Surveillance: No Tax Legislation Before Midterms, Hudak Says

Do you have it longer term? I definitely have a longer term, and I think that some of what we've seen in terms of the price action so far has been really really overdone this year. You know, I don't understand why investors are surprised that the government has come out and said that they are going to support strategic industries technology private firms going to provide both explicit and implicit support on financing as well as on the regulatory side.

This has always been the case, and people who have been reluctant to invest in China are those that don't understand the strength of Chinese political will and how important the growth and the breadth of the economy is for the future plans. So we saw the plunge protection team get into action. What if they learned from and why

is this response any different? So I think what's happened in two thousand eighteen is a little bit different in that um the government has put a series of policies and new regulations in place that, you know, while hurting earnings maybe a little bit in the near term, especially around some of the key sectors in China, actually really lay the groundwork for more sustained and better growth in the future. This isn't just about supporting stocks right now.

This is about creating the right framework and the long term support from you know, the policy side that will allow the kind of growth and development that they need to achieve their big technology goals. Well, then all the you know, the optimism we have and shall we heard Kate Moore's optimism here over the last number of hours. But within this optimism is a gloom crew. Doug Cass will join us later on. Doug Cass is a little bit cautious on the market. What do the cautious people

get wrong? Is it financial? Is it mood? Is it the size of the bet one way or another? What is it? Yeah? Tom. Let me just say, I don't think I'm gonna live this down when I get into the office today. Kate, You're too optimistic is going to be branded right across my face. But here's what I will say. The people who are very pessimistic are concerned that, you know, all of these policy things will weigh indefinitely on the potential for earnings and growth. People who are optimistic,

you tend to have a slightly longer time horizon. Exactly is Doug cass would say that, did Kate? More is X access is way different than the kind of access Doug Kiss, don't anow us the characterize what you're saying. If it's not optimism, what would you call it? How would you frame the way you're thinking about the world

right now? I'd say I have the ability to look through some of the near term noise volatility UH and some challenges and some headwinds to Chinese sectors into Chinese growth expectations is very likely in the near term, and I'm gonna, if I'm gonna be totally honest with you, I can't necessarily identify catalysts that's gonna lead China to rip and outperform the rest of the market in the

fourth quarter. But I think you know, as especially longer term investors and individual investors think about their allocation to this incredibly important economy, to these really interesting markets where companies don't look exactly like their US counterparts, they need to think about adding over the medium term. And you know this is what you hear me say, which is

to try and reverse the negative. I think that the order take away the cloud that's been hanging over a lot of people's recent experience in emerging markets and say there are some very very strong growth stories. A big week for tech earnings in the United States this week. The divergence, though, in between Chinese tech and US tech has been absolutely massive. Are you saying that you would buy the Chinese side of the story and look for

some convergence here. It's really convenient to say that US company, US tech and Chinese tech are kind of similar sides of the same idea, But the composition of these companies, their demand, their content, the regulatory environment are all totally different. And you've seen what is almost four four thousand basis points spread between the performance of US tech companies and Chinese tech. But apples to apples or it's not these

are you know. My point is if you're thinking about technology over the long term, you've got to own both sides. These companies do different things, access different consumer bases and and are developing technologies at different pieces. It's not you know, you don't have a an Apple in China or you know an Amazon in China that I feel pretty calfinated accident. She's stand up on the upper west side of the week. Kay as much sharper than us about that big week

coming up for tech and eggs. What are you looking for? Netflix just does everything the bulls wanted to do, and then the stock ends the week down two. Well, we're in this market where if you are putting up numbers that look too good that everyone's going to step back. Is it possible that we continue to get the same kind of subscription growth? Who knows? Um, there's we really are looking for goldilocks numbers, things strong but not so

strong that they don't look unsustainable. And you know, it's possible that good numbers this year pardon me, this quarter on the top line and the bottom line aren't met with huge out performance. So um, but I would say that's an opportunity especially our growth managers are looking to

add shares. At this point, does it matter what corporations are doing with their cash, because to me, it's my my official line interview after interview is nothing's changed, and they're doing a little bit of capex and everybody stands up and cheers, but it's a yeah, but kind of capex, that's no big deal. Well, the only CAPEX we're really seeing grow in a meaningful way into thousand eighteen is

in tech. Actually, every other sector is kind of doing what it's done for most of the post crisis period. It's like low single digit growth, just what they need to do. It's really interesting to me, though, that when growth starts to want to perform, we get a lot of people come on this program and say it's time to shift to value, that rotation is here, get out of growth, go to value. And then you just said your growth managers are looking to add to exposure. So

clearly for black Rock that's the theme. You think growth is where it's at, that's where it stays. So last week we had a great debate. We had our equities off site and value versus growth was one of our key discussion points. What do you see Houston, Red Sex. Is that where your off site was. Well, there are a lot of different teams here. This is what I'm

gonna say when it comes to value. You tend to have value as a style outperform when you are in an economic or accelerating economic environment, when the second derivative growth looks really good. Um, and that has been you know, the experience that most people have lived through. What I will tell you though, is that like what's falling into the value style and disease right now? Some of it's just not very good quality and some of it is

structurally impaired. And I think our value managers would say, you know, the work they have to do is that much more difficult than it's ever been in the past. We are also, while we're looking for a sustained expansion, are not looking for a massive acceleration in the growth rate at this point. And that I think, you know, tempers the opportunity for value. John Hudeck where this was Brookings,

we talked policy after the election. Do you just assume John, I mean, you're not like a poll wank, but do you just assume gridlock Democrat House? Yeah, if the Democrats take back the House. Sure, gridlock is going to increase dramatically. You're going to have one party controlling the House, another party controlling the Senate that agree on next to nothing. And unless unless Pelosi and Schumer can somehow extend an olive branch to the president, um, it's going to be

a period in which we have another nothing. Congress. Is grid luck good? Well, gridlock is good if Congress is proposing a lot of bad ideas. And I think there are a lot of Americans who see Congress as a group that's proposing a lot of bad ideas in terms

of policy. But at the same time, there are must pass pieces of legislation like appropriations bills that gridlock really threatens, and that increases the likelihood of government shutdowns, lacks of reauthorization for essential agencies, and in a whole host of other problems. John, what can the president do without a Republican Congress if that is indeed what we get after the midterms, And why do you think the focus will

be well? Presidents face this fairly regularly. Right the past, several presidents have baced a period of unified government and then a period in which they lost control of at least one House of Congress, and they handle it in different ways. An effective president takes a deep breath and says, well, the political landscape has changed dramatically, and if I want to be effective at all, I have to become a dealmaker.

And for President Trump, he sort of prides himself on that, and I think he has an opportunity to change course a bit. If, however, he stays course given a different political environment, it means that he will contribute to that gridlock. In Any hope of breaking that gridlock, of course, comes from the Oval Office, and if the Oval Office is not willing to put in the time, then gridlock is

the name of the game. Who was the last effective president? John, Well, you know, I think, uh, It's not often talked about, but I think President George W. Bush actually worked surprisingly well with uh Democrats in Congress after the two thousand six of wave of Democrats taking control. I mean they didn't you know, they didn't do everything that they wanted to get done, but they were as antagonist because people

thought they'd be. And John, this goes the heart of your academics, which is the idea of a president with executive experience, And we can clearly state that President Trump did not have that not serving in government, and President Obama was Senator Obama. Do you make a big deal of someone that enters the office that actually was a governor.

I think that's pretty helpful when you look at a President Clinton who worked well with a Republican Congress, or I should say relatively well President Bush who worked well with the Democratic Congress. Part of that had to do with their experience previously. But I think with President Trump,

you know, he is an executive. He is a business executive, and in his many decades of working not just in New York, but in other countries I'm sorry, other major cities around the world, he saw these changes in political environments, real estate environments, and economic environments, and to be effective he need to change when those environments changed. And so I think he has an opportunity to do that. The

question is whether he will. The president's tone and I believe I saw the video and the blur of the weekend, But Johanna Hudec, can the president get tax legislation through by the first Tuesday of November? Absolutely not, thank you. Not going to get anything through between now in this next election day or frankly now in November of twenty nineteen. So let's tell foreign policy, John, because that's where the

focus is right now, Saudi Arabia. Would it be fant to say this is the biggest foreign policy crisis so far of the Trump administration. Absolutely. I think some are looking at this, or I should say very few are looking at this as an issue of a journalist being tortured and dismembered. But this is of course much larger. It has to do with American values and leadership around the world, respect for media, and of course economic and

defense relationships. And audio Arabia is an important, important economic partner and an important partner in America's defense. But we have a lot of partners who do things from time to time that appalls the US and there has to be a response to that. And the president right now is facing acrossroads, and he can make a very bad choice, and he can make a series of better choices, and the ball is really in his core. So walk me through, John,

what you think are a series of better choices? You know, I think a series of better choices includes a serious reprimand of Saudi Arabia that would probably come in the form of some mild sanctions. Um it would come from a very um uh you know, firm statement from the President and probably a firm statement from the Congress that the United States does not condone this behavior and it will stand up for media around the world who, frankly, as you both know, are under attack and a variety

of countries every day. John, one more question, what happens the first Wednesday of November. I mean, if there's let's assume the Democrats take the House, what's the lame duck character of I mean, John Farrell is looking at me like, what's lane duck? Explain lame duck to our global audience, and what flavor of lame duck? Will this be? Sure? Lame duck exists for a Congress or for a president, and that happens after an election and before either a new Congress has sworn in or a new president is

sworn in. What you're going to see in the lamb Duck is a Senate that is rapidly approving judges as quickly as they can. I think that's going to be true even if uh the uh, you know, Republicans maintain control. There are some loose ends in terms of appropriations. A farm bill etcetera that Congress wants to get through, and I think sanctions on Saudi Arabia is something that this

Congress is going to want to get done before January. John, Thank you so much January Duck with Brookings to give us a good election, John, why don't you bring in young Mailey. In the equity markets, Matt Madbie millerit back and lac Managing director and equity strategist. Good morning to your Matt. Big week for tech nes this week in America. What are you looking for? Well, I mean it's it's going to be very very important because the tech has obviously been the key, key leader in the market, in

the stock market since the election. Remember everybody said that the you know, President Trump is gonna be negative for uh for tech companies, and in the group was getting hit right after the election. They've rallied strongly since then. The one concern, of course, is the key leader within the tech group has been the semi conductors, and they've been acting very poorly lately. Uh so uh you know, they've been much more weaker than the rest of the group.

We keep talking about the Tunter day moving average in the in the SMP five hundred, which we continue to cling to the same thing as in the XLK, the UH Tech ETF, but the SOCKS Semiconductor Index or the SMH which is the semi e t F, it's broken well below. It's two winter day moving average seven percent below. And it's a very very important support level for that

one as well. So if we don't get to UH this group to turn around and for the general UH group to see good earnings to help the you know, the tech group, the key leadership group bounced back, We're gonna have some more headwines as we moved to the bag, just to break down tech a little bit more. We have seen a divergence within the big fang names themselves, notably the difference between say, Facebook and Netflix through and

it's been quite dramatic. Are there any particular names, any companies, any business models that you think will do better in the current environment. Well, I mean, the one thing that we have to look at is, you know, this whole thing with when it's kind of funny because away from the fundamental side of the situation, I'm more interested in how crowded this trade. As you talk about the fang stocks, you look at a Facebook. You know, in this recent

most recent downturn, Facebook is actually outperformed. It's it's come down a little bit, but it's actually been trading more sideways. A lot of these stocks are very very crowded because they performed very well. Uh. But Facebook, of course it's been washed out. It's done more. It's no longer crowded people. It's not not a lot of week money in it. So I think some of these underperformers are going to do better. It's October whatever it is, and we're all

focused on the first Tuesday of November. Michael Purvis, Weed and Matt Malie wrote a wonderful note a couple of weeks ago. A number of weeks ago, I should say about how portfolios have to adjust, what percent of portfolios are behind right now? The answers, it's ginormous, isn't it. Yes, you know, it's well, of course every year it's it's kind of funny how how badly the tend money managers, both on the hedge fund side and on the mutual fund side, UH tend to underperform the market. The thing

is nowadays, it's it's on a percentage basis. It's a big percentage, but a lot of them are very tied, very closely to these indexes, so they're not well behind the market. However, it's kind of funny because I'm still think we might need need to get a little bit of more of a wash out here before the market really bottoms. But as you get past the election, you know, we all know that the in mid term election years,

and market tends a rally towards the end of the year. Uh, then performance sphere become plays a huge, huge, uh component to what's going on in the marketplace. Even if you think we're gonna have a horrible gonna have a horrible recession in two thousand nineteen, if the markets trailing at the end of the year, and you're an institutional money manager, you've got to be in the market. You've got to

be buying. So uh. You know, people may be a little bit of careful, especially on some of these groups that are very badly beaten up, some of the bank stocks which have rallied strongly at the end of the year the last two years. I've been really negative on the group, but I always be careful. Wait are you saying no? Uh, you know, I'll take it back yes, I think right now. I think as we look at the two thousand nineteen with interest rates moving higher, things

have changed. We keep them saying that in the fundamentals haven't changed. You know, mortgage rates have doubled, I'm sorry, not double, They've gone up a full percent in the last year. Uh A. Long term bonds have doubled since a little of two thousand sixteen. The yield on long term bonds. Uh. There's, of course, there's a lot of

uncertainly now with earnings. So my thing is raising a little bit of cash in case we have a tough year, get a little bit more defensive, because these defensive groups are out performing, especially Matt MAYLEI thank you so much, milar type. I greatly appreciate it, without question. My interview of the day on the issues of Saudi Arabia, Turkey at the United States. Stephen Cook, Stephen A. Cook is with the Council on Foreign Relations. I can't say enough

about his book False Dawn, Protest, Democracy and Violence. I'll look at the Middle East, look at the Arab Spring. It is one of those books where I'm reading every word cover to cover. Stephen Cook, good morning. If you uh wrote false Dawn today, How would you change the chapter on Turkey? Well, I think the chapter actually holds up even stronger now. Turkey was one of those countries in the early two thousand's that I think people widely

believed would be a member of the European Union. By and um, it is more authoritarian now than I think it's been in since the Republic of Turkey's founding almost nine years ago. So the Turkish president ridget type Aerdan essentially runs a one man elected autocracy. Within this is a present from Mr Rohan in his autocracy? Would you

explain his calculus now? I think it's been confusing within the media, the Ariduan calculus of Saudi Arabia combined with the calculus is to the United States and to Iran as well. Well. The issue of the day being the relationship between Turkey and Saudi Arabian. I think it's fairly clear that everyone has multiple interest in doing everything possible

to embarrass the saudiast Um. First of all, he can demonstrate through the leaks to the press that Turkey can be a responsible citizen as opposed to a reckless Saudi Arabia.

He's scheduled to announce tomorrow. Uh. There the Turkish government's belief of what happened to the Saudi journalist Jamal Kashogi, And I think what he's trying to do is to demonstrate that for all the criticism that the Turkish Turkish press has taken for its past fabrications on this issue, they've been one on the story and have reflected accurately

what's happened. And then it's important to remember that Saudi Arabia, he is a arrival and actually in conflict with one of Turkeys st jijik Allas, the government of Cota, and so anything that Aireduan can do to kind of bring the Saudis down and notch will be beneficial to him. On the question of Iran, the Turks really have played a double game. Um. They have been signal publicly that they want to be on the side of the United States, while over the course of the preceding decade helped the

Iranians evade UN sanctions. So uh, it's entirely unclear what they're going to do with the renewing sanctions. Stephen A. Cook, with his constant formulations, I can't say enough about False Dawn. I'm reading it cover to cover Stephen A. Cook. This came up this weekend. Let's let's have the pro answer the question. If the Saudis are Sunni and the Iranians

are Shia, what is Turkey. Well, Turkey is predominantly a Sunni country, but the Turks have never really pursued a sectarian farm policy in the same way that the Saudis have, for example, the way the Iranians have. Um, the Turks see themselves as natural leaders of the Muslim world and that includes sunny and Well then all this is where we go from here. Of course, CNN leading with the report uh this morning of a double coming out of

the consulate that looked like Mr Shogen all that. What is a pro like you monitoring over the next over the next seventy two hours. Well, what's really, I think crucially important is the way in which the sad government responds to these revelations. Uh. It is a situation which is obviously very very difficult for the Saudist to get out of. The stories they've told are not believable. Uh. This is going to shake the royal family even if

Mohammed bin Salman remains the crown prince. Uh. Look for the king to reign him in a it and for his enemies to regain some ground within the royal family. How do you depose Mohammed been Salmon if the royal family decides to do that. He's not the king, so I guess he's not deposable. But have you figured out a path yet to what the royal family would do. I think it's unlikely that the king will depose his son,

and it's really up to the king. So any enemies of Mohammed bin Salman will have to depose King Salman, and it's going to be very hard. The Crown Prince and the king control all of the important services, the military, the Ministry of in Curia, the Saudi Arabian National Guard, that could that could be the instruments of of toppling

the king. But one can imagine that as Mohammed bin Salman gets pulled deeper and deeper into this this scandal, that the king and people around him determined that the young Crown Prince is doing a service to Saudi Arabia and some of those people who have been previously been sidelined been brought back as steady hands for the kingdom. Stephen at the time that we've got left with you. Let's pull it back to the United States. Can you rate UH Secretary Pompeo's shuttle diplomacy of last week and

what would be the next step for the Secretary of State. Well, I think that the administration is caught an extraordinarily awkward position. Um too allies Turkey and Saudi Arabia vastly different stories, and I think that Pompeo's effort to try to get the Saudia's on board to at least telling something that's believable so that we can get past that wasn't entirely successful. I think the administration is growing frustrated with the Saudia. Isn't it's time for them to take them on publicly

and say you have to come clean. Does the Trump administration have a Middle East policy? I see Jerusalem in the embassy there now Australia is considering that is well, But do they have a Stephen A Cook policy? You can UH find. I think it's UH focus on countering Iran, which is why the administration has been reluctant to UH come out swinging against the Saudis on the death of

Jamak Choti. UH it is to destroy the Islamic State UH and in doing both of those things, it's maximum support for America's allies in the region, most of whom are authoritarian systems. Steven, thank you for the updates Stephen and Cook with a Console on foreign relations, and again just the highest recommendation of his short brief terse book False Dawn on the Arab Spring in the path from that.

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.