Surveillance: Not Trade War But Tech Theft, Feldstein says

The former chairman of the Council of Economic Advisors, the former Chief ECONOP advisor to the President Ronald Reagan, Marty fauld Stein, the Harvard University Professor of Economics joints this. Now that's better, isn't it. It's better. That's better, Marty. Great to see you're good to be back on radio. In your words, Marty, it is not a China US trade war. Why not. What it's really about is not trade.

It's about China stealing US technology, stealing and by forcing American companies who do business in China to transfer their technology to Chinese firms, and also the Chinese stealing through the internet. So, Marzi, this riises a question. One of the moves forward, the point of progress we've seen this week has been the Chinese set to be offering to buy even more agricultural product. Sounds like for you at least, Marty, that's not gonna get it done. That's not gonna be

enough to broak a deal. It's the opposite that is, they're saying, let's not talk about technology theft. Let's talk about the trade deficit between China and the US, and we the Chinese, can solve that problem. We can buy more of this that the other thing. But that doesn't deal with the true underlying technology theft, and it doesn't change the overall you has trade deficit. It'll shift it

from China to the rest of the world. The President might actually be happy if the bilateral deficit is addressed, even if the I T issues are not, and bassillor Lightheiser may have a very different point of view on this, Marty. Do you see the prospect of the President actually accepting this kind of movement from the Chinese, because ultimately, for him he might need a win, and anything that moves the bilateral deficit in by some form of magnitude palatable

for the president would be sufficient enough for him. I hope not. I hope not. I hope that he's listening hard to the voices of Lighthouser and others who are saying that's just a diversion from the real issue. To get the real interaty addressed, though, you need the Chinese to acknowledge the issue is an issue. At the moment, Professor, that's not happening. But the US is making it very clear to them, as we did not in the beginning. In the beginning we talked about the trade deficit, wasn't

clear what the administration wanted. We're X number of years on from a February morning where we all woke up in America to the fact that our president of the United States was envisioned. Were you on that trip with President Nixon? By any chance? I was not, But but we were all on that trip with the excitement and the history making of it. Are the Chinese now any different than they were then about just waiting out the American and Western process. Well, they see themselves as much

more important, much bigger. They see that as an economy their real size is equal to ours, equal to the European Union, and that gives them a lot a lot of leverage with the companies of Asia who want to trade with them. So they've got a very different sense of their role in the world. Right to catch up with you as a whitse It's fantastic to have you with us in the studio, Matt found Stein, the Hovid

University Professor of economics. If you are interested in how every big merger craters, this is the conversation of the day. Tara la Chapel has been brutal about not just Craft and all the rest of it, but every single combination. The obligatory press conference, all the grinning, all the smiling, and the memo today from Tara la Chapelle is right to the point. Warren Buffett those investors more than a

memo this year, Tara, what did he get wrong? So with Warren Buffett, his letter is scheduled to come out tomorrow. I think that accessors want to hear more from him about his um strategy around invest singing tech stocks. He seems to be jumping in and out of those, and also more about the succession plan and what's going to happen with all. Okay, but think today the big news is Craft. Hi, come on, okay, Tara, I just did

the common size balance sheet analysis. The percentage of goodwill on Pepsicola's balance sheet is the percentage of goodwill bad will on Craft's financially engineered balance sheet. It's ginormous. It's like thirty eight or thirty nine percent a it's failed be they got more to write down in the future. How did this happen? You know, I think a lot

of people were just kind of drinking the koolie. You know, Craft Highns for a while had the leading operating margins in this industry, so they're extremely profitable, and I think people thought, you know, this strategy, maybe it does work, but it was very shortsighted. Basically, they just got the business.

They cut as many costs as they can, really weren't investing much in the brands, and and you know, that strategy only works for so long until you have us flip up like this, and then suddenly they need to do another mega merger to sort of hide that, bring another company in that they can go back to cutting costs, because with the businesses they have, you can't slash costs into perpetuity. That just doesn't work. And that's what we're seeing here. Kick. Should I just say that that was

the ultimate cf A punt of the week. What was that she can't drink the kool a craft on school. Its very very smart. Actually missed that tower that was actually fantastic. It's four ab A colleague kre Brad Allison wrote this morning, I actually think this is quite interesting that Berkshire Hathaway's Warren Buffett will go out there this weekend and perhaps talk about the struggle to locate great deals.

The real question, Tara should have been the deals that he had made just aren't turning out that great either. This weekend, we're going to spend this weekend talking about finding great deals and how hard it is to find great deals, and and not spend much time when we should be looking back at the deals that have been made exactly and you know, a lot of his letters he spent as sort of aud top seeing some of the business decisions they've made, you know, really getting into

the weeds of insurance and they're different units. But he doesn't, you know, really talk as much about Craft for example, and some of these investments that they've made on the on the stock market side that really you know nothing, we are puzzling to investors. They don't align with what we know about Buffet and his belief. It's very odd. Hit Oh stop. His belief is to get a preferred coupon. That's all it comes down to, is his Yeah, but his Buffet one on one is his eight percent or

whatever it is, preferred coupon. Is that a threat with this right down and with the equity price cratering, or does he still get his coupon? I mean, I don't know the details are on that, but I would suspect that we're getting to the point where Buffett really needs to consider whether he stays in the stock. They are the largest shareholder, even bigger than three GS, and at this point it's really hard to defend. I'm sure that he's still you know, they've made a ton of this

investment because of that this guy. How did they how did they quote unquote make a ton on this investment. So the way this works, so Buffett had helped three G buy out hind and then they helped bankroll the deal with Craft and Hynes that brought those two companies together, and as part of that, Buffett got preferred shares, which the company eventually bought back from them, but has left

Buffet with this huge stake in the common shares. But at the end of the day, you know, they did make out pretty well because for a while, you know, they were getting see this, I think it was a nine percent coupon, and on top of it, a stock was doing okay for a while, and everyone in the industry felt this need to mimic them. So it felt like, you know, these guys are the ones to copy that they're doing the right thing. It was only a matter of time before you know, the curtain would fall and

we would see that this strategy simply is flawed. And you know, I can't imagine how much one Berkshire would say. Buffett Um exited the board last year, so he's no longer an insider at the company. He's simply a shareholder. Okay, thanks so much, folks. I'll get out on Twitter. Cherylas Chapelle Warren Buffeto's investors more than a memo this year. It's a terrific precursor. Thank you rather to that meeting and normal outspoken of fantastic schwap Since for Financial Research,

chief fixed income strategist Take Kathy. Great to catch up with you what I keep hearing from a lot of people on the bye side. Her from Pimco. Yesterday, I caught up with Mark kiss all over there. It's to fade the strength. It's this theme of fading the strength, looking to build cash and go up in quality. Does that resonate with you, Kathy? Yeah, yeah, good morning, Thanks for having me on. Um. Yeah, we've been we've been

actually suggesting moving up in credit quality for quite some time. Um. I think this, this big move we've had since the first of the year, since about Christmas Eve, uh, in credit and lower quality credits should be faded. I think. Um, there's just really not a lot of substance behind it. And when you look at the risk reward trade offs, you're saying, well, how much how much reward am I getting at these spreads for the risk I'm taking? And

it doesn't look all that attractive. So, Kathy, where aren't we? Are you at about four d basis points over correct? Yeah? Is that too tight for you? Then, Kathy, you just think that's too tight? Um. You know we're officially neutral here, but I would say that it's a bit tight considering the risk that we get some downgrades from the triple Bees into the junk area. Um, that could overwhelm it.

And we really still aren't clear on what the FED is doing Uh, we know that they're sitting on the sidelines, but we don't really know what the next move is going to be. Keathy Jones, Just so you understand where are we were four and a half hours away from the real yields scene on Bloomberg TV on bonds. With that mentioned, Kathy, is there any real yield out there? I mean, inflation is lower, so do I feel better about my inflation and just a yield? Well, there are

the real yields are higher than they used to be. Okay, so when we have the zero industry policy, it was really tough to find any real yield. You can find a little bit out there, but it's not you know, it's not fantastic. It isn't going likely going back to where it used to be prior to the financial crisis. Um, we just don't don't see nominal rates moving up that much relative to inflation. Rich Trueman, did you get that where Ms Jones said the real yield is not fantastic?

Can we put that into an ad ad campaign? Okay, that's not what she meant. She's a regular on the show, your regular on the shows, Cathy. You enjoyed the program, don't you? Oh? I love the program. It's my favorite. It's my favorite TV show. God like that. Do you like that, Kane? Do you sleep through Limbeg's veilance something TV? Lis Ane Saunders doesn't treat me like Kathy. This idea of going up in quality just for people not familiar

with fixed income, What does that ultimately means? Specifically? What is coming up in quality mean? Well, I think within to say, the investment grade corporate bond area, now about half of that university, maybe even a little bit more is the lowest UH tier triple B. So we would suggest that you you move up and into the say the A rated bonds, not abandoned triple be entirely, but

certainly not concentrate there. And it's easy, particularly if you're in a passive strategy that just follows an index, to get overweighted in the lower tiers of credit quality. So we're suggesting move up at least divide out between the triple bs and and some A rated bonds. And in the junk world the same story. I mean, if we're even within junk, if you're heavily concentrated in the triple C to your risk of default, getting some bonds at default is very high if we go into a slowdown

in the economy. I mean this, what you just said, they're cat is extremely important because people are not buying individual bonds nowadays. They're buying indexes, They're buying ETFs, are buying segmented Are our listeners too segmented in your bond world? Should they be buying more blended et fs and portfolios? Well, you know, we we like e TF so we like passive strategies because they're really you know, provide you a lot of liquidity and a very cost effective way to invest.

So I wouldn't abandon it entirely, but yeah, we do think you need to be somewhat strategic here and and even tactical in how you allocate within the passive in the passive world, because it's been pretty easy for a very long time as asset prices kind of moved up with the FED being very easy, and we've had a little bit of that year to day. But when things change is going to get more challenging. Jiants always criites a catch up with you. Thank you. She said the

real yield five times in the interview. I kept counting. No, that's great, Cathy. Thank you strategist. I want to make clearer the markets just shifted. There's no other way to put it. On a Friday morning, we had higher yields. A thirty year bond with a vengeance has come lower yield three basis points to four digits three point zero one nine. The abruptness of that is sobering, with a tenure two point six six percent green on the screen on futures. But also sterling comes in abruptly in the

Euro one thirteen thirty seven. And as Karen mentioned there, it is Samsonite, Caterpillar, and Xerox to be a list of companies that we would get to. She is senior vice president for TIT for TAT Trade, UH for Vanguard, and Matthias joins us now supremely qualified on Washington on

our domestic and international relations. And I should point out she's a member of the CFA Institute, so unlike so many in Washington, she actually understands the bid and they ask and thrilled to have you with today what's the bid? And ask on American trade right now? It's so interesting. You know, trade takes forever, and you can achieve so much just by threatening, Like look at the markets this morning. What we're doing with China and with Europe, that is

what is going on right now. There's a lot of chess thumping, silver back, gorilla posing power posing, to paraphrase Amy, good morning meeting at Bloomberg, surveillance to continue. So what happens after the chess thumping, Well, that's the interesting thing. Trade, Real trade agreements take a long time to accomplish. Tariffs you can slap them on right away, you can do some political damage. So I think this is just a moment where everyone's trying to to to pile their chips

up on the table. So when they really start playing the game, when they really start negotiating trade agreements, they have something to play with. So I would I would read through a lot of it as an investment. But it's a unilateral, bilateral discussion, and we're all at tuned to bilateral or multilateral that is right. Solutions are they out there? I do think there are some multilateral solutions that are still possible. We have a president who is very,

very bilaterally focused on trade. Obviously he's trying to you know, carve off and do one on one negotiations with with the major trading partners. But I do think the European Union will stick together on the trading front. Um. You know, these this this headline that we just had this morning about Caterpillar or Xerox and Samsonite uh tariffs from Europe.

M is sort of a positioning play. But I think I think let's like bring it back up a little bit global trade right now, global trade disc beautes are a proxy for people's worry about global growth. Okay, but you know the Bentley was down today, so I didn't bring it into the office early, and I came in in a fine German automobile. Why can't we have no tariffs on autos and see if the best car wins

at whatever price point. Well we could do that if there was one global president and everybody voted for here. But the answers were afraid to do that, right America is afraid to do that. Well, every country in the world is. Germany is afraid to go to no tariffs, I think so. And Japan, for example, protects its agricultural industry pretty significantly. I mean, in automobiles, automobiles are unit decision. You know that. I would suggest it's not like corn.

You know perfect you know, nineteenth century commodity, and I just don't. Isn't it good for the Germans to call the president's bluff and say, okay, tariff guy, let's do no tariffs. I think it's really tough because those industries employ a ton of people, both in the US and in Germany, and those are voters both in the US and in Germany. And like you said, a car is not a ear of corn. A car moves back and forth. Theoretically, No,

it's not a soybean. It is part of a huge integrated global supply chain, and the companies don't want to

blow that to a matthiass expertise. What do you see in the Senate where they are worried about agriculture in terms of China and the US negotiations, forge about all the chest thumping, as you call it, that we're gonna witness in Washington, what does a given senator from Iowa or Idaho actually think, Well, they would like to have China buy more U S agricultural products, and I think the thing that they're most worried about is that there is some huge breakdown in trade talks or in the

in the bilateral agricultural relationship between China and the US. Were China says, okay, no Moss, We're going to buy everything from Brazil. That would be a disaster. So that's why you see the Chinese offering to buy more agricultural products part of their trade talks. You're you're a student of Washington and you're doing this for Vanguard. I understand,

but you're doing it within a gilded age. I'm looking at yields today coming in abruptly again the German tenure I find stunning now folks, point zero nine eight, it's ground down another thousands. I mean, these are all important discussions, and their discussions of disinflation, that's right. Does that mean we don't care about Martin Feldstein's fiscal deficit or debt because low yields are going to come to the rescue forever? Well,

that's that's a really good question. We can have a deep academic discussion, but we don't do those on Friday to continue. I know, I know. So you know, in in active funds, as investors were trying to figure out where we can make some some return for our investors, um with with our with our strategies and and You're right, it is very challenging, but there are a lot of tail winds. It's not just trade, It's not just this president. It's not just this last couple of years that are

driving yields lower. Uh. You have a combination of demographics, technology, globalization, whereas inflation. This this should be the perfect environment for inflation, and we can barely crack two percent. As a student of Washington, how do you how do you define the paths forward for our new socialism? Howard Dean spoke to us this morning and he was piercing about it being a one off. Do you do you buy it as

a one off. We've been doing a lot of work in our in our group at Vanguard on income inequality and ways to think about it, try to resolve it. I think some of these discussions around socialism and changing the overall objectives of government are driven by income inequality, and um, you know that's something we're gonna have to tackle. So I don't think socialism, this discussion around socialism is

the one way. I think it's a symptom of an economic environment that's been growing over a number of years, got a major problem. Since I've last seen you, I wanted to Helsinki with the leaders of the world. And I enjoyed the Helsinki summer, which is like twenty five hours in a day. What a gorgeous city. I was thunderstood. Have you been there in the winter? Yes, I actually was just there in January. What is it like when it's dark? Stop? What's it like when it's dark all day?

It's lovely, it's snows and it's sort of glows in the snow with a beautiful, huge moon, and there's no one there. It's very peaceful. You would be bored. Is it like Frozen? I mean everything it's frozen. It's like the movie Frozen. Yeah, they have They actually have ice ratings for the different inlets and lake areas, so that you know, you know, if you got to go out like the opening scene of Frozen. Yeah, you know this one Paul Sweeney where the iceman come out. Of course,

I'm sorry. I was gonna say, you'd never leave the bar. I think you have to wait. They have a drink. I tried. It's what is the drink? I tried. It's white. It's a coconut thing or something. I don't know, don't me. It's like some Paul Sweeney somehow nose the answer to this. It's like some famous finished drink with gin and white stuff in it or something that sounds perfect for they use it a duke when they lose. Amatheist, Thank you so much, so good to see you. And please, where

are you based out of now? Are you at Vanguard Active Fixed Income Team? So we're you know, we're managing a couple hundred billion in active assets. Thank you. You You gotta go to television. Thank you so much for joining us Amatheist with Vanguard Today. There are exactly three people that I would like to talk to about this exceptionally

historic week in fashion. One is, of course, the great Vanessa Friedman over at the New York Times, My good friend Robert Burke with all he's done in retail over the years. And our guest Dana Telsey. Dana, you grew up literally X number of years old, toddling around Bergdorf Goodman. When did you discover Chanel at Bergdorf Goodman many many years ago? What is amazing about Channel is in every category, whether it's handbags, whether it's clothing, whether it's cosmetics, they dominate.

And while Carl Lagerfeld did not just for Chanel but for the fashion industry. Seems like we'll never see anything like that again. Why will we never see a Lagerfeld again? Is it just there's too much money being thrown at the industry. I mean, he did Chloe and then he did this, he did that, and then a thirty year plus run at Chanel. Why can't that Pixie does be

reinvented again at a Gucci for instance? The speed at which fashion is moving today and the ability for one designer to dominate for that period of time is basically something we haven't seen. And the ability to manage to to managed two brands is and be able to differentiate them and create something unique and innovative is exceptional. And yet he had his own line also, so what he meant to so many different brandons, the wide range of consumers.

He was innovative and adaptable, and that was what was so impressive. I'm sure you bumped into him over the years. What was the body chemistry of Carl Lagerfeld in a high end fashion audience? What's the personal vision you can bring on Mr Lagerfeld? I think one of the things when you saw him is that he was so forward thinking and you were basically in the company of someone who saw what the next season and the next trend is going to look like. He may be dressing you

for today, but he's thinking about tomorrow. Let's talk about the tomorrow fashion. Boy, has it been interesting and ugly? I see the vacancies that moving around on Madison Avenue. What is Dana Telsey c forward for autumn and then into that important holiday season two thousand nine. I see

what you're seeing in terms of the movement around. It seems like everything is getting closer to Madison in six years or sixty one rather than in the upper seventies where some of the higher end brands have been located. But there definitely seems to be a collection going to a certain particular area. When you think about the fall and what's going to change out there from what is now.

I think the continuation to be even more differentiated will be key to give people a reason to be able to buy and to say whatever it may be, I'm associated with with this brand, and I think that's going to be what we see a little bit. I think we're still beginning to see logos continue to be very important. The dominance of Gucci continues to be very strong, and

also the streetwear cultural and lot activewear is doing. It's basically resonating throughout almost every brand today, and I think it's going to be super interesting to see the mark new designers make on brand, whether it's at Selene or whether at that Burbery. We have some new new collections that everyone's going to be watching carefully. So, Dana, we've got the Chinese all important Chinese luxury market or the Chinese marketing general slowing down. We've got Western Europe a

lot of uncertainty there with Brexit. How's that impacting the luxury end of the retail market. What was so interesting is that on most recent results coming out of LVMH, their fashion and leather goods business showed an increase of around seventeen percent. That was higher than expected, and frankly, that strength that they had, I think that was stronger

than anyone exactly expected. Obviously, it's full priced sales and the newness that you have at the Louis Vuitton brand was amazing, so beyond the age of Pacific growth that you had, because you did have that, I mean, you're continuing to see strengths there and it accelerated from fourteen percent through the first nine months. That was that was terrific. I mean this includes the Louis von Archlight sneaker exclusively online one thousand ninety dollars for set of sneakers. Dana,

do you want a pair of those sneakers? Or like Jeff Curry's got the balance ones, do you want to pair of those fancy over price sneakers? Who wouldn't want to own a pair of those fancy over price sneakers? Because you know what, it's the look of today and that matters. So Dana has more and more retail sales go online. Which of the retailers that you follow doing

the best job of managing that? I mean, you're certainly seeing companies like Nordchdrom doing a terrific job online knowing their customer with their rewards program and marrying it with Norchdrom local and how they integrate the rack. I think they're doing a terrific job at online. And we're going to continue to see more. If you're just joining us Dana Telsea where US Telsey Advisory Group. As we discuss Carl Lagerfeld and look at luxury, maybe Paul let's go

a little downmarket right now. What's your perspective there. Well, it's interesting one of the things, Dana, want to get your perspective on those surprisingly bad retail sales numbers came out in December, down one point two percent, but then Walmart came out with pretty good numbers last week. What is your sense of the market. I mean, overall, I think the mass markets, given that they're there, where they're located in open air centers, they seem to be gaining traffics.

What was so impressive about Walmart do us number? Not only was it a sequential acceleration on a two year basis, but it was driven by positive traffic up just under a percent, a mid single digit grocery camp, an e commerce growth of pent plus the fact that when you look at the Stam's Club business, the three point three percent complex fuel traffic was up six point four percent. So what it tells you is traffic is going to these discounters. It's going to the off prices. They in

a pun, they value value and it's working. So people want to see where can they get more for their dollar. So, Dana, we're getting the majority of the retailers starting reporting I believe next week. What should investors really be looking for here? I want to watch the inventory levels, particularly at the department stores. We had a rough holiday season for the

department stores, definitely a bit lackluster. Some of them came in with inventory levels that were higher going to the fourth quarter with the expectation of a stronger holiday season, and overall after third quarter inventory was up one nine. We're looking for fourth quarter inventory. Hopefully it shows a downward trend, which is what we need. In a date, Dana, we're seacraft, you know, craft food slaughtered. What's the strategic vision forward for big retail Macy's calls and the rest

of them? Is it just cost cutting? Is that the only solution or do you have a better idea? Got to be services. It's got to be reconfiguring the store prints, footprint into what into what? What makeup? No no, no services. What you're seeing with what some of these stores are doing. Look what Macy's has done with the Apple in store shops. Look what Bloomingdale's has done lately with their news is a Tiffany model worked all that fancy new Tiffany kids

stuff they've got. It is one of the most popular items of Tiffany's lately is everything for pets. It's been very popular. Oh no, let's not go there, tom See. Dana saw me in Central Park. Dana, you know that vet Bill got a Tiffany light blue. You know Leash. I told you the pet pet purchases a Tiffany. They're very popular. Yeah, they told me. I can't go to the website to see what we paid for that thing.

As well, Dana, what's the fashion item for summer? All of our listeners coast to coast and worldwide one to know what Dana tells. He says every woman needs for the summer. What is it? I think overall what people are gonna need for this summer. I think it's going to be all about some of the maxi skirts that are out there in the flowing dresses. I think that's gonna be the one of the popular trend. Riley from St.

Louis modeling that yesterday. Dana Telsey, thank you so much, greatly appreciate it, particularly that perspective on Dana Telsey's Bergdorf Goodman of years ago and Mr Lagerfeld as well. Dana is a jewel she she's ad sell side of bear Stearns and then Boom. And what I admire most about her is not that she's, you know, one of the absolute top retail annals, but she has built a phenomenal business. She left uh the safety if you would have the

cell side founded her own firm, and I would. You can count on one hand those animals that have left Wall Street and established large, thriving re research departments, and she was absolutely at the forefront. To me, with Dana, it's so visceral with her because of her childhood or her grandparents were involved with I believe with Bergdorf Goodman. I can't remember the story right now, but it's wonderful when you've got cell side where it's visceral, like Mario

Gabelly on autos and that kind of stuff. 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