compared to the rest of the world.

What is the story there, David? For you, I think it's while you thought that small caps would hold up better because they had less China exposure and less trade sensitivity. Overriding that in the tug of war has been slower global global growth, slower US growth. We saw it with the I s M numbers yesterday. I think that's trump small cap in the near term. The greater uncertainty as as UH compelled people to flee to large cap certainty, particularly in a growth space. It's put small cap on hold.

I mean the names. I mean Windom Hotel, I think a lot of her people know, people don't know d x C Technologies, Granite Point, UH Cars, dot Com, I mean all these names that And I'm as guilty as

this as anybody the media doesn't cover. Is at the same old, same old decade or is there something new this time around with microcap, small cap and mid cap that the success story goes back to at least the twenties, if not longer that over the longer term, small caps will I'll perform anywhere from one to one and a half percentage points annualized and over a long term time period. I like to say that's what's going to get me to retirement. A little bit bigger scale of what happened

with the autumn of two. They're massive underperformance over over the last eleven months. I think that's global growth uncertainty, US growth slowing at that time. What was the prospect of not higher but lower interest rates that took small caps down? David's Harvey, thank you so much. Within too short a time, mid cap small cap if you're in Asian studies and we've had the immense honor on this program to speak with people like Orville Shell of Berkeley

and Jonathan Spends, the Giant of Yale. And another one is someone who framed New England Chinese studies. Her name is Ellen Widmer and she was a hero to so many back when nobody did Asia studies, nobody did China studies out of Wesleyan, uh and Colombia as someone who has lived the Chinese live and writes about it to this day. And Stevenson Yang joins us writing for Bloomberg Opinion as well. Well, how lonely was it doing China studies at Wesleyan a few years ago? Uh? Well, it's

it's pretty terrifying to be placed alongside those names. And I would never place myself with them. Um, I didn't do Chinese studies. I just stumbled into China in about five because it was a better job than journalism. Well that's good, I mean, John and I are looking for that China I are looking for that is well, the China of How different is it now? Elizabeth Economy would say,

there's a huge difference with this new regime. Well, uh, it's let's let's say the post eighty nine China was very, very different from the eighty five China eight five China was. Five to eighty nine was a very exciting period, a lot of opening up, a lot of chaos, really, people earning a lot more money than they had ever imagined before, people starting new new companies, all sorts of things. But

after eighty nine things changed. What you've written about recently is the dollar dynamic, and we hear a lot about this from financial types with suits and ties on. Explained to us your take on how we can manage this relationship through how we controlled dollar flow internationally in dollar flow with China. Yeah, it's it's time for people to realize that the capital account is inextricably linked with current account and that we can't simply focus on trade flows

to try to correct things. Actually, the capital account is a better way to address it, and the way to address it is to raise rates on US treasuries, raise long term US rates, which will reduce capital flow into China and increase capital flow outside of China. What's so important about this, John, is it's not just raizor rates for one reason. There's a set of reasons, including international

in the efficacy of rates. So and you go through this very detailed piece on Bloomberg Opinion, which essentially lays out the following logic that if the trade war objective is to even the playing field for American firms, when you think about the Federal Reserve, the presidents should be ordering them not to cut interest rates. Just just paste that together for a lot of our listeners that might not be following the logic, just make that work. Well.

For the last ten years, a little over ten years since the Great for the Global financial crisis, US interest rates have been closed to zero, and that has caused probably about two trillion dollars to flow into China. That free money, essentially has been what's fueled the Chinese investment boom and made them able to compete unfairly with US firms. Is that a little vague for you? Well know, I just think we should explore for the Federal Reserve more

specifically here in the United States. You think it would be better than for the US central banks be raising rights. What damage would not do domestically in the US. That would do damage to the US public markets, for sure, but it would not do damage to the US consumer or the US average average person um. And it's time for public markets to come down, I mean within the public markets, and it's just very very quickly here. What

do you look for in the Hong Kong debate? Is but a too mud was mourning or our morning and I'm calling what do you look forward to that is coming into a solution? That is a fascinating thing going on in Hong Kong. Unfortunately, if Carrie Lamb had made her statements two months ago, then it probably would have worked. Now it's uh, I think it's too little, too late, and uh, you know, China is working mightily to avoid a crash in the Hong Kong markets. Um, but but

what's going to happen to the protests? Hard to say a Cusan Yang, thank you so much writing here a different view on China. We love that, particularly with their decades. If we're in uh China. 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.