Surveillance: We're Entering Deglobalization Era, Sharma Says

of course on the Bloomberg. This is an important moment where this is a Nelson David Rockefeller sitting your fellow at the Council on Foreign Relations, Shannon O'Neill, truly one of our experts on Latin American, particularly in Mexico. And a lot of people won't know this about Nelson Rockefeller, who you know, people will perceive as a governor of New York forty one vice president the United States. He cut his teeth in Latin America. He was I remember as a kid, he was way out front on the

courage of America to look self and build relationships. A lot of people equate President elect Trump to Rockefeller vision and Rockefeller politics domestically. Do you see any indication we can get Nelson Rockefeller with President Trump to your Latin America, I think, unfortunately not. I don't think he has a

lot of interest in the region. He's never expressed a lot of interest in the region, and really very few of the people that he's actually appointed so far that he's nominated so far have any knowledge or interest in the region. So I don't think we're gonna see that turned south that we saw with the Rockefellers. What lessons can we learn from the populist movements in Latin America as we look at the rise of populism here in the US and around the world. He is there a

continue between the two. You know, there are very big differences, and we have here the biggest challenge in Latin America. From me, we have economic populism, we have overspending, the like, That's what we usually think about. But the really biggest challenge of population brings to me is the undermining of political institutions, the undermining of the checks and balances that

make democracy work. And while we here have two hundred plus years of democracy, we probably we have much stronger institutions. Many of the things that we rely on are not actually rules or legislation their norms, and that I think is the challenge. We could see a rolling back of some of these checks and balances that really make our democracy vibrant with a new administration, if they so chose.

Before we look ahead to that new administration, let's look back at what the Obama administration can say about their achievements here in Latin America over the last eight years. I've traveled with the Treasury Secretary to Brazil, Buenos Aires, and Bogata, and it struck me that, um, the administration could sort of trumpets its success bring some more emphasis on free markets to those countries. Did did the abdministration do which with regard to to Latin America, What can

they say that they did? You know, we saw a lot of bilateral cooperation more than say a regional cooperation. So we saw economic ties, security ties deep in with Mexico over the last eight years. We saw similar back

and forth with many of the Southern Cone countries. And one thing we have seen particularly the last year plus is a turn in Latin America to a much more US friendly and market friendly types regimes, whether it's Brazil, Argentina, Peru or others, So that really is something they did themselves, but a real accomplishment. And finally, I would say one thing Obama did in the region was take the challenge in the issue of Cuba off the table, which had

always deviled overall US Latin America relations. What we were doing in Cuba. How much of that is is at risk? I wonder if we had the death of of del Castro. Of course we have the change administration here in the US. UH president of MoMA did so much is that at risk of changing with a new president? Like so many policies, It's hard to know what Trump will do, but he has come out and many within the Republican Party are staunch hardliners. They want to roll back and set up

real divisions between the United States and Cuba. Perhaps we'll see Trump not nominate a ambassador, which is now we have normal relations there, but we may not see a person there. And I doubt we'll see a continue opening to to UH to Cuba, particularly as long as Castro is there. The stereotype there, well, there's not one stereotype. There's so many stereotypes of Latin America. Which one do you want to destroy? Most I mean, it's commodity based.

It's a long ways away. Bla. What's the one you want to destroy most, you know, the one I'd like to destroy most is the sort of image we have that Latin America is full of tumbleweeds and donkeys walking down the main stream exactly. And I don't know what they say about Bolivia, but there's that famous line exactly. So that is no longer Latin America. It has its challenges, but it really has vibrant economies, it has a burgeoning middle class, and it is connected with the rest of

the world. It's the global players today. I went to a dinner last night at cocktail party. Was a cocktail party, David. That's what you do. When the cocktail party is a good one, you called a dinner. There you go so no one knows. You say, I went to a cocktail party last night with a lovely woman from Uruguay who said I mispronounced it. But that's a different story. How's Uruguay doing. Uruguay is doing fairly well. This is a

little Switzerland. It is like a little Switzerland. It's about three million people, so it's about the size of the upper East Side of New York City. Um, but it's doing fairly well. It has a broad social safety net, there's jobs being created, it's very open to the rest of the world, and it has a lot of political consensus to do so. It's also very US friendly. So this is a country that has found a balance and makes things work. Okay, you've made things work here today, shanonil,

thank you so much with the consolt foreign relations. I want to bring in Steve Whiting now he's the chief global strategistic City Private Bank HUD enough to join us here in New York this morning. Morning, Steve, good morning.

Let's start with that ECB meeting yesterday. Get your sense of of that decision a taper in all but name, I suppose this is sort of a very very successful, uh you know, approach, communications approach around what is a a program that they've managed, and they've had a long time to think about ways of making it more flexible, the potential to reshape the yield curve to make the

most of what will be a smaller amount of absolute purchases. So, uh, you know, they did everything they could and succeeded in the marketplace in many respects other than you know, the fact that we did see higher bond yields at the long end in the Aurozone, but the currency weekend inequities moved up despite a what we won't call a taper according to Mario Druggi, but what is a smaller amount

of absolute asset purchases forward. Yeah, he indicated there's a willingness to buy assets below interest rates, and then during the Q and I that followed, he seemed to indicate that they weren't there yet, that the committee was there

to study that it could do it. What's been the market effect of that of the ECB expressing some willingness to buy assets that would be below the interest right, there's a well, certainly the steepening of the yield curve UH, the notion that policy is still open for business, that this is not kurt tailing or you know, the beginning of the end UH to UH stimulus in Europe. I certainly think that for the rest of this decade, you know, rates will be zero or below at the base level

in the Eurozone. Unfortunately, that's not the whole story in the Eurozone. That you know, what monetary policy has done, what policy to harmonize bank regulation, to create a variety of risk mitigating steps politics can undo. And that's a little bit of our focus too. But yesterday he certainly ruled today politics driving so much. We certainly saw the result of the referendum on Sunday. Uh. There's obviously the banking crisis continues in Italy. What are the next steps there?

We look for a sort of caretaker prime minister in Italy. What's the result of the steps to the resolutions? You see with regards it's it's these are still open questions. And you know, you look back in Spain without a government manage pretty well and you know, you you wonder though, do populist victories work everywhere every time? Uh? And you know, so we don't know do we have early elections? Where

will the five star movement play into this? Uh? You know when I look at the political calendar next year, I just see you know, agony over what will the results be? You know, where will we be you know in maybe in the second round election in France for example. So we don't know will there be early elections or caretaker government in terms of Italy. Uh? And you know, I would just be careful that in sort of these year end market periods where professionals need to make their year. Uh.

And the direction of markets have been up. You know, folks are not fighting it, They're buying in and we will have, particularly in Europe generally, lots of concerns about politics and uncertainties. And I'm just not convinced yet that markets actually like uncertainty. How different is this year end market period from those in the past, and light of what we saw first in the UK the US election here is positioning somehow different this year than it has

been in the past. Well, I think a couple of points. You know, last year, I would point out that we had very difficult positioning the first FED tightening of a cycle in the month of December, which December tightening steps are unusual, changing the course of monetary policy as unusual. How far the Fed would go as a question, Uh, you know, we were vulnerable in the petroleum markets, we

were vulnerable, vulnerable in the Chinese currency. Uh. And these sorts of things made for an unusual turn of the year period which is normally seasonally quite strong. You know what we're seeing now where the best equity returns of the year, uh, you know are seen late in the year into the beginning of the new year. Is the

normal seasonal pattern. But when you look at all that the FED was, your face is how how sure is Janet Yellen going to be when she answers questions on on on Wednesday of next week of the direction of the Fed under a new administration. You know, she's just so extremely careful not to over extend herself and not take risks uh and uh in some cases not answer those questions right now, Stephen winding with this City Bank,

We've had a wonderful morning with Mr Wroyd. A lot of value add here, and I guess to circle back to the United States. You've always been diligent about saying nominal GDP links in the revenue. I'm assuming you look for a revenue pop across a broad corporate America. Given

the enthusiasm for the president elect. Well, look, if you have tax cuts alone, forget infrastructure spending, that amount to three percent of GDP probably the turn of the year, maybe, and this was achieved under uh the second Bush administration. Maybe early lier than that with changing with holding tables, if they can possibly get that through earlier. You're talking about, you know, substantial fiscal stimulus H the larger budget deficit, more borrowing, but a smaller tax take even with high

savings rates for upper income taxpayers. That's a really that's certainly no timid fiscal policy. Uh. And that will mean faster nominal growth leaks out to the the world, but will a lot will substantially get spent to the United States. How much has your your outlook changed since the election? And maybe more than that, have you changed allocation since since the election? We have? We went into the election neutral on global equities, underweight on fixed income. We took

down our international equity weights. So the global UH position is now more overweight on cash UH inequities. And UH. Certainly this is not about you know, the year in seasonal rally we talked about, but about the strong US dollar and the political risks and next year. But this goes to the heart of the matter for next year and frankly even for now. Does city groups see a correlation and normal relationship between bond dynamics and equity dynamics

or is it distorted? And you will wait for normal? Well, it's important is that there's only one economic outlook and if you look um, this is maybe a little bit inside baseball, as you would say. But if you look at implied volatility in the fixed income market, it's expected to be very high employed volatility and equities expected to be quite low. And the only way you get this is if this is smooth sailing to stronger economic growth.

So policy has to strengthen the economy more than bond yields have risen in many respects, and so again you need smooth sailing on the trade front, international relations, all these sorts of things, um, inflation expectations, growth expectations have risen.

They've done the same in the UK after Brexit. But you know, as you saw in the case of Brexit three months later, there's news, there's things that haven't been priced incomplete, like you know, including what you know, whether it's hard Brexit so called they're depending on, uh, the position of London as a financial center. Uh. And you know there will be more things to learn here about

an administration that's forming about these choices. I will say, when you heard, you know, comments from Wilbur Ross, for example, that trade sanctions are the last thing that you want and that's the last way that you improve American exports. You know that substantially more optimistic view of things than we heard during the election campaign. Items like a lot

of people have made bets here on the promise of possibility. Uh. When you look at at what policy could happen, people have bet that it's going to You saw that, you know, the hope for this infrastructure spending package among some What is that going to give way to to more reality? In other words, is that going to last? What is the reality? You know, that's that's the key question here.

You know, unified government spells action. Uh. And you know, we think that Republicans and the new president will work fast to make sure that maximize what they can get done. Worried about there's some fracturing still in the Republican party in the House, but I think that should be a worry. And you know, I think to be clear that you know, what we know now, a lot of Republican strategists could tell us everything Hillary and the Republican Congress would do

probably you know, get nothing done together. They could be

very very clear about that. You know, here markets are forced to forecast with greater uncertainty, and that's one of the reasons why we just have this overweight in cash at the moment, just our confidence level that we know what will happen as opposed to assume is is different now under in this new policy regime, do the personnel picks instill confidence to they instill clarity the people that he's picked for his countet, Donald Trump has picked for

his cabinet, that they give you any more clarity about the policy directions of his administration. I think it's one in the direction of deregulation and whether you know good or bad deregulation. We know that regulation can be costly in some cases. But I think the major story here is that the risks uh that we were most worried about, disruption to trade, disruptions to labor markets and and labor

market mobility, these types of risks have been diminished. And uh, we think that the picks have installed more confidence in that regard is investment picked up? Well, we we haven't even had a new administration yet. You know what's funny is that, you know, the last three days we just exactly you know, earlier you showed on tv A, you showed the consumer confidence chart, which is very interesting and telling that there was this latent ability for consumer confidence

to rise even more. I'm gonna be very interested in what business confidence readings do. You know, what does the n f I BE reading do when you think about, you know, the cost of healthcare, when you think about the cost regular you nail and the folks the chart was mourning in America. How we've come back on the edge of Ronald Reagan expectations and good feeling Steve Whiting.

What is critical here is the two businesses. There's the blue chip advisors in the roundtable business round table, and that's big companies with endless debt available, endless credit available. And then there's small business America. The n f I B survey right which it's sort of kind of like come back. You need to see that before you get more enthusiastic. No, I think that there's a good chance that domestic small business will feel more optimistic in the

outlook going forward. That that that would be my prediction. I think that there is a bit of trepidation in international business if there's any sort of disruptions, you know, to supply chains across uh, you know, countries. I think you know, you know, just look at the auto industry. If you have some reason why you can't you know, put on a door handle from an American produced car because you know that part was made in Canada or Mexico,

then you don't get that sale. These are the sorts of tail risks that I think people worry about on the international business side, and uh importers generally, UH you know, are going to be concerned about relations with China, for example. But I think that the domestic small business sector, which has been hampered in a lot of ways UH and has had incomplete recovery as you just suggested, I think

we'll have more of one. You travel widely, and I imagine that a question you're going to get is about trade and how real the threat of tariff's are you at? Wilbur Ross hedging a little bit here saying that we're misunderstanding trade policy Trump trade policy. If we think that tariffs are gonna be at the top of the agenda, there there at the bottom. What's very comfortable? Do you

hear that? Exactly? What do you say though, to those those clients and others who who ask about how how much clarity there is about Donald Trump's trade policy and what that could mean here for the economy. We're at the very beginning these are uh, individuals that haven't taken their seats in government yet. Um. I think that from the range of different picks, there are going to be a wide variety of influences on becoming new president. And uh,

some of these things are specific two countries. You know, when you think about Mexico, which exports in the neighborhood of ten percent of its GDP to the United States, and the US which exports less than one percent of its GDP to Mexico, you know, you have very different trading and bargaining position is at the starting point. Now you've also had very big exchange rate adjustments, and you know, we have to to say that, uh, this can actually

add detention. We can't look at this and just say that this is going to be smooth, smooth sailing from here from all the good things that we've heard so far. Are there opportunities in US equities right now? Absolutely, And you know, a couple of a couple of things, I'd say, UM, we're a little bit more cautious on sort of chasing the rallies that have been driven by expectations, not that they can't work out, but it's been a lot pretty fast. Uh.

And then there have been well positioned sectors. You know, you think about financials, were the cheapest sector at a large discount of the broader market heading into the situation in the face of higher interest rates. How you get the higher interest rates should normally matter. But when you're the cheapest sector in terms of valuation and you've had these large liquidity buffers and interest paid on reserves, things that are unique to the cycle that make you know

large financials geared positively to interest rates, you go with it. Stephen, Thank you so much, Stephen, you have a lot perspective today and particularly Yeah, I'm sort of David were that's what we need right now because you look at the data screen in one moment, it's correlated and like you look twenty two minutes later and it's like, wait a minute, what are bonds of equities doing? And some of that's like end of year. I mean, we're getting to that

point without question. The story of the last sixty minutes is weaker Euro one oh five fifty five, no parody watch, but nevertheless it gives it up as maybe we look to Italian banking, we continue stay with us. This is Bloomberg who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the two and of four trillion dollars. Why they see their

roles to serve, not sell. That's right. Charles Schwab is committed to the success over seven thousand independent financi Chill advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more and find your independent advisor dot com. What a joy it was yesterday to talk to Michael Lewis. I can't say enough about his new book on uh Amos Tversky and Daniel Khneman. Uh. It's gonna be another giant hit for Michael Lewis, and you know that with

the success. But there were sort of a first book by Michael Lewis where you went oh and then boom. That's the way it was for Russia. Sharma. He brought up Breakout Nations in pursuit of the next economic Miracles, and it was like another blur of emerging market books and then you picked it up, David and looked at it and you went, oh, just like Michael Lewis, Ruscha Sharma joins us now, of course with his new book Out as well the rise and fall of nations and

again Russia. Scharma with Morgan Stanley on commodities. Wonderful speak to you too short today because of the news, and Coca cola is the commodity bear market over and you can you say for commodity e M the boat, the sea is rising, the boats will lift. I wait, um,

wait to be with you on tom um. Now. I think that as far as commodity prices, the concern, if history is any guide, what it really shows is that you typically tend to get a big bust and then you know, some sort of an echo bubble after that. But but for many years, possibly even a decade or two, commodity prices after a bus tend to sort of trade in a very broad range. So therefore the price of oil I think about the barrel is the is the price range were likely to be for the foreseeable future.

And in fact, uh, there is one expert dimension to this commodity rarely currently that that the liquidity in China has now found its way into many commodities, and that's partly leading to these bubble like conditions back in some commodity market places. I mean in China, some of these commodity prices that are up a lot of the rampant speculation going on without demand having actually recovered that much.

So I would say that we have to really trade with caution here, given the fact that the huge bounce you've seen in commodities off the lows is being really led by rampant speculation in China. I know that you cautioned against it talking about emerging markets as a block, so forgive me for for doing so here. But if we see the disintegration of these multilateral trade deals, if we see a movement towards more bilateral trade deals, if the US becomes more inwardly focused, more inward looking, what

does that mean for again, forgive me emerging markets? Yeah, I think that you know, we are in an era of the globalization, and in that era, I think that the old emerging market model of exporting your way to prosperity is under serious threat because historically, if you looked at the progress of emerging markets, many of them, particularly in East Asia founded u found their way to prosperity

by exporting manufactured goods to the developers. That's a model which was started by Japan and followed right through by Korea, Taiwan up to China. I think that model is under very serious threat now because that was done in an error of globalization where global trade was booming, capital flows were UH financing a lot of the trade, and you also had free movement of people between borders, or at

least free a movement of people. I think that all those three traditional aspects of globalization are now in reverse, and this model of exporting a way to prosperities under serious threat. I was in Mexico earlier this week, and you know, the feeling there in Mexico is like the fifty first state just being kicked out of the Union. So I think that this is a very serious uh disruption of the traditional emerging market growth model. A few weeks back, we had Neil Ferguson on the show and

he said, these are not the nineteen thirties. There the parallel doesn't work when when you're when you're looking a history, for example, is there an analog? Yeah, I mean, I'd say that is the most extreme example of what of

what happened. But you know, but generally, if you look at the history of development, what we've seen is that you have long ways of globalization followed by equally long ways of deglobalization, and deglobalization doesn't have to be of the sinister variety that we saw in the nineteen thirties, but something just sort of grows, uh like over time. So I'd say that history has parallels, but maybe not the exact parallel of what we're seeing just now. But

are you seeing a different deglobalization with the president elect? Yeah, I think that the trend seems to be accelerating, right, So that's what we've seen this year. In fact, in the post crisis world, deglobalization was already creeping in sort of slump and trade flows, capital flows even the slowdown, and immigration flows, all those things were already in play

even before this year. Now, this year, uh, the political mood has really sort of shown itself to be in favor of the globalization, whether it's Brexit or what happened here in the US a month ago. So I'd say that the train seems to be on the accelerating and uh, I don't see that that train sort of shifting in the fourth table future here, let me ask the question everybody wants to ask him, want to toss you off the show when's the next book come out? Listen? I

just I just came out with this book. Uh, and luckily it's sort of you know, found a good reception. So I'd rather write on this as you know well that writing books is a bit of a tall order. So I'm just happy to sort of think about the theories and this, as I said, the globalizations on the

big aspects that I've covered in this book. But to be the most important thing, really, what I've tried to do in this new book of mine is to basically speak about why is the global economy today just not being able to grow at the rate that it was last decade or or the tacade before that. So for me, I've spent a lot of time on on that team. And then okay, if that is the world, what is the new math for economic success? And then which countries I'd like you to do well or not? You're in

the new math? Richard Charmoan, thank you so much. I make a joke of it, but he puts so much work into the books. But hey, two thousand seventeens in new year, maybe we'll see something year. Mr Scharman is with Morgan Stanley his books are truly definitive on emerging market. 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. I'm Bloomberg Radio. Ye. Who you put your trust in? Matters? Investors have put their trust and independent registered investment advisors to the two and four trillion dollars. Why Learn more at find your Independent Advisor dot com