Surveillance: The U.S. Is Abusing Its Privileges, Rose Says

Foreign Affairs at magazine. It's a jewel, this one. I hate him because the books in the back, like including a one volume on chopin what is the music book? Foreign Affairs again does it well with thoughtful reading, including essays by Secretary Pom Pale and also by the former Treasury Secretary of the United States, Jacob Blue. We're thrilled to Jack, Lou and Gideon Rose could be with us together this morning. Gentlemen, this is just a joy to

have you here, particularly with the news flow. I've to ask you an ugly question. I don't want to ask you, but I want to go first to you. Gideon. You've got a beautiful essay in this new issue on authoritarianism in the Middle East. Give us your thoughts on the new Saudi Arabia. Well, so uh, in many respects, this

is not exactly shocking. Um. The Saudi regime does not take distance lightly and they have gone after their internal critics in many respects in the past when and in fact, many regimes have done this in an unsavory way over the years. When Napoleon did something similar and got criticized for it, his foreign minister Talleyrand famously said it was worse than a crime, it was a blunder because it

made everybody upset. And so what the Saudis have done with Kashogi was not just a crime but also a blunder because by doing so so gratuitously and obviously they've made everybody upset. And the reality is this crisis will blow over. No one's going to actually break relations with Saudi Arabi be over this. And so the question now is not really getting to the bottom of it, but getting past it for the diplomats and how that happens will be an interesting story about diploma for the diplomats.

Mr Secretaries, Secretary minution attend this conference in Saudi Arabia. Look, the story is coming out of Istanbul or nothing short of horrific and Um, the idea that journalist could be murdered for reporting offends our most basic values. I've made it my business to refrain from publicly advising my successor. I appreciated it when my predecessors offered me private advice.

But I can say that when I was Secretary and we had to make a decision about whether American business people should attend a conference in Russia, business conference in Russia while Russia was occupying Crimea and moving in in the eastern Ukraine, I advised them not to go. All right, But um, you know, Mr jacklu, how does it affect

for relations between the US and Saudi Arabia? So away from the from the conference which is immediate, which is next week, Um, what kind of advice would you have taken on on the next step for the US and Saudi Arabia. Look, I think that the issue is a very serious one. It has to be engaged directly. There's a need to understand, in a kind of murky situation,

what the facts on the ground are. Um. I think it's taken too long to get to a clear explanation of what happened, and the swirling stories that we hear only make it worse. Um, the conversations that have been going on between Secretary Pompeo and the leaders in Saudi Arabia hopefully will provide some more clear understanding. UM, I'm not sure that we'll ever understand exactly what happened, and they're just going to need to be a recognition that

this kind of behavior is unacceptable. You know, the United States has complicated relationships all for the world, but it also has align that it draws in terms of what core values are and I think that that's this is a situation that requires an articulation of those issues. Well, should it actually hurt business? Again, this is the very complicated question, Mr Leeu, of how to deal with allies

that could have, you know, questionable morals. So look, you know, the the idea of using economic sanctions is actually what I wrote in the current Issue of Foreign Affairs about I believe that using economic power economic leadership is an appropriate use of power and a powerful tool. The question is how you do it. Um, you have the opportunity to inflict pain, but the goal of using economic pressure is not just to cause pain. It's a change of policies.

You have to articulate what the new policy is how economic pressure would be used to accomplish that, and you have to do it in a way where the United States hopefully is working as part of the world community. I'm not addressing the facts right here, but as a general model, saying you can power requires some care and skill give you. And I notice how the Secretary diplomatically began his essay with the walk through of our history of American sanctions and waited for the crushing criticisms of

the Trump administration until the end. Let's bring up the quote right now here from Secretary lou in Gideon Rose's new Foreign Affairs and magazine, the president's administration is behavior, behaving as if the United States is immune to consequences. He goes on to say bellicost unilateral actions, and then he shifts it will fall to Congress and honest reckoning on the part of US polly policy makers with the limits of American power, Gideon Rose, can Congress come to

a diplomatic rescue or is that's so nineteenth century? I mean, Congress has lots of power and at some points in the past has played an important role in American foreign policy. They're not really doing so now. I think many of us would like them to do so now, but end well, it's a quite The people in Washington can do anything

if they actually choose to. Right now, we seem to be in a sort of partisan spitfighting spending contest that prevents Congress from playing any kind of significant role in foreign policy or domestic Well, I'm gonna use the word pragmatic. This is what you do when Jack lou works with Joe Mowkley and Tip O'Neil up in Massachusetts from another time ago. There's got to be a pragmatic view coming out of these mid term elections towards if we're not going to go to multilateral, we're going to go to

some new lateral What would you like to see? Whatever the form of Congress in senateive is. To be clear, I think the United States should work multilaterally whenever we can, reserving the right to act unilaterally when we need to. The question is, um, do we go around the world as we are right now with our tariffs, acting in a way that violates norms that we helped to define? Do we do things like withdrawing from the Iran Deal, leaving all of our allies in Europe and Japan with

with countries like China and Russia. They cooperated with US rejecting to what we're doing. And that's going to happen in a few days when the new secondary sanctions kick in because the United States withdrew and does that increase or decrease American influence. The argument that I make in the article is that this is a powerful tool that you need to treat as a tool of some limitation.

Where does it come from. It comes from the centrality of the dollars, the world's reserve currency, and the primacy of the United States. It's not a good thing when you see countries in Europe working with China to develop alternative payment systems in order to get around the dollar. This won't happen overnight. This is not a question of the ATTORNI switch and does the world move away from

the dollar. It's a decades long process. I think it's profoundly against US national security interest to accelerate that process. And I think the unilateralism, the the you know, the I think not careful unilateralism is driving that process to speed up. Reserving the right tower is different than using it on every issue. Aren't these just acting on campaign promises. A lot of people won't expect the president and his administration to follow through, but this is what they promised

when the people voted for them. Well, I think that, you know, we all have to live and should live with campaign promises because when you're elected, it is a contract with the people. UM. I think how you exercise that power has to reflect the facts on the ground and strategic questions about how do you preserve us influence. I think that diminishing US power over the long term is a very serious consequence, and I think it's something that the Embarkan people don't want us to do. UM.

These are questions that require careful thought, careful analysis. You know, Tom asked, can Congress come to the rescue? Congress is traditionally pushed administrations, where administrations have restrained Congress. The idea that that kind of leadership comes from Congress is a bit backwards. We're not seeing the kind of careful leadership that we've seen frankly in Republican and democratic administrations in the past, Which does not mean you don't use the levels,

but you have to use them carefully. But but if you if what you say is true, Secretary Lucian, the Republican Party not hold the Trump administration into account if they're actually diminishing over the longer term the power of the US. Look I I can't speak for the Republican Party, UM, but I know that over my decades in public life, UM, there used to be a core and the Republican Party that believed deeply in free trade, that thought that it

enhanced American influence and grew the economy. We now see a Congress that's willing to step back when an administration puts in place things like steel and aluminum tariffs on our closest allies, which is an attack in some ways on the core principles of the Atlantic Alliance. It doesn't make sense in terms of our long term national security.

We could keep this discussion going all day. We'll try to do that with Secretary Louis welcome all of you on Bloomberg Television and radio worldwide with Jeck Lou and Gideon Rose and celebration of a new Foreign affairs magazine. You have the Secretary State occupied in Riod with your lead article on Iran, and I love his subhead Iran Exposed. But as you listen to Secretary lou Gideon Rose. Is

it America exposed? Is that the real distinction here? I think the challenge is exactly the Secretary he was saying that you have to pick your fights. You can't fight with everybody on everything. The United States is far and away the most powerful player in the world, not just in the security but also in the economics fear. We can deploy that leverage for our interests and our values, but we can't do everything, and so you have to

pick and choose which fights you on. And the problem with this administration, or one of the problems with the tradition for me, is that they keep fighting with everybody, allies and enemies, Iran and China and Russia, and were not Russia, Russia the only person they don't fight with, but essentially everybody else. And that diminishes your leverage. And at some point people wonder, is this guy really somebody

we want to play with? Or should we just go and organize a game by ourselves without the United States. That's the danger down the road within our economics statecraft, Mr Secretary, is the idea of our new debt, in our new deficit. Congressional budget Office driving for this convert sation. We have a Reinehart and Reinhardt not right off and rogue golf Carmen Reinhardt Vincent Reinhart writing on where we are ten years on in this new edition of Foreign Affairs.

But it comes down to a debt. Your thoughts on a debt growing easily out over a trillion And we have one guest who is suggested, with economic slowdown, we could begin to look at a crisis near two trillion dollar deficit. You know, I I think the growth of the deficit over a period of strong economic growth is very troubling. Usually you deficits go up when you're in a recession or when you're in a war. We don't usually drive the deficit out of control when we're in

a period of sustained high growth. I have a number of concerns. First of all, our borrowing requirements will keep growing. That means that, you know, for all the focus on the trade deficit, when you have a fiscal deficit, you're borrowing money from overseas, You're driving up the trade deficit. That's going to have a powerful negative impact on our trade balances. Secondly, it has an effect on interest rates. It drives up, not just treasury rates, but all rates

in the economy. You know. Third, we need to have fiscal capacity when the economy needs it. We're in the tenth year of a recovery. We're not going to grow forever. Whether it's six months, a year or two MutS from now, we're going to wish we had more fiscal s Your charm, he has a limited charm. As you worked in the legislative branch for years and then in the executive branch, many of you won't know that secretary who will also

served in state for a while. Your charm, as you understand the addictions of Washington is debt is a growing deficit. Does it become an addictive process for the Beltway? I think right now you have an unusual situation. There is no loud chorus for fiscal responsibility. Fiscal conservatives voted for a tax cut that costs two trillion dollars over ten years and blew a hole in any plan for fiscal balance. Progressives are saying, you know, to democratic administrations in a

row were fiscally responsible and what did they do? They were followed by Republican administrations that spent more than we had on tax cuts. I'm worried that putting together any coalition to care about fiscal responsibility is much harder. And I would point out fancy that the chairman's Gideon Rose is the Peterson, the Pete Peterson chair at the Council unformulations,

with his deficit UH knowledge over the years. Francy. Yeah, I like them to talk about charm Tom, but I really want to talk about is actually dullar as a reserve of currency? Secretary leew And. This is something that you alluded when we started off the conversation. Why why does it not actually really lose its appeal in less than ten years if the US continues going the way it is. Look at the moment, I don't see an

alternative out there. There were times when people thought that either the euro or the yen or the R and B would emerge as a near term alternative. UM. I think if you look over the next five or ten years, it is hard to imagine that it's going to be a process that's that quick. I'm being very careful when

I say this is a multi decade process. Um. The special position the United States has in the world, because the dollar is the world reserve currency, is one of the reasons we have the ability to have the deepest and most liquid bond markets in the world. It's it's the reason we can exercise the sanctions authority that we exercise. It's an enormous consequence to the United States to maintain that. I think if you just turn the speed up on

a movement away, it is against the national interest. So I'm not sitting here predicting it's going to be in the next five or ten years. And and I I think if there were an alternative, I might be in a position where I would be more concerned about it being quicker. I think it's pretty scary if you take what could be a fifty year process and you accelerated by ten or fifteen or twenty years. But does China

want to be that China fill that vacuum. I think at the moment, you know, China wants to have it both ways. They want to be taken very seriously as one of the two major economies of the world. They wanted their currency, the R and B, to be accepted by the I m F into the Special Drawing Rights basket. Uh. They don't really want their currency to be fully convertible and subject to all market pressures the way a world reserve currency would have to be. Um. Do they want

that in the long term? Possibly? What I do think is that there are conversations between Chinese and Europeans looking at ways to develop alternatives to you know, settling in dollars and going through things like swift. What we're gonna do is one final question with Secretary Low and then we'll move forward with Gideon Rows on Foreign Affairs Magazine.

Some interesting themes they are, particularly on nuclear warfare. Mr Secretary, your Democratic Party was distracted over the last twenty four hours of the DNA out to one one thousand and twenty four of whatever this silly DNA debate is. How does your party get back to Mokeley and Tip O'Neill. It's that simple. How do we get back to what you lived a number of decades ago? You know, Tom, I hear a lot of discussion about where where is

the Democratic Party going? Um. I think in a few weeks on election day, we're going to see whether or not Democrats win a majority in the House. The arithmetic to me is pretty straightforward. If we went back a majority will be because we picked up some centrist seats, some switchovers from Republican to Democratic seats, and you're going to see a group of new faces, new moderates come

to Washington. This is not a moment where I expect broad bypartisan revival, but I think it's gonna be a breath of fresh air if we see some faces that are looking at how do we get things done, how do we solve problems? And that's going to start to become part of the debate about where is the Democratic Party going? Mr Secretary, congratulations on your article and Warn Affairs. Uh this morning Gideon Rose with us in celebration of

a new issue of Foreign Affairs magazine. It's got a real focus on a new thinking about nuclear But the real headline, Gideon Rose, is you go all cabinet on us with an essay by Secretary of Pompeio distracted right now in read and the attendance this morning of the Secretary Treasury Jack Lou with you as well with Bloomberg Surveillance. Let's start with Jack Lou. What did he tell you

in Foreign Affairs? The great ability to have wise men and women like that to come in and sort of help us get some perspective on events is really one of the pleasures of the job. Um. So one of the things that that Secretary lou is so concerned about is the way that we are abusing The United States is abusing its privileges as the most important dominant nation

in the global economy. And the question of we have the leverage to use our financial power to extract things from others, to enforce norms, to uh get things we want, but we can't do it recklessly, and if we do it too much, then other countries basically start to question whether they want to be part of a system that

we are helping to run. And the real question here is the United States has basically engaged in a bargain with the world in which we have our economic power and our security power, and we use it relatively restrained lee on behalf not just of our own national interests, but of the system stability as a whole. And the question now is are we actually going to continue that kind of policy or are we going to simply be

using our power just for us? And if we do it just for us, at some point will others say this is not a game we want to keep playing. So let's not with the premise of the pace, and we should question it to begin with, Is the United States doing it too much? Well? I think so the answer is again yes, because we're picking fights with everybody. If not so much that you can't have trade disputes with your allies, not so much of you cannot trade

disputes with China. It's not so much that you can't object to what Russia is doing in here, and you can't object to what ex is doing there, and you should say something about the Saudis. But basically, if every single mode is punitive and you're never cooperating, and you're basically trying to punish everybody, you you rack up a lot of grudging compliance. Even when you get anything at all, you piss people off. And that's what we're doing now.

And the question is how long before people just start to lose faith in American economic leadership of the system as a whole. That's the real danger here down the road. And Secretary of Pompeo with an essay as well on Iran, and in course he is speaking the Trump Doctor and as he calls, well, but so this is a great question, right,

So what what what Pompeo wants? And it's a legit goal is to use American economic leverage to get let's say, other countries like the Europeans, to put pressure on Iran and to further our goals. That's a legitimate policy. We've tried to do secondary sanctions before. I happened to think it's a dumb policy that doesn't work well because other countries resist. That has happened in the Nine Ease with

Europe on Iran and Libya sanctions. But basically, if you want to do that, then you can't pick fights on something else, and if you want to pick fights on this other thing, you can do that. You can't fight with everybody all the time. If you do that, your positioner rose down the road. And what the administration is has it's demonstrated its ability to get into fights, and it's even demonstrated its ability to get out of them

uh and settle them and move on. But it hasn't yet demonstrated any ability as far as I can see, to link its fights together to some broader strategy that moves things forward. Overall. Well, let's talk about the argument as to whether there is one rule for Iran and

another facaity Arabia to sending Arabic at special treatment. And why because they are the dominant player in the global energy supply markets and that extracts their ability to uh, their their ability to manipulate oil prices, gives them leverage over other countries pulses? Does that enable them to commit humanitarian catastrophes, do things like the allegations that we're seeing in Turkey murdering journalists. I mean, uh, if you say, does it permit it in practice? Yes? In theory no,

but I think you will. And my cynical guess is that you're going to see this uh again. People are shocked, shocked to find this happening. Nobody is surprised. Nobody has any illusions about what the Saudi regime is actually like, and if they did, they were uh, they were silly to have done so. Um. Yeah, I looked within the magazine and we don't really have time for it today. Why did you take the nuclear topic on? Because what annoyed me was the fact that the nuclear issues get

brought in as unquestioned game changers. And when you say, okay, no matter what we're doing, we they've they've moved forward. So obviously this Trump's everything, and it's no longer clear to me that that necessarily should be the case. There are good reasons why you might think that there are good reasons to be upset about hawks, but there are also reasons to worry about whether we're obsessing too much.

And there's a wonderful piece by John Mueller that closes by saying, before we get let's at the very least not get into a major war and kill lots of people and do the things for fear of something that might happen that we're not really sure about. Gideon Rose, thank you so much. Congratulations a new issue of Foreign Affairs Magazine. We'll have the conversation with Mr Rose and Secretary Lou we'll do that out in our podcast here Allison Williams with us parsing the details of all these

different things. I'm going to assume, Allison, that this economy is so good it's really hard not to have a good earnings report. Like things are pretty good. So I'm gonna go all ratio on you before Farrell beat you over the head with detail. What's return on equity and what number is really good? Isn't it? It is really good? And definitely the returns on they are being boosted by taxes this year. So that's sort of the big up,

big from the gift from the trumpet ground. Um, it's a couple of hundred to a few hundred, depending on on the banks, you know, I mean, it's it's it's here that job that's all different glass and pretty consistent. That is across the board. It is consistent across the board. But but keep in mind that was a lot of this sort of stock run that we had, you know, late last year when we got the tax reform. It was a lot of the initial move up that we

had post the election. Banks sort of anticipating about a regulatory environment, anticipating for fiscal stimulus, anticipating a lot of the help that we had this year. Can we talk about the lack of consistency in some of these reports. It's very hard to get a read across from one bank as to what the last quarter did for other banks. Um, dead underwriting, equity underwriting. What's the signal from goldban this morning, Allison?

So I think because this quarter in general, it was sort of a muted quarter for trading, So there's sort of you know, slight puts and takes across those businesses across companies for the most part coming in line maybe one or two surprises. The big surprises that we've gotten are on the investment banking fees, and I think that's because if you look at again in a very muted trading environment, we had huge growth in I p O s in the US compared with a year ago, So

US I p O is doubling. The global equity you know, global equity underwriting in general kind of flatish because there were weak there were weaknesses in an area like Europe, like I p O is super strong, and that's where you're really seeing the strength, especially um for companies like Goldman and Morgan Stairs, speaker of IPOs. There's one I PO that I think everyone would like a slice of.

According to the Wall Street Journal, Tom Uber receiving IPO proposals value in the company up to a hundred and twenty billion dollars. That headlines just crossing the Bloomberg. Can you imagine the scramble to get a piece of that ipl So I believe we rip up the script at this point, Williams, what's the math on that? Ms wims that we want to pin you down live on radio Worldwide but you're going to anyway, I mean, they're gonna go We'll just go with a lot. Okay, a lot

does this safe answer? But you know, an I p O a million years ago used to be a six percent business. I can get any idea. They're not going to make, you know, twelve billion dollars off of this transaction. But what's how do you do that? How do you know? And and just you know, you're talking about the size

of transactions. I think that's what we're seeing really in the noise around the M and A numbers, Right, So the M and A numbers are one area that are coming in a little bit all over the place in terms of growth and what's happening. And I think a lot of that is because given the size of deals, when there's you know, some closings pushed to the fourth quarter,

it can show up in your revenues. We generally do see that at the smaller boutiques, but this quarter it was it was sort of notable the difference between announcements and closings. I think it's very interesting at this point the cycle for these banks to to work out what they want to be a part of from what they don't want to be a pontsaw alisone. You're still getting valuations like this for these kind of companies. It kind

of makes you scratch your head. Where are we? Last week we had a big correction in the equity market, UM Marcus a Unit, Gouldment Sex They're worried about meeting their targets for next year and pulled back due to credit risk. And then you see headlines like that, where are we in this whole cycle? So I think there's two I guess there's two sides of the business. Right.

There's the traditional lending business, which I think is hitting on all cylinders, just given the fact that we've had the interest rate cycle move up and credits still stable, so UM very profitable on that front, and also the cost cutting efforts coming through adding to the tax reform we're hitting are we's that are at or above targets? And then we have the capital markets business. So again there's pockets of strength, but in the quarter, you know,

not especially strong quarter, not especially weak quarter. I think in general, investors are still looking at potential upside to the cycle in terms of help from volatil it in then longer term capital market, like if I email Juno, which is a New York City Uber equivalent. I get an email back. If I email Lift, nobody an Uber talks to me. I mean it's like, I mean, Pharaoh, You've got so much cloute you can actually talk to What are you trying to talk about? Just you know,

I owe money or they owe me money. Whatever. You can't communicate with Uber. Wall Street's got to communicate with Uber. What advice do they give a company that's a hundred and twenty jillion dollars According to The Wall Street Journal, Well, if I perhaps if I would have a better question answer to that if I was the Goldman banker. But I think what's important to know is that the Goldman bankers do have a sort of an eye into these clients, right,

sort of the Morgan Stanley bankers. And that's why I think we're gonna be listening today to hear what these companies are hearing from their clients. That is one of the things that we've listened to just to point out.

According to reporting by The Wall Street Journal, Goldman Snacks and Morgan Stanley last month, the two banks that delivered the value I proposals to Uber, according to the Soldier, is this going to be a techie techie deal where the public has no voting rights, no control on nothing. There's gonna be three side card preferred transactions. You know, everybody's gonna get rich except the public. And then foisted on this company at a hundred and twenty billion dollars.

I'm getting silence see that, and it's you know, she named her cat red herring. Yeah, you know the I p o s of a million years ago, back when they were in print, John, we called those red herrings. I will I will say though that um, you know, in terms of you know, Goldman and Morgan Stanley, and you know you're talking about sort of the performance of the stocks after the fact. I think that is something

that they bring to the table. That's something that why people will go to them over time, right, is to find the valuation that makes investors happy. But that also, um, sort of rewards the people that are sounding. Do they do road shows anymore? Do they? You know, is there going to be an uber road show? I think there's always very Because I'm not an investor, you just don't, you just don't follow it anymore. Come on, you dial up.

Can we just point out that that one twenty. According to the Wall Street Journal, that one is nearly double the company's valuation in a fundraising round two months ago. Think about that a fundraising round. How two months ago the valuation proposal delivered by Goldman Sax and Morgan Stanley is double that valuation from two months ago, Tom, in

the whole digital dissemination, does I mean Ellison? They're putting us out on Twitter on WSJ business is Well, I'm trying to sign in right now to the But I think more importantly, and I think more importantly Tom, for many people who have access to public markets, it's very difficult for your average retail investor to get access to

private markets. And there has been some real growth opportunities in private markets, which is why private equity have found it so easy to raise as much money as they could possibly want. And watch some people also, if there's many people out that they talk about the valuations in

private markets, Tom, and maybe they're too frothy. But if you can get evaluation two months ago and then get a proposal for an IPO from two banks for doubled evaluation and anything else, does Liz Hoffman, Gregg Bensinger and Marineen Ferrell state second paragraph, the combined Uber would be more than the combined General Motors, Ford Motor and Chrysler. I mean, that's a kind of silliness we're talking about. And I think to that point, we've had sort of

this early volatility, We've had some price activity. I think for companies that might have been thinking about doing deals and going public to some extent, you could actually get sort of a push. Right, So if people are concerned about the market next year, does that pull forwards? Does that pull forwards? In a serious point? And on the

private equity side, I would say this as well. So we have seen this huge growth, and I think there is a lot of talk and there is more effort about trying to get private equity more into retirement accounts, sort of broadening. You know. It's it's good for the managers, it's good for the investors, especially for something that's locked up. John, you and PIM are better at this same I am. Is there any indication Uber makes a quarter to quarter operating profit. I believe I have not seen it. I

have not seen that. I think cash burn is quarter. You know, there may be one quarter where they've done well. But Allison essentially they're throwing a tenth of a trillion dollar valuation and something that I believe. Cash Burn is the middle name. So I'm financial analysts, so I cannot relate to tech. I can't relate to tech until and that's why tech focus. Financial companies don't want the bank analysts.

So I continue continue this. There is already some speculation out there, and I I won't name names, know that this is well timed good news for certain investors in uber and those certain investors, of course could well be the Saudis or soft Bank who have rather large steak in uber Um, and this is wild timed good news

for those um those respective entities. At this point there it is Allison Williams just killing it today doing Morgan Stanley earnings blind and then coming in there nailing Goldman Sax and then vamping on her knowledge of the technology space. This is Bloomberg coming to today from the Bloomberg Interactive Broker Studio, and we're thrilled to bring in someone that we have known for yours, Muhammad el Arian writing always in Bloomberg opinion and very visible in terms of synthesizing

economics and all Dr Llarion. You have a heritage of Egypt of your father of years ago. In in cif I Capital Finance magazine two years ago, you wrote up the bold vision of Saudi Arabia. Is it shattered right now for Saudi Arabia and how will the adjacent Middle Eastern nations deal with his latest uproar of Turkey, Saudi Arabia and a disappearing journalist. I think in terms of what countries are going to do in the region, they're

gonna wait and see. Saudi Arabia is very important. UM. They're not going to front run the kingdom in any way, so they're gonna wait and see what comes out of the internal investigation and what the Saudies themselves say in terms of what it does to the Saudi vision. Clearly it's a short term setback. Long term we yet to see.

What I find fascinating Tom is the market reaction UM today, For example, CDs on on on Saudi sovereign is tighter, oil is lower, So the market is basically saying this is a short term hiccup that's going to be brushed off, and the question is politically whether that turns out to be the case or not. So the market is just making the assumption that this doesn't escalate. We saw that in the old market yesterday, not responding to a not so veiled threat that they could use it as a

policy tool. That makes me ask a broader question just about complacency in general, Mohammed, So let's talk about the broader question of complacency. Do you see a lot more pockets of that popping up through sing I see somewhat less complacency. I think last year was the height of complacency, Jonathan Um. And that's because markets were very comforted by central banks. The narrative has changed in markets. Central banks

are stepping back, fundamentals are reasserting themselves. It's a messy transition, it's a volatile transition, and there are complicated fundamentals. As the I m F meetings, Um told us, this is not about synchronized pick up and growth anymore. This is about divergent growth and all the complications that come with that. So it's the reaction function of the Federal Reserve shifted

as well. Typically, when we see around like the one we saw last week, several years ago, the Federal Reserve would have sent someone out and it would have backed away that didn't happen last week. Yes, not a word, not a word from any official, neither the board nor from the regional banks. And I think that's important. This is a different fat. I tell my friends, this is a different fat. This is a fat that will deliver

higher rates than what the marketing is. Fact, this is a fit that will keep an eye on the issue of future financial stability. And it's a different paradigm for markets. And I think markets are starting to get it. They're not quite there yet, but they're starting to understand that this is a different fit. In your classic when markets collide back in the back of the book, this ancient tome, it's like out a Game of Thrones, John, it's up there in the temple thing up there, like on fifteen

stories up chapter eight. Improved risk management? Have we have we actually improved our risk management? You've invented this idea of unknown unknowns? Are we better at our unknown unknowns? So I didn't invent it? Um, We're not better at unknown unknowns. Um. In terms of risk management, where there has been a significant improvement is in the banking system. The banking system in the US has been de risked.

If you're looking for sources of systemic risk. It's not the banks, But John and I are doing tons of interviews Mohammed which make it very clear there's a new shadow banking, and that's what people are talking about. Correct, Because what people haven't quite understood is that risk doesn't disappear, It morphs and migrates, and it has migrated to the non banks. So there's certain segments that I really worry about. I worry about the overpromise of liquidity that's now embedded

in the system by certain products. John Very John Tucker is a non banks, a non bank for three children. Yeah, but I have definite systematic risk attached to me. So they say, what's a non bank? A non bank is a an institution that is not subject to both the restrictions and the privileges of being very close to the Federal Reserve and being very closer to posit insurance. So where's the leverage right now? What are the pockets of fixed income that you're worried about? So I worry about

the lower quality segments. I worry about segments of high yield. I worry about emerging market corporates. I think there's been an overpromise of liquidity there when you see the proliferation of ETFs and inherently a liquid as a class, worry because it doesn't need to have signal to the consumer instantaneous liquidity at reasonable bit office spreads. If the underlying asset class is a liquid, that is a silly promise to make, and yet it's been made because the market

has gone that way. So what did you make of last week when we have a significant draw down in risk assets like equities, but then we see leverage loans looking really solid and yes we see a bit of spread wine again high yield, but there's been some performance there through eighteens. So what do you make of that Equities get hit but things like leverage alons look rock solid. Mohammed? Why, Yeah, it's unusual. Normally it's the bond market that leads away

and then the equity markets follow. But as you point out Natan correctly, corporates in particular have been relatively stable. Um. I think part of that is because people have been reassured and conditioned over and over again to fade every cell off in markets. And I think that is very deep conditioning after years and years and years of exceptional support from central Banks Maham, that opinion Columnistum, do you want to us say, in New York City without the

New York Jets jacket? Um this morning, and we're a little bit disappointed. Yeah, I just expected that he would show up with the New York They play the Vikings next, which is like a layup win right there. There's no such thing, because lay up for the New York Jets. Muhammad Arian with us, who was so visible that I think too many people forget the first principal skills of Dr l Arian, which is out of the game, theoretic uh knowledge base of the British schools of Oxford and

of his Cambridge is well Dr Larryen. And this goes to your books The Unknown Unknown and the te Decision, and that John von Neumann who who sort of codified this, if you will, in World War two had a great idea about zero some games, and that was just the basic idea, how can I maximize my rewards in this sort of game in a President Trump era, in the neo mercantilist world that we're in right now, how can

President Trump maximize his rewards? So I think what President Trump is doing is approaching an inherently cooperative game trade in cooperatively in order for the other side to correct regards as longstanding deficiencies. And that is quite a change from what we've had in the past. The distinction, and this goes back to Abanage Sticks of the Princeton and his art of strategy classic book, The Distinction, and you

just nailed it. The perception that the other side is one side and it is not multilateral and numerous, isn't it it is? You know, Tom, what he's done is he's taking it sequentially. So everybody in the beginning said, you know what, if you're going to take on China, let's confront China with one side. And he did something very different, high high risk, but it turns out to be a strategy that that is working. He said, let's take them sequential. So he first agreed with Career, then Mexico,

then Canada. The EU is next, and then he will confront China. So his idea of trade is very different from what we've seen in the past. And it turns out, just like Reagan realized this in the eighties, that if you're willing to underwrite the cost and risks of an operative strategy, there are benefits, but the equation is a very delicate one. Sometime it let's talk about potential outcomes.

What are the potential outcomes at the moment for un So, A lot depends on how long it takes the Chinese to realize that at the end of the day they will have to make concessions. If it takes them a short term, short while, then we will get concessions on a joint venture. Requirements be intellectual property transfers and see

the deficit. If we don't, Jonathan, and this is really important, then what is today's trade issue becomes a national security issue, and the more it migras international security space, the harder will be to diffuse these tensions. Some people might say we're already there, Muhammed, I think we're getting there, and I understand those who feel that we are already there. I don't think we're quite there yet. A lot will depend on what the Chinese decided to do over the

next few weeks, not months, weeks. Yeah, I hate you talk about trade, and I have to say, you come on the more optimistic side of the debate. You think there is a real chance and you can talk about talk to me about what probability you allocate to it, but you think there is a real chance of having

what you've described as a Reagan moment. What's a Reagan moment and what's the chance of actually ham Nick, So, a Reagan moment is an event that changes the landscape in a permanent way and in a way that's beneficial to the US. That is what Reagan did in the eighties with the Soviet Union. He completely changed the geo

political landscape. My probability, Jonathan, are percent we end up in a very damaging trade war, sixty percent that we end up with the same outcome of China as we've had with Korea, Mexico, Canada, which is tweaks but nothing revolutionary, and a fifteen percent probability that we end up with the Reagan moment. So that's how I see the probabilities. But as I say, the longer this goes on, the

more worried I will be about going higher. What's the market position for I think the market's position for what it has seen, which is that we get tweaks. At the end of the day. This is not a trade war, this is a skirmish, and that it will be solved because after all which countries would voluntarily go into a global trade war. That's how the market. How do you respond to the gloom crew? Friday afternoon, all the articles

come out, World's coming to an end? There's that, There's what John Themes look at the Bank of American Mary Lynch fund manager server that came at this morning the most bearish on the global outlooks. How do you respond to that? So and yet your Bloomberg survey that came out yesterday on the metric markets suggested a majority of people feel like it's time to fade the divergence trade, which I find, which I find interesting. The way I respond of that is very simply to say, differentiate between

baselines and risk scenarios, right, and make a difference. And I your WIS scenarios are there, but let's not forget the baseline. And that's how I do it. But this is this is a more fluid and to use Ben Bernanke's term, unusually uncertain time than we've seen for a long Time've got been and a half left with you, and then you're gonna go after one of John Farroll's other properties, which I fully understand. You manage money for a small school up on the Charles River in Massachusetts

a few years ago. I was flabbergasted by a Yale University article the other day on use of alternative investments? Are they done? Are we done with relatively ill liquid alternative investments? Is everybody going back to block and tackle endowment investing? There still going to be a place for alternatives. Oh, they'll definitely be a place for alternatives. I mean in in a in a period where there's ample liquidity, then giving up liquidity is not something that you get rewarded for.

And that's why we have seen a general tone change against that. But we are we are exiting that regime. And I think that endowments have to remember that their edge is that quasi permanent capital, and that's a really important you don't you know this, Tom? You know this, Johnathan. You don't get involved in the investment world if you don't know what your edges. John is entourage or two of them will help you get out of your chair, and the other two will help John get out. How

much small AMO entourages compared to yours? Well, yeah, but I got that, Bill, you know got that right. We have a tool to two people after Muhammad Laren. Thank you so much for joining us. Thanks for listening to the Bloomberg Surveillance podcast. Scribe 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