Surveillance: Happy 2019 For CPTPP Countries, Sumpter Says

as multiple rate hikes. Let's find out more from Brett Ryan. He is Deutsche Banks senior economist and he joins me in studio. Brett, thanks very much for being here. Happy New Year to you. Maybe just explain from your perspective why it is that so many analysts economists are actually pulling down their estimates for economic growth. No wars, thank

you for having mere of the program. Um. Basically, uh, you know, I think everybody expects the the economy is slow next year as as the fiscal stimulus starts to come off. Would agree, I would agree with that. Uh, But the main thing is that consumer spending is still the engine of the economy. It's still se of GDP. Uh. Everybody expects housing to remain weak because mortgage rates are high,

the Fed's hiking rates UM. But the housing is only three point one percent of the economy compared to six percent where it was in the last cycle, and we don't we certainly don't have the leverage on it um. Non residential investment, which is CAPEX business spending that's been that was on a tear in the first half of this year of CAPEX is software and technology, so that should continue at a healthy pace, but not as strong

as it was last year. Because why us that? Why do you feel that there's going to be less spending? And you know you mentioned housing. Okay, that's interest rates, We'll get to that in a second. But why less Why less spending on on investment and software? And right, well, I think there was there was an initial rush in the wake of the tax bill. UM. Certainly it seems that we're in these little mini cycles with CAPEX that are like accelerated depreciation. Yeah, it's exactly bonus appreciation UM.

And it seems like we're in like two to three year cycles now for CAPEX. So I wouldn't our forecast is fairly conservative. I think we're we have capex growing it around three percent next year. But really it's it's it's the question is, you know, do we slow from three point one percent growth in eighteen to two percent next year or is it more of a gradual three percent to two and a half, you know, two point four,

which is what what our number is. And that's kind of going to determine where the where the FED is going to shake out this year, next next year. Okay, So with a two point four percent estimate for economic growth in how many rate hikes and what are the path to those rate hikes? Well, I mean, in our view it should be it should be three rate hikes, um, if we're gonna be growing at two point four percent next year. Uh and core inflation um being above the

Fed's target. That's the other key there. Um. It's it's pretty easy to get to two point one percent on

core core PC inflation. I think in you know, it becomes obviously it's a little bit more in doubt now the markets not pricing any FED hikes for next year, and some parts of the curve or inverted um telling you that the market is now expecting rate cuts two point five for the two year and point five for the three year al right, so they're saying I'm not gonna be hiking much at all, um, But you know,

these things can change quickly. Uh. And I think the risk markets and yields may have gotten head of where the economic data have been. Um. Case in point, the Chicago p m I last week was at sixty five. That's still a very healthy leve manufacturer. But I can I can you know, I can see your Chicago fed with the Kansas City FED report and raise you of Philadelphia or an Empire manufacturing report. Right, so I'll give you,

I'll give you a filliant Philly and phillion. New York have slow, but there's still firm firmly in growth territory. The Richmond was the one that really kind of surprised people last week. But I would say that Richmond was more locally driven. Um. But yeah, it's to the extent that do finite the tightening that does the fight tightening of financial conditions. Right now, how much does that lead

bleed over into the real economy. And that's that's really what people are doing right now in terms of the growth forecast. Now, even the thing that I find it's not an intercessily stock market, it's investment grade credit spreads, and that's what really the Fed's gonna be watching. That's

what we're watching, um. And right now, Yeah, if if the credit spreads say wide where they are, let's call it, you know, a hundred and fifth two d and sixty basis points over treasuries, Yeah, you could seek growth slowing to a low two percent as opposed to a mid two percent range. Are lenders being compensated for this spread? Um? You know? At this point, I think when you look at imbalances out there the economy, it's not like the household last time. It's corporate debt and so at a

level right at record levels. But from the FED Senior Loan Officer to survey, they're still easing lending standards two corporates. So I don't know if lenders are being compensated just yet. Does that concern you? Um? Actually, is the fact that that there's still there's still be easing credit standards to corporates is a positive for cap bacs. And you know it's not like there you know, there's been a ton of demand out there. UM. So earlier on in for

exactly earlier on in the cycle. So UM, you know, there's still profits are still at least in the deeper profits are up ten percent year over a year. Companies are doing fairly well, and you know, risk markets seem to have have sort of priced in now zero to negative profit growth next year. I think it's just gotten a little ahead of itself. The reality is probably somewhere in between. It's not going to be great, but it's

not going to be off a cliff either. Speak a little bit about job growth and wage I guess you could call it inflation, but not really. What do you see? I mean, does that make it more difficult to do your job when you see almost full employment in the economy and yet you don't see a surge in acceleration and inflation? Yeah, I mean this has been you know, this has been the case throughout this cycle, and it's

been sort of you know, confounded economists. Why is the Phillips curve so flat in this cycle versus other cycles? And you know, there are many arguments for that. I think the main thing to keep it not key in perspective here is that you know, at three point seven percent unemployment rate, we're generating non farm payroll growth in the private sectors one point nine percent year every year.

With three percent wage inflation and thirty four and a half hours worked on average, that's generating four point nine percent year over year nominal income growth. So you know, not only nominal income growth is what what you make is then what you spend, right, and the combination of hours and wages and job growth, what you're gonna see is job growth slow because we're getting near the kind of the limits in terms of labor supply and wage growth.

You're starting to see now take up and grind higher. UM three percent is generally what FED officials would consider um consistent with two percent core pc inflation targets. So it's taken a while, and it's but finally, yes, yes, but we're finally getting to a point where you're seeing their response in wages to a tight labor market. It's not roaring, but you know you're seeing the response. Do you think you could characterize it as a lost decade,

just as there was a lost decade in Japan? Um? No, certainly not. Japan has had seven recessions over the last thirty years. Um. You know, the US has managed to avoid that. Uh, And all the while the US has been able to raise interest rates, so Japan has been stuck at zero. So I would I would certainly wouldn't

say it's a bit of lost decade. And you know, it's quite impressive that we've come from a ten percent unemployment rate down to three point seven percent now, even though it took you know, initially a long while to get started. What do you think is the biggest challenge for the US economy in t I think it's it's

it's really it's on the policy front. UM. I think we have you know, the things that are weighing on the market right now are one trade China US trade issue is UH, if you do if talks do not, you know, produce something on March one, and those tariffs go to two fifty billion goods, that's a seventy billion dollar tax on on US and that's gonna get passed onto businesses and consumers. UM. So that certainly hurts with in terms of investment or the uncertainty causes UM causes

you to pause on capex plans, UH, that sort of thing. UM. Second I would say would be you know, obviously international Italy, Brexit, UM. Those issues that are kind of been been a constant you know in the background destabilizing issues. Um, and then you know, the last thing I would say is, uh, you know, really a corporate loss of confidence would be would be the the main thing where corporation is to say, you know, with all the policy and certainty, that's it.

I'm I'm you know, hunkering down and not investing in my busines this or of being a layoff workers. But it doesn't seem we're far from that point. I mean the labor market there is nothing. There is very little signs that's slowly all right, thanks very much, really well done. I appreciate it. All three of those things going to be front and center. Appreciated that. Brett Ryan is Deutsche Bank's senior US economists, joining us here in the Bloomberg

Interactor Brokers Studios mergers and acquisitions. The hallmark, perhaps foreen is going to be the mega deal. Those are the deals that have valuations of five billion dollars or more. Here to tell us what to expect in twenty nineteen, having learned everything about the mergers and acquisitions industry because he basically helped to create it, is Robert Profusak. He is the global chair of Mergers and Acquisitions at Jones Day. Thanks very much for being here, Rob Profusak much appreciated.

Happy New Year to you. Happy New Year too, it was. It was a pretty happy new year for the world emerges and acquisitions, wasn't it too? Yeah, But it was sort of a tale of two halves. The first half was record setting, it was fabulous, and the third quarter started to get bumpy a little bit, I think, mostly because of the trade issues um and uncertainty about evaluation.

And of course the last month or so has been very bumpy with all the volatility, but it's it was still a third third highest year ever, almost four trillion dollars of transactions. That's a mind boggling You can't even I don't know what I mean. Four trillion. Couldn't line up four trillion things, And actually I have no idea what it really means. A lot, a lot I like that.

That's the technical term. You mentioned, the word valuation, and I want to call upon your expertise and your experience in the world of valuation, because when we quote daily stock prices or the price of any asset on a daily basis, it is not for the whole entity, whereas when a company or a buyout firm puts forth an offer to purchase an entire company. It's like buying a car versus buying the steering wheel. There's a whole different valuation process that is involved, and I'm just wondering if

you could share a little detail about that. Yes, well, the valuation the M and A setting is different. It's very different. If you talk to your average analyst about on Wall Street, it's a multiple of earnings. It's earnings growth that sets them multiple. They look at that. That's not so important in M and A is it's a more fundamental valuation. It looks at the cash flow of the business and if we pay this and we spend that much capital, what return are we getting on our

capital investment. In a sense, it's it's similar, but it really is a function of the return on the investment you're making. M and A really is just the alternative to building something yourself. So you could build that car if you bought a steering wheel, and you bought the tires and you bought all this stuff, But it would be pretty hard to do. You know, you'd have to spend a lot of time and you really wouldn't know what you were doing, and you weren't sure what you'd

get when you came out with it. Out of it. If you go to the dealership and buy that car, you know what you're getting, so you're willing to pay a premium for that. That's what companies do. So the valuation in a sense is more fundamental. The markets are more fickle. Uh, they're They're just based on I'm willing to invest this much on the assumption somebody will buy it for more. That's it. It isn't a question of really and a hope that I got to return on

my capital. But as we've seen in the last quarter, you know, it is what it is. Well, if it is what it is in the last quarter, what do you think the change in stock market valuations has done, if anything, to those efforts to buy and sell companies? Well things things look, the fundamentals of M and A are driven by this investment decision. Am I better off investing in a new plant or buying one? And to make it simple, um, and usually it's better to to

buy than to build. You've got it happens quicker, you've got more certainty, you know what you're getting, at least you think you know what you're getting. Let me about it that way. Um, the by versus build decisions very simple. Um So, but when and M and A is driven in these in this world, that's why basis becomes so fundamental by technology and globalization. It isn't really the credit markets does that and the other thing stuff that guys like me talk about. Yeah, on the fringes that matters,

but it's a more fundamental process than that. Um Right now. You know with with evaluation is being uncertain. If you're a seller and your ten percent higher a month ago, you're gonna say I better wait. So it will have a short term effect, not a long term effect. Now, some of the other things that are going on the headline issues probably will be stimulative. If there is a deal with China or if there's we say there's a deal with China, and there's a difference between saying it

and having one. I think, um, you're gonna have a real spirit of activity. China was a big player in North American seen that door was it's safe to say, really slam shut in. It went from three hundred billion dollars of transactions in North America to just just a

tiny fraction of that last year. If that door is reopened, there'll be a blizzard of activity here because Chinese companies, despite putting all the politics aside, want the market, they want the technology, they want to know how, they want all those things, and right now they are foreclosed from doing it. You know, the Broadcom situation last year was really important symbolically. It meant we need to reset this balance.

What one thing that I find interesting is this sort of inner dynamics of this year's morgers and acquisitions, small deals one out Goldman Sacks one, for example, with being the top advisor by dealing with small deals, not big deals. Do you think that will continue next year as it becomes more politically fraught to get some of these big deals done. Well, it's hard to tell. This administration is much more accommodating in terms of anti trust issues. Um,

much more accommodating. Now that isn't to say unless it's from China, right, or anything from China, um. But in terms of the China influence, it's the doors is shut. And you can say that's political if you want, doesn't matter. It's shut. So who cares? Who shut it? You know? Um? And I think if you know you there's going to be some sort of resolution of that. Whether that door is wide open or just partially opened, I don't know. Um, But there were fewer bigger deals. Um. There were a

lot of big deals in the first half of the year. UM, and that was mostly I think because the sense of people like me, which you can get. You can get big deals through this administration, whereas the Obama's administration, especially in the end of it, was very difficult. So what we'll see, you know, I think there's there's so much capital, and there's so there's so much to do with it. I don't think it's it's right to look at a

particular segment of a particular period and come to some conclusion. Um, you know, that's what we do. I know. The overall number of deals is still down year over year this year, which is kind of an interesting statistic, even though the third biggest year ever in terms of dollar volume. Talk if you can about activist investors and their role in mergers and acquisitions, Well, it's a we're in this we're

in a quiet period of activism, so to speak. There is a without getting real technical about it, we're just about to enter a period that if an activist wants to nominate somebody to a board of directors, they get the right to do that. It's generally January and into part of February. You're going to see a lot of that. And you know, this story is easier with this decline in the marketplace. You know, show me the money and

do something with it. Now. You know, the traditional refrain of the activists has been level up your balance, she pay out the cash. Well, companies have been doing that. I mean, last we're gonna have a trillion dollars buybacks this year. A trillion again once again, that number that we can't even fathom. We don't know what it means. So that's not so much. But there's still a lot

to do. A lot of the story about activism probably will be sell the company, break it up, meaning more M and A. What are the top industries that are going to get beset by mergers and acquisitions in it's easy, it's easier to say which businesses won't be that active. I don't think we're gonna see we have despite the precipitous decline in oil prices. I don't think I think we're gonna a rush of M and a in the oil PA in the fracking patch, because it already happened, Yeah,

it happened. It already happened to media, and they're not as levered as they were, you know, when this happened last time. So I don't think you're gonna have a lot of it and people are gonna look at the prices and say, not a good time to sell. Um. Everybody else is in about the same boat, you know, the oil the oil stocks are are different. I think you're gonna see a huge amount of technology that's just the name, that's just the name of the game and technology.

When you look at the big tech companies, they are Bill Weathers for what goes on in the industry in general. You've got to keep buying things. You've got to get mark you've got to get additional name brands and all that stuff as part of your portfolio. Industrial companies are still are still globalizing. So you're going to see that Europe is a little bit less certain. I and think until we have some greater clarity on what Brexit means,

hard to tell. It really is hard to tell. Thank you very much for being with us, Always a pleasure. Thanks for your thoughts and your insight and happy new year to Robert Profuseck. He is the global chair of Mergers and Acquisitions for Jones Day, giving us not only his outlook for but a little bit of description on what happened in We are broadcasting from the Bloomberg Interactor Broker's studios. And here's an acronym for you. C P t p P the Comprehensive and Progressive Agreement for Trans

Pacific Partnership. It entered into force yesterday. Seven of the eleven members have ratified. This practice reduces tariffs among countries such as Mexico, Japan, New Zealand, Canada, Australia and Vietnam. Here to help us understand the implications, Meredith Sumter, Eurasia Group Head of Research, Strategy and Operations. Meredith, thank you very much for being with us. Happy new year to you, and will it be a happy new year for those

member states that have actually ratified this agreement? What will happen as a result? Thanks for having met him. We should expect that it will be a happy new year and happy between nineteen four those member countries. We should expect a massive rush of immediate liberalization among those countries. As you said initial cuts. The majority of the initial cuts went into effect UM yesterday, but the substantial amount over of terrors will either be cut or eliminated by tomorrow.

We're at the start of the process by which the remaining tariff lines for these countries will be drawn down annually over a period of several years. And when it's all said and done, perhaps over the next five or six years, we could see most cpt p P member countries will see nearly of tariffs amongst them eliminated. So will this be enough to I guess, create a new superpower or do kind of alliance when it comes to trade that does not include the US. It certainly will

be an economic force. And the key question is when a Washington wake up to realizing that it is outside of what is likely to be the most high value, generating, cutting edge trade pacts UH that the twenty one century so far will see. This is it the third largest trade pack behind NAFTA and UH the European UM Single Market. But at the same time it comprises UH important crucial rules that are meant to address many of the industrial

market access concerns of the compan administration. They're important chapters on leveling that the playing field with state owned enterprises. There are also critical new rules UH concerning trade and investment related to the digital economy. Now this is important because the digital economy, of course, is where economic activity

is headed. But it's also notable that these sorts of rules don't necessarily exist elsewhere, either in international UH institutions like the w t O or another notable trade pacts. If the US wanted in, if they, using your words, wake up to what they are missing out on, would this pact have them? So there are certain several members that really do want the US to come back, because adding the US economy to this trade pact will significantly

expand its dynamic force. But at the same time, the US will have to negotiate to get back into the pact. Several of these countries have because the US decided to leave the pack, many of these sort of stringent provisions that Washington had advocated for have effectively been suspended. So you see some reports that some of these member countries, because the US has pulled out of the pact, are not subject to as high levels of competition UH with

US companies as they would have been otherwise. So Japan aside and some other key members aside, you may see some of the existing cpt p P members drag their feet a bit should Washington decide that it wants to re enter. What role do you believe countries such as Colombia, Thailand, South Korea, even Indonesia and maybe even the United Kingdom

will play in the future of this pact. Well, certainly, now that we've had the cpt p P ratified member, countries are now looking at ways to expand the pack. So Columbia has already applied to join, Thailand is keenly interested, South Korea's indicated interest, uh, the UK and Indonesia have

expressed interest. But watch here, because while Thailand has the most to lose from being outside the cpt p P given its heavy role in regional supply chains and the increased competition that will come to its economy from other Southeast Asia cpt P PEAK countries, except that Thailand will move first to try to enter, the UK joining will likely not happen for the foreseeable future, um as the United Kingdom will not be able to join until after

the post Brexit transition phase. It's over the one country though that that people should watch over the long term is China. China is watching this trade pac closely, but for for now in the short term, will remain focused on the less ambitious trade pact it is negotiating with Asian countries and trading partners. This is the regional comprehensive

and an economic partnership. Now that aside, Beijing's interests will be peaked by a successful cpt p P. However, as ultimately China's priority is to be at the center of the Asia Pacific's economic architecture. They will not want to be outside of this trade pact and will look for some way to align with it, if not to join. Meredith, I want to sort of ease the do able knowledge that you have having been a diplomat in Beijing, fascinating role.

Especially right now, I'm trying to get a sense of how much we should really give credence to the softening of trade tensions between the US and China based on a Twitter post by President Trump and some utterances from officials in Beijing, is this real? I would say, for now, pay less attention to the tweets and more attention to any sort of announcements and the detail of announcements that

actually come from the negotiators themselves. So with that I would watch closely in the US as to what U. S TR Bob Letitheiser might put out in terms of the progress of those negotiations coming through. Certainly, from my perspective watching China, I have seen little into no indication yet that President Shijun king uh is ready to make some of these significant structural reforms to his state backed

economy that Washington is demanding. President Ji Jim Ping gave a notable policy speech on the eighteenth of December uh lauty in the forty Years of Reform and Opening, and he used that speech not to signal that there would be structural reforms to the economy, but rather to champion the Party's role in the economy and the success of China's economy under his watch. Murder The next year will mark seventy years since Maltzi Tong led the Communist Party

to power. Is there any likelihood that nineteen will cause leaders in China to reassess their economic program or will it just bolster their efforts to push forward their China First program. Certainly, Hi Jim Ping is perhaps the most powerful leader that China has seen since and all indications thus far indicate that, while they're likely, is UH some grumbling and discontent among you know, party and policy circles with the direction that Juan Pain is taking the economy.

So think less structural reform, certainly, more party control over the functioning and the state economy, more control over civil society.

There are no alternatives to she UH, and it is unlikely even if there is this discontent, we have seen little sign that there is going to be anything but more power consolidation UH and more political stability for China under Juan Pain, which in a certain sense is positive for markets, But if you think about it from an economic reform perspective and with China's continued slowing and growth

over the long term, that doesn't look so good. Thank you so much for being with us, Meredith start Uh, your head of research, strategy and operations for your Asia group. I want to bring in an expert when it comes to looking at investments. Jack Ablin is the chief investment officer and founding partner of Crescent Wealth Advisors. Jack Ablin, Happy New Year to you and thank you for being with us. Let's begin with your thoughts on US equities

are they expensive? US equities, unfortunately, pim are still a little bit expensive when you look at them through the lens of history. Um, the the one thing that perhaps some bulls are latching onto is forward pees. That forward pees look reasonable based on the next twelve months earnings projections. But I would argue that only six months of those projections are real. Uh, the Q three and Q four probably haven't been revised downward to a point where they

a lot of sense. All right, So if you believe that stocks in the United States are still perhaps expensive, when will they cease being expensive? How much further do they need to decline in value? It's you know, it's hard to tell, just because markets oftentimes overshoot. Also, um, you know, it's it's a timing thing. It's possible, for example, that, um, you know, if the forward earnings are in fact true and earnings could you know, miraculously be revised upward, which

of course they've been being revised downward. Um we could we could also, um you know, get a cheap market

without too much pain. But my sense is, um, you know, the foreign markets are actually fairly priced, and in fact, I would in fact go so far as to say emerging markets are down right cheap, down right cheap emerging markets when it comes to their export quality, or are you talking about companies that are focused on domestic consumption in emerging market Yeah, it's um, well, I'm looking at the index in general, but I would say, um, domestic consumption is certainly a part of it, a big in fact,

an increasing part of it, which is encouraging news. But you're right, Um, a lot of emerging market companies do rely on global growth and global demand, and of course that's something that's been called in a question over the most recent couple of quarters. So now that leads you, I would imagine to thoughts about the value of the

US dollar. It does, and I think here the US dollar, which have certainly been driving the the S and P versus emerging market trade over the last few years, UM has probably gone as high as it's gonna go, largely be because um, the central banks are now particularly broader, now starting to close down a lot of their aggressive policies and you know, who knows, maybe even start to tighten, which could help boost the value of foreign currencies relative

to the US dollar over the coming twelve eighteen months. So would that suggest that if you are an investor that has dollars to spend, now is the time to do so when it comes to purchasing assets outside the US, well, you know that's uh. I think it's a tricky question because we look at a multiple of factors and valuations. Certainly one of them, I certainly wouldn't jump headlong into a market that I didn't think, which you know, was cheap.

But in the other hand, there are fundamental factors like you know, the economic backdrop, liquidity uh, and of course moll entum um, none of which has really been too cooperative. I will say on a momentum front, we do look at the relative return of let's say international or emerging versus the US, and you know, probably not a surprise because the foreign markets did get hurt earlier in the year, that they've actually been out performing on a relative basis

UH to the US. So I would say from that perspective, if you've got money already in the market and it's in US, yes, shifted it, keep your keep your position in place, and shifted to the international markets. If you've got dry powder and you're waiting to add risk, I think there's probably still a little more time left on this. On this move, you mentioned liquidity. What is your impression

of liquidity conditions? Liquidity unfortunately appears to be tightening. I mean not just because of the FED, but also lenders

willingness to extend hash to borrow spends and invest um. Here, we've seen credit conditions tighten if you look, for example, at credit spreads, which is one of the main metrics that I like to track, uh, and that really broke down from our perspective in the first or second week of October, uh, suggesting that uh, you know, it is getting a little bit more difficult to uh borrow money uh in these markets, not just on a you know,

nominal basis, obviously with interest rates potentially moving higher, but also on a spread basis, as lenders require higher premium to extend credit to lower quality borrowers. Jack Avelin is the chief investment officer and founding partner of Crescent Wealth Advisors. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene. Before

the podcast, you can always catch us worldwide. I'm Bloomberg Radio