Surveillance: Trade Wars Would Be a Disaster, Goolsbee Says

of course on the Bloomberg. Dean Current's with us. He's the CEO of Macro Risk Advisors. He joins us on the Spectrum Enterprise phone line, Spectrum Entro price nationwide fiber based network and I infrastructure solutions, and deemed great to have you with us. Yes, good morning, Thank you. We'll get to Volatilion a moment, but let me start with

the speech. I know that you, like so many others, were lending an ear to that speech, and I wonderstand how you interpreted how you, as an investor, interpreted what the President had to say last Friday. Well, it's a continuation of some of the more nationalist America First policies that he's espoused and the essentially that he believes is the mandate that got him into office. Um, what these policies mean for markets? Uh, clearly you can paint a

picture of a negative outcome from markets. Of course, so far, there's really been very little materialization of risk. Um. And uh, you know, these these political type sources of volatility have been increasing with with bregnant last year, the Trump upset and a very heavy calendar of elections in Europe. It's very challenging to know how and when some of these risks will make their way into markets, and so investors are you know, it could be in for a bumpy

ride this year. It's gonna be Uh, it's going to be challenging. When you look at sources of volatilities, you say, are the political type ones the largest? They looming, the largest, taking up the most space. They are there in this category. I like to call it non market market risks. In other words, it's it's not the typical kind of risk

that that the investors are comfortable with discounting. Um, it's there. Uh. Sometimes things happen for reasons that even in advance, you believe that the economic outcome won't be a good one, UH. For for Brexit, folks argued very strenuously and I would UH, I would contend rightly that long term this was not the right outcome for the UK, for the EU, and yet the citizenry was enraged enough to, you know, to vote for the exit. And I think the same as

is true UH for Trump. For investors and at Macro Risk Advisors, we help investors hedge very often. And when you're contemplating hedging, of course, you're trying to weigh the risks in the market versus the cost of the insurance that you're you're buying. And in the last six weeks or so, even though we've been consumed by tweets and uncertainty on the geopolitical UH landscape, the risks in the market that the day to day fluctuations have been quite minimal.

And so for the folks that did buy hedges, that did expand option premium, UH, they've certainly not been rewarded. And what that's done is it's continued to weigh on the VIX index of Folatility levels continue to decline. When when you're looking at this particular type of risk, how challenging is it? What what what investor is saying, so, what's their biggest concern they're bringing to you when they're when they're wondering about how to navigate this kind of non

market market risk as you call it. Yeah, I think, um, it's so unpredictable. He's unpredictable. Um, what version of Trump policies our market is going to get? And Uh, in the last six eight weeks we've seen uh refleationary enthusiasm almost where where the view of Trump is a tax cutter, as a source of deregulation, as someone who can rekindle animal animal spirits that may have been suppressed during the

post crisis time frame. So that's the good side. And of course markets have priced in quite a bit of that already, and the investors I speak to are grappling with the question of is it too much too soon? Will some of the policies ultimately emerged in a protectionist fashion, a trade war with China? These are bigger picture issues

that you know, certainly UH confound market participants. And then the other thing I would just add, I think this is really really important is the interaction between fiscal and monetary policy has become considerably more complicated. Trump makes Janet Yellen's job much harder than it already was. And for a long time, the central banks were the only game in town. Uh, there's an exhaustion I think among investors

globally with a force of monetary policy. But already Yelling and her counterparts at the FED are trying to articulate that they need to anticipate potential inflation through some of the Trump policy and briss when JP Morgan said they were decidedly focused on the path to some form of fiscal stimulus. Good morning everyone, Bloomberg Surveillance from New York. David gurn Tom Keen in the same studio. It's been New York. It's been a while, like weeks months, den't

current it with us? With a math of correlation and volatility with Macro Risk Advisor's Dean. One of my great themes in Davos was the uncertainty within, or the uncertainty upon or the uncertainty about the uncertainty. It's a little bit like the volatility of the volatility. Tell us about that relationship. What are pros trying to do when they trade the volvo? Right? This is a nuanced point, but

I think it's actually quite important. UM. We we spend our time UH studying not just volatility, but the correlation profile of sectors of stocks in UM assets like the SMP five hundred and an important point is that the Trump administration has created a huge sector divergence. At least in the first eight weeks or so, you had your reflationary type sectors things like the XLF, which have skyrocketed

post the post the wind along with interest rates. And then you have the other side of it, which is the more disinflation defensive UH sectors, things like consumer staples, things like UH utilities, and you know the the I R and d X and so again, the the underneath the hood of this very low VIX is a lot of sector action and UH. And I think that UM and this is where your quote vol of vol question comes in. Even though the VIX is at twelve, it's

certainly not going to spike down to six. But I do think that investors are under appreciating the potential for a more correlated move in stock. And then math guy, I want you to take it over to uncertainty where you can't create the probability distribution, you can't do the mathematics. If we talk about Trump uncertainty. Whatever our politics is, is there uncertainty upon uncertainty from where you set. I really believe that's the key thing, and that's what's changed

in the last eight weeks. And again that's what I would argue the low VIX does not properly account for. It's a little backward looking the vix. It's looking at realize volatility and pricing options as if that will continue the uncertainty factor with Trump. Again, I'll tie it back to how it complicates the complicates the mission of the central banks by introducing this potential reflation or even inflationary impulse at a time when the business cycle is so

old and four point nine percent unemployment. Yelling said it herself. Is it appropriate to throw a trillion dollars of stimulus at a business uh, you know, during the late stages of a business cycle, when we're already at four point nine percent unemployment? And what does that do? What does it do for you know, potential inflationary impulse? And how might she have to react? I think that's very challenging for investors at this point. That was fabulous, Thank you

so much to incredent. I don't know about you, David Bureau. But my answer is when I'm confused, I like to read a lot. I read three lengthy, balanced articles this

weekend on the Affordable Care Act. Sitting with us is truly one of the most experts, whatever Democratic, Republican, whatever your politics are, Mike Leavitt has a perspective on the Affordable Care Act and what it means with his work as a state governor Utah and then as they secretary of Health and Humans Services is becoming called h h S. I like health and Human Services. Uh better? What's the Republican plan? I read a lot and I haven't seen one. Is it? Do you have it? Can you show it

to us this morning? One thing I believe we can be certain of is that at some point that will be a bill past the Congress titled repeal and Replace. They have dined out politically for three different elections. They've been rewarded. It's an essential they have to act, and I think they're poised to what the actual definition of repeal will be and what the definition the place We don't know, do you as a grizzled politician? I mean, I mean, I know there's like three Democrats in Utah

so it's not a normal thing. But as a grizzled politician, do you assume you can't get to replace and the Ryan m McDonald's plan, McConnell plan, you can't get to replace until you do the repeal. I find it very difficult to think they can do them simultaneously. I think that they met the method and the means by which Congress works makes that difficult. I think the logic of

it makes it difficult. Uh. I think they can lay a framework out for what they mean by replace and do that in a very short order after they do repeal. But I think that you can actually begin to chart how this looks. I think they will pass a budget resolution. Then I think they'll go through a series of of executive orders that will have some impact. Then I think they'll start unrepeal, and then I think they'll have to

break the replace down into a series of bills. And my own sense is they'll lay a framework out and then legislative against it, legislat against it. Secretary Levitt Thom's been reading. I've been reading. I'm sure you have as well, and you bring to that reading a more perspective on this than than we have. When you see President Trump signing the executive orders he signed over the weekend with

regard to the Affordable character What do they mean? Give us a sense of what he thinks he's gonna lessen the burden on agencies. Uh. And there was a lot of commentary about how that was eroding the Affordable Care Act. What what's he done thus far? There were two executive orders that were signed immediately upon his entering office. One of is a fairly standard part of the playbook of transition.

You want to get control of anything in the regulation pipeline that you can still take out before it becomes effective. And President Obama did something similar when he was inigated. Virtually every president does this, and it's anything after November that was put into that pipeline you can bring back and take a look at it. And so that was

the first executive order. This the second basically said, uh, I want to repeal and replace the Affordable Care Act, and I am instructing all of those in my administration to aggressively begin to look at it. Had one piece of important information that hasn't been reported, and that is I want to go through a policy process before you do anything. But I'm telling you this is the direction

we're going. It was a direction center, it was an enabler, and it did give them sufficient authority that in the gray area or where there are areas of uncertainty in the law, they can regulate. Now that's very significant because the Affordable Care Act had many I mean, I've heard the term two thousand different places where it said the Secretary shall pass regulation, and they have been busy for the last six years passing regulation that defined the granularity

of the Affordable Care Act. Well, there's a lot of the tail there that once you take it out, it's like taking the thread out of the tapestry. Things begin to fall apart. And they can probably do quite a bit too restrict the usefulness or restrict the functionality by simply passing regulation. As the chairman of Loved Partners, you know the principles here. I'm actually no Congressman. Price said, the presidents picked to be the head of of HHS

to be your your successor in that job. And I recall reading that he had a plan for replace in the Affordable Care Act. What what sense do you have from what he's proposed in the past of where he might take this going forward. This is a very good point because the Republican Congress actually acted with a bill, passed it through both the House and the Senate, and

it was vetoed by President Obama. The best predictor of the future is what we can see, and I think you can see that there are a number of things that that they could and couldn't do. For example, I think we'll see a lot of activity on Medicaid. They would like to obviously send more of that to the states with discretion. Now there's it's a double sided uh coin. On one hand, it gives the states more flexibility. On the other, it begins to limit the amount of money

that they receive. And if you're a budget maker, that's an appealing thing because it gives you certainty. One of the problems for budgeteers in Congress is that they don't know with certainty how much money will be spent on the entitlement program. How do you respond to the other side that says, look whichever way he has slice at,

whatever the Republicans do. The working numbers I have correct me if I'm wrong, Governor, is seven to thirty million people go without healthcare with this replacement of the Affordable Care Act. Is your math seven to thirty million or

do you have a different calculus. Well, like I think we have to remember the Republicans have made a commitment that they're not going to allow people to hang out there, which Mr Trump certainly has a excuse me, David, every time I say Mr Trump a dollar in the bucket, the President says he's going to be sure everybody's happy on healthcare. Well, the commitment is initially by the Congress that they're not going to allow the twenty million people

to go without insurance. Now, that causes some problem for them on the budget side, because they have to pay for that uh while they transition to whatever they're going to put into place, and that will have impact on the tack that tax bills that they ultimately pass. But I think it's a big problem if they do allow if they were to break that promise, because they would clearly that would be the rallying cry for the next

three elections by the Democrats. You know, I was talking with the head of a few months back, and he said the new president would have a few months to sort of write the ship here or these spirals were going to get out of control and something else he said was that when you look at how this law was implemented, there was't enough attention paid to the back end. Uh. He said, There's a lot that could be done in terms of moving healthcare forward, but the back end services

are still not where they need to be. Do you agree with that? And how how do they begin to change? How do you begin to change the infrastructure surrounding healthcare? I do agree with that, and I also believe that there are great lessons for the Republicans to learn in this process from what the Democrats did. The first thing is they passed it were they strictly partisan vote, and that sets that that that makes it very difficult to

have it sustained politically over time. They have committed publicly that they're not going to do that. One component of it is they have only a two vote margin in the Senate, which is going to essentially require that they have that. The second component is the second lesson I think, is it takes time to do this. You have to the logistics of rolling out a massive program like this go well beyond which what most people think about. So thinking they're going to immediately do this, it's been in

place for six years, they need time. Weird from Greg Bellier that the Republicans meeting in Philadelphia this week is the oddest of oddest things, the GOP with a president who, um some would say as a populist, maybe a conservative. I'm going to go to the great philosopher Brigham Young. Remember a chip on the shoulder is a sure sign of would higher up. How big a chip on the shoulder does this president have? He's the most unlived president or for that matter, on Romney president I've ever seen.

Is he a Republican? There's a lot that we don't yet know about a President Trump. We know Candidate Trump, but we're only two days into President Trump. I think that we have we have begun to. It's become clear that he's not going to be like other presidents. What that actually will look like we don't know yet. But there's a we don't have. You gotta come back, I mean, please try to get back. It would like to speak

to you, m Bloomberg surveillance again. I think this will be evolving, as you say, three days in and a busy agenda for the president this morning. Michael Lovitt, thank you so much. Mike Lovitt, the former Secretary of Health, Human Services and of course Governor of Utah as well. Brought you by Bank of America. Mary Lynch. Dedicated to bringing our clients insights solutions to meet the challenges of

a transforming world. That's the power of global connections. Marylynch, Pierce Federan Smith Incorporated, Member s I p C. The first quarter wasn't good, second quarter wasn't much better. By the third quarter, I think that our next guest was spitting out his cheese, kurds and culvers. David Harrow joins

this now. He's partner and Chief Investment Officer at Harris Associates, joining us now on the Spectrum Enterprise, oh Human Football, Specium Enterprise, Nationwide, Fiber Bass Network, and I T Infrastructure Solutions. David Hair, there's a great deal to talk about. Who you want to talk about? The game? First of all, which game was Tom mentioned? You might play coy But again, well, I have to say, and I have mentioned this, the packard defense has been suspect for such a long time

and it was really exposed. It was really exposed last night. It was just awful, really, I mean that's I mean, they just converted just about every third dial and they moved the ball at well, and then when the Packers look to be doing something while that phone was nasty. But yeah, let's talk about the patriots. They earned it, and you know, Tom and I've always been big Patriot fans, and we're just so prove that they are undogs. Get a chance. Yes, life will go on and the Packers

will rebuild. Are you at a point in your international investment? No? Seriously after Mr Trump's speech, what is the response of the executives you speak to each and every day abroad? Well, it's kind of a wait and see approach. And it is interesting now you know, travel frequently meet we meet with our managements and they're all very, very interested. This is the first thing that anyone's looks really is is what the Trump administration going to do? And is it

going to be positive? Is it going to be negative? And as I mentioned, I mean certainly there are there. There's both. There's some very strong positive policy implications and there's some negative. And the negative has to do with this trade and protectionism. And you know, he keeps claiming that they're free traders as long as it's fair trade.

I think that has to be clearly defined because businesses, Uh, if they want to invest in places that will be exporting into the United States, I think they want to make sure that those assets and those investments aren't for not um. So it is something they're all very, very concerned about. But on the other hand, you know, the positives are pretty obvious. The deregulation. As you know, regulation has strangled certain sectors of the U. S economy for

eight years. If you look at Mr Barrow's essays from a e I about one of the reasons why he believes the recovery from the Great Recession was so soft was because of the over burdensome regulation. And I think this is one thing Mr Trump is really the President Trump, I guess, is really working to alleviate what do you would be positive on trade and on protection? And what are you what are you hearing? Are you hearing anything

that makes that clearer for you? When you hear Wilbur Ross testifies say, or Stephen Manuchin, are they giving you a better sense of where this administration might be headed. I think back of what Greg Valier was saying about Doris Kurrns Goodwin's team of rivals, and and the fact that maybe the cabinet here will have some robust disagreement and influence what the president does. Are are you closer to having more clarity? I don't. I don't really think so. I mean I think we just I think in the

next couple of weeks that will be flushed out. Um. But just from what these people say in front of their congressional testimony, I mean, we know what these are like, a lot of the commerce people are just grandstanding, so they say the safe conservative thing pretty much just to get you know, then um, the appointment. So I mean, I just don't know how serious to take the this, this this testimony in front of these committees. Let's start David with a portfolio. Do you do you restructure your

portfolio at the margin? Do you adapt your portfolio? Well, as you know, we tend to act in a very very evolutionary fashion. We priced businesses as as price moves

to our evaluations of these businesses, we make adjustments. And so if you look at the third and fourth quarter, we had a tremendous rally and some of the sectors we were overweight consumer discretionary industrials, financials, and so maybe we've trimmed a little bit of this as they've reached their prices, their cell prices were still very much overweight these areas. Because the revaluation has begun, but it isn't

anywhere near completion. The pricing differential between these sectors and say consumer staples and utility stelecoms is still way too large. So though we've trimmed a little bit um and maybe we look a little less overweight, were still over Wait, doctors, I would say we're on the third or fourth inning. We still have a long way to go before this this uh we get proper valuation differentials in these sector. What we're gonna do is come back and talk to

David Harrow solely about investment. Everything seems to be tinged with politics, tinged with international relations. Can we do that, David Girl, Can well try and come back and just talk about investment investment management with David A It's probably a good first question. If is it possible to do that in this day and age value investor exclusive? Yeah? I mean, I mean, can we come back and not speak about Donald Trump? Can we come back and not

speak about the Green Bay Packers? We will try that way to do that with David Harrow. Our stocks rich, David UH, certain places, I think it's hard to find value. In other places it's a a bit easier. And I think it's it's really hard to generalize and say stocks are rich. Stocks generally are richer than they were three quarters of a year ago. That is for sure, remember those loads of February. But um, yeah, they're still good places to find value. Do you find value abroad in

the land of Arrow? Or is your foreign nation the United States? Where your value is this year? Which is it? You know? I actually still think that the valuation differential between internationalisted companies and the US domestic companies is still is still pretty large in favor of UH foreign stocks being a bit more attractively priced. Now, I have always argued that U S stocks should sell at some premium foreign stocks given the higher return characteristics of US equities

over non US equities. But I think the valuation differentials, if you look at just kind of conventional price, the cash flow price to book, are a bit more expensive than they should be. So I do think if you look at the universe of equities, um, that foreign stocks look a bit more attractively priced than than US based stocks. I want to bide by Thomas Rules here for the segment. I want to talk about politics directly. But how difficult

is it to be a value investor right now? There is so much noise, if we can call it that happening. Uh is it harder than it has been in the past to be a purely value based investor? You know, to be honest, it's it's never easy because as value investors, we really make investment decisions based on the intrinsic value of the businesses and which we're investing, and your shareholder base, your client base. The consultants, all they want to talk about is macro, macro, macro macro. Now we're not We

don't believe macro economics is unimportant. We just believe it's only important to the degree which it impacts the medium and long term earnings and cash flow streams the businesses in which we're analyzing, and it tends to happen, is all.

This macro noise seems to have very, very little as any impact on long term valuation, which is frustrating and dealing with your constituents, But it's actually better in terms of looking for opportunity because of the market prices move on factors that have very little impact on medium and long term valuation. That provides one with an opportunity to enhance return by and taking advantage of the markets short

termism and focus on non fundamental factors. So it is frustrating and that you always have to talk about X, y Z and why it's underperformed, or why it's lagged, or why you're having a bad corner, or why you're having a bad half year. I do believe there's a tradeoff. There's a tradeoff between short term performance and medium and long term performance. And as you know, a good bottom of value investors tend to do is they'd rather perform

over the medium and long term. And this is what we explain to our clients, but sometimes they don't quite get it that way. Now, I wonder if you could just walk us through how your positioning has changed here at the beginning of the year. I wonder when you look at consumer staples and utilities in particular, if if, if your outlook for those two sectors is markedly different

this year than they were in two thousand sixteen. Yeah, the outlook isn't so different, but the valuations of course swing um now over Okay, the years about three or four weeks. So we live just a little change here and there is if there's an abrupt price movement somewhere, if there's a stock that you know, it's a large position that's keeps getting edging closer to our cell price, we might trem a little bit, but we we don't really um similar to changes in value being very slow

paced over time. I mean a company should be creating eight, nine times eleven twelve percent value for share every year. So when we value a business, that value curve should have a positive slope. It's the price that's volatile, and we don't really move a lot unless their value moves a lot and underlying intrinsic value or price when so a lot in either direction, especially if one moves in the other dozen' that's what causes us to be more

active in terms of portfolial positioning. If one of those lines moves a lot quicker than the other, and our weights might be a little off. Kilder David Harrell, thank you so much, greatly appreciate. He is with Harrison Scis shes Quinn, professor at the Booth School, Austin gils We joins us and of course with the service to the Obama administration. I guess we could try to avoid the

politics here, Austin, let's do that. Avonage, Dick Say, Avanage, Dixit, and Bury Nilbo their classic book The Art of Strategy, and buried in it they pay homage to the late Tom Shelling, one of our great losses of two thousand sixteen, and Michael Porter, who was with us in Davos on

the game theory of a zero some world. Here's the headline, Austin, we are going to be imposing a very major border tax, which implies, if there's a cake and they have too much of the cake, whether it's Canada or Mexico, I believe those are the borders, We're gonna get our piece of the cake at the expense of them. Are we back to neo mercantilism? With what you've observed in the last five days, Smith starting to smell like it doesn't it?

And you know, I thought with the border adjustment tax they were calling it UH that they were going to reform the corporate income tax, it might be a creative way to get around the normal problems of putting in tariffs and trying to build up walls to to your advantage at the expense of the other guy. But I

don't know it has seen. It seemed like from the Twitter feed that that President Trump isn't for that border adjustment tax anymore, that he's that he's literally just kind of talking back to the to the mercandilist side um. And that makes me nervous because, as you know, Tom, that's been tried hundreds of times. It's not like that has never been tried before. That has been tried, and we know it doesn't work. So if they do that, boy,

I don't think the market's going to react well. The new president has whipped out his sharpie and signed a few executive orders, one of which is to renegotiate the North American Free Trade Agreement Austin, and I wonder if if you have any sympathy for doing that, if if, as many people say, this is an old agreement it could be revised, any common ground there between Democrats and Republicans revising that that deal at least, Yeah, though you

know the negotiating parties in that are not Republicans and Democrats. As you know, it's you know, getting Canada and Mexico on board. I I do have some sympathy for it, And a little known aspect by those outside that world

is that the TPP was a renegotiation of NAFTA. Both Mexico and the United States we're going to be parties to t p P and it changed a bunch of things, which you know, in the twenty years or so since we passed NAFTA, we've gotten better at trying to figure out ways to figure out what kind of things can go wrong. So I'm sympathetic that if they went at it with an open mind that they could revise us a whole series of things. I don't know. We're gonna

have to see if that's what he intends. It feels more like what he intends is in the zero sum mentality that he's gonna have, you know, a collection of threats and a collection of demands and try to try to get our trading partners to give us more. And look, all power to him if he can do that, but just please don't start a series of trade wars that would be a disaster. A question about your Council of

Economic Advisors. We talk a lot about trumponomics. How much of of defining a prison's economic policy is done by the Council, all of it. It's the most important job in the government. Look, the Council of Economic Advisors is the president's own personal think tank basically, and so it's influence and effectiveness depends critically on the relationship between especially

the chair and the President. So the president is listening to the c a chair and and that chair is having an influence on them, then the then the CIA is powerful, is important, and and the arguments are being taken seriously. If the President is basically like thank you, you know, and uh, then the CIA's effectiveness is not there because it's not a cabinet It is a cabinet agency, but it's not one that has a bunch of regulatory oversight directly. So there's there's nothing you can do if

nobody will listen to your argument. And now, folks, we go back to early Austin goes this is six weeks out of Milton Academy. What happens? What happens when you text the rich? Evidence from Executive Compensation Journal and Political Economy seventeen years ago. Mr Trump, I believe is gonna

stop taxing the rich. Do they spend it? No? Look, look what what that paper showed and it's it's just one paper of a large, large literature that says the Laugher curve argument that if you cut taxes for rich

people will pay for themselves. It's totally not true. That data is disproven that hundreds of times, uh, and so in that in that one paper, I was looking at corporate executives, and you saw around the time when Bill Clinton raised taxes on inh income people, there was a shifting of the timing of when they took their compensation. They tried to get as much as they could cash out stock options before he took office. But the longer run impacts were quite modest. Here's here's a basic question.

Why why is tax reform so difficult? Why has it taken so long? Why is it proving to be so difficult time and time again? Well, you guys know why it's difficult. Tax cutting is easy. Tax reform I anything that broadens the base or rationalize the system. It's very difficult because some people have to pay more in that situation. And a lot of times the biggest advocates of tax reform are also the people who are advocating tax cuts.

So whenever the Republicans come forward with a plan that is, we're going to lower the rates and broaden the base. You see the their their advocates say, wait, wait, wait, wait wait, don't raise our taxes. Let's just cut it. Let's leave it in the same system and cut And that's what I think they're gonna do again. Austin, don't be a stranger. Let's get you here. From much conversation Bloomberg servants, Austin goes to be the Boost School Chicago.

Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide on Bloomberg Radio. Brought you by Bank of America. Mary Lynch. Dedicated to bringing our clients insights and solutions to meet the challenges of a transforming world.

That's the power of global connections. Mary Lynch, Pierce Feeder and Smith Incorporated Member s I p C.