Tariffs Only Address a Short Term Goal, Rose Says

it was skirmish, Tom right. The skirmish is to get people's attention so that they can be really attentive at the bargaining table. And I my hope and prayer is that that is where the end game is going. Is what are we going to be negotiating over? I think the media is poorly explaining it. To use John's numbers, hundred bill in but then there's a tariff on that. If it's five percent or one percent or three percent

or ten could it really be twenty five percent? Are we are we going back to days of twenty five tariffs? I don't think we'll ever revisit the smooth holidays where it's tariff on tariffs, and you get these huge percentages and and you know when you get a lot of small percentagers together, that's real money we're talking about. And so so I think that's kind of escalation. We've learned the lessons from in history, and everyone has learned them

even in high school. But one of the things that we need to keep in mind is we the negotiating strategy is you've got to get the attention of the other side. And and the five agenda of China is bio medicine, robotics, high tech stuff and and the fact that we even touch on their on their prize possessions brings their attention to the table. And I think that's

the strategy of the administration going forward. And Bill, just to backdrop to all of this, the U s economy looking rock solid, the Chinese economy looking a little bit self done. So to me about what's happening there, thank you. I think one of the things that we keep we forget is first, China's half the size of the US. And number two, China's growth is based upon massive over investment.

The essentially, when when you think about the investment to GDP ratios in China, it's multiples of what the U s has. Now that adds to their productivity. Yes, it gives them the great advantage going forward, but it's deprived the citizens of a lot of consumption. And and the She, the She administration recognizes that they have to address consumption

in China. And so so that's where I think the US has got some advantages because we know that they need more consumptions goods and services high tech UH services of the sort of five G type type environment. And and quite frankly, in that race, in the five G world race, China and the US are starting at the same place in the starting line. There's no advantage U has has over them. In fact, I think the Chinese

advantages over US. So so they but the domestic market is where the US wants to go, and our domestic market is where the Chinese want to go with their five G services. And now the game is how do we set the rules of trade going forward? So Bill, I want to sort of explore what this means for

the macro backdrop. In early the world economy is on the rocks, some people predicting a recession, and the response globally was as follows, the FED completely capitulated on its plans to raise interest rates that year multiple times, and the ECB expanded QWI and did all kinds of things. The Chinese but the foot to the pedal right to the floor to boost credit as well. Now we're starting to see those forces reverse. Twenty seventeen was global synchronized growth.

Eighteen looks a bit more fragile, and the things that boosted things through sixteen starting to reverse. Does that concern you a little bit? Bill, Well, what's concerning is the nature of growth right now and going forward, US is going to be the engine of growth for the global economy. Where that's that that myths of synchronized growth we saw before was Europe trying to get a two handle on growth, right I mean, we're talking about the U s and

like being able get three and four handles. The European economy because of the the eurosclerosis that has always had, has never been able to get a two handle or anything better and to sustain a to handle and and and we're seeing evidence that that is not gonna happen yet again. And they can refer back to this subpart Growth Bill. In the time we've got left to do un NAFT. We've got Mexican pace so nearing twenty one. It's been there before, but this has been a real

weakening pay so. Is that part of a collapsed naft to debate or is that just about dragging and central bank divergence elements of both. I think that the NAFTY negotiations has gotten a lot of uncertainty in it because now we start to hear about bilateral deals with Canada

and in Mexico. But I think the key to the to the pay so is, like every other emerging marketing currency, is when the US magnetouer global capital sucks and everything and that all the strengthens, that means that the emerging market currencies are gonna collapse more than the developed market economies because US continues to be the center for capital markets and capital flows. And every entrepreneur out there knows that you're not gonna go to Argentina to the raised capital.

You're gonna come to New York Stock Exchange and lists there. And even as US firms are going to private capital, foreign firms are coming to list more and more in the US. Billy, thank you so much from our Washington vire on one fm. Uh, and of course with the Milk and Institute. Uh, this is a joy. Another exceptionally strong briefing from Foreign Affairs Magazine. Which world are we living in? Is it the world of the Red Sox?

Is the world of Yankees? No, it's certainly not the world of the New York Mets for those that follow baseball. It is the foreign policy world that we live in now. Gideon Roses with us with his new Foreign Affairs Magazine. The essay from Graham Allison with his important book A year Ago Destined for War is stunning. We had the Soviet Union. Thus we had a space race because we were competing with the Soviet Union, and we have the development of what we know is our foreign policy because

we were competing with the Soviet Union. Then there was an interloade. And your whole issue is about the now? What? What is the now? What? Well, so this is a

great question. Over the last couple of years, a lot of the certainties and assumptions that people had on all sides of the spectrum had brought to the debate over American farm policy, the international economy, the future of the global political system had basically been upended by voters in Western countries who have overturned Brexit and UH Trump selection and a bunch of different policies and a bunch of of the rise of populoust nationalism and problems in the

liberal international order. Basically, what that means is all bets are off going forward, and everybody is riled up and things are very bull But the question of what actually is driving all the turbulence and where things will go is unknown. And so what we did is we tried to scope out the future by offering six potential narratives of what is the turmoil and change that we're living in,

where is it going? And the argument here is some of the people say it's just the return of great power politics, like Graham Allison and we have a wonderful place by Steve Cotkin about look what you thought of as the liberal international order was just the American moment of great power which we organized in our way. UH. Others saying no, all the critics of the American order in the post war system have been wrong in the past, This too shall pass. Others saying no, it's tribalism the

dominant now. Amy Chua from Yale has a good argument no. Others say Marx was actually not wrong, but just early what did you expect from capitalism? You know, the richer getting richer, the poorer getting screwed, and everybody's rising up in protests. So it's an attempt to scope out what is the future that we're living in, and we know there's the real answer right now is we don't no, And that's why this is an interesting moment in general. What's so interesting were the week that you and I

have had? It really the two weeks we've had. Yeah, is we're sort of jumping from moment to moment. Well, let's hope the future is not socialism, Gideon. Well, you look at Corbin and uh, you know Sanders and a bunch of people in the US. Uh, there are ideas. Everybody seems to agree that the old conxisting ideas haven't worked, and people are searching for new ideas, but no one has good new ideas yet. So we hope that the mistakes don't get repeats. Socialism suddenly isn't a new idea,

it's a felt experiment. But I would have thought smooth holly and and international tariffs and a trade war were old ideas that we rejected as well, and so both right and left seemed to be going back to the bad old ideas of the past rather than coming up with new ones for the twenty one century. Do you really think we're going back towards smooth holy question. So the big question on trade policy now is is trade policy is going to follow the Iran model or the

Korean model. A year ago, the Trump administration made the entire world thing that it was on the brink of a nuclear war in Korea, and it turns out that they were responding to a real problem just by generating a lot of hoopla and then walked away with a photo op and no actual deal and some headlines. If that ultimately is what happens on trade, then you'll end up with a compromise, just like you ended up with

the compromising Korea. It's fine on Iran, however, he actually lived up to his promises, is starting to rip up the Iran deal and causing real problems. And so we just don't know whether these guys are screwing around with the mobile trading system for short term by that oural advantage to achieve a point, or are they actually really going to risk destroying the whole edifice. But do you think it's helpful using the words smoot holy when the

average tariff I think was about forty percent. I mean, the average tariff right now is mid single single, mid digits. The whole point is where we're going. And what made smooth Holly bad was not just the size, it was the theory behind it. And yes, what we're doing now is very small and absolute terms, but it's the same damn theory. But the theory is behind it right now. And as you know, Giddon is the end goal. The end game is that ultimately they want the Chinese to

to open up. They want to tried barry us down, don't they. Yes, But here's the question, do they Well, actually you say you know what they want, We don't actually know what they want because a lot of it about it, haven't they what? I've been quite clear about what they want. They want the Chinese to open up, they want the tried barriers down. Yes, but that's a short term goal. The question is cannot be achieved without

destroying the entire long term system. The US has a major power in the system that has refused to use because it didn't want to use its power to extract bilateral rents from everybody else. It wanted to have a

system that actually worked. What this administration is doing, whether it's dispute resolution procedures of the w t O, whether it's the trade things, whether it's trying to bring in national security, what they're basically doing is using every bit of leverage the United States can to extract gains from everybody else. And that is maybe a short term tactic that might work to achieve some pause that have goals for the United States, but it comes at the cost

of the entire system being undermined going forward. Gideon, thank you so much, Gideon Rose. Congratulations. Which world are we living in again? Folks? And you've heard me say this before Foreign Affairs Magazine, and Bill Lee was raving about it earlier with the Milk and Institute. It's kind I'm gonna call it fifteen essays, and it's the kind of thing where you find three or four which are just

jewels that really framed for you the debate. And your three or four essays can be different than John Farrow's, can be different than mine, But the answer is you find a set of ideas in each issue. And John Ferre I know you don't care with your Ronaldo vision, but actually the fonts almost big enough where you can mortals like me can actually read it. Ijsa we glosses tongue. Jonathan. I've never been up there, but I am told you go up past Admiralty Island and it is spectacular and

it's southern Alaska above Vancouver. Juno, Juno, Alaska. Would you like to go? I I yeah, I sort of would. I mean, I don't you know, have any like I don't have to be there tomorrow or anything like that. But very cool, you know, joining us now from Juno, Alaska, PRIAMR with TV Security. Why are you in Juno? Is that where the rate conundrum comes together? It's beautiful here, but you know, I'm here to meet investors a huge macro week with the ft in d cb um, so

investors want to talk. But I have to say it's a very good place. It's light here twenty yeah, I'm actually outside. That's the way it is in the surveillance world for me and John Farrell. The sun comes up early as well, always dark first. We're right, we're done off Argentina there. Well, you look at the volatility of the Argentinian Pasa Mexico out of twenty one and such. I would suggest much of this comes across as druggy yesterday and waiting until the summer of two thousand nineteen

to do anything. But it's really the combination of what we saw from Powell and drag, isn't it It is? Yeah. I think EM is sort of having this one I would say, almost triple Vanny here. So they've had the high reel rate in the US. Uh, then they've had e CB ending QUEI and you know, all the idiots

and credit issues as well. And and the dollar doesn't help because if the dollar continues to strengthen in US rates continue to write, you know, I think money is going to come out of risk cassettes everywhere, and so e M is one of those. Italy was another one. Who knows, you know, what's next. But I think that's the problem with them here. Even the solid fundamental EM economies I think are potentially going to struggle because in a less liquid market, if you don't want to get

out of EM, you sort of sell everything. It's hard to see why the Federal Reserve should back off anytime soon, especially when they telegraphed what they were going to do very very well and from a mile away. And what was the response from Argentina to raise their inflation target, the response from Turkey the president Dwan saying he wanted lower rates the factly help themselves? Have they right now? I think, um, you know e M has to deal

with you know, what do they do without flows? So as as you start getting this risk of outflows picking up, I think they have to start reading interest rates. But it actually hurts the economy. So there is in a in a little bit of a bind. I think with the fact that global queue is ending this and I think that's you know when when you talk about Powell,

I think the FED absolutely wants to keep hiking. From a domestic standpoint, have to look at global spillovers and a financial condition statement e M. At some point it is going to spill over into the US as well. Within this is what inflation adjusted rates do. What is the TV call on what American real rates will do given this massive transatlantic divergence? Right so, I think we're a little bit out of consensus. I am long tenure

real rates. I think US tenure rates above one per cent or a problem even for the domestic economy because if you look at real wages, we've had no real uh, you know, growth in real wages. I think that's the problem. So if mortgage rates rise, um, you know, even if the economy is strong, I'm not sure the consumer can actually keep paying up I a mortgage rate. So we've had a decent rise in real rates. I think at

some point it's it's going to be self limiting. I think one per cent tenure real rates is that level beyond which I think the economy is going to struggle to handle further increases. And we've talked to you about the curve in the past two s tens is now broken down to about thirty six basis points. We just keep grinding lower. And I have a lot of investors and a lot of our listeners will always write and

so it's different this time. It's different. This time. You don't get an economic signal from the curve in the way that you did, say a decade ago, and Change taught to me about the signal you take from the difference between a two year note yield and a ten year yield of thirty six basis points, right, So I think there are some special factors this time around the fact that the U S surgeries is largely issuing in

the front end. That's a big difference. Um. The other thing is that it's all the pension demand, so there aren't some idios and radic factors. But I would say still the curve is the single best indicator that if you looked at any one market indicator, the best indicator of a recession has been the curve um and and and then I would just say that it's the markets sort of lack of conviction around how much can the

FED go above neutral and what exactly is neutral. So I think what was interesting was even though Draggy actually potentially increase for guidance, the FACT took a lot of that for guidance out. So what the market saying is sure the fact can hide two more times this year, a couple more next year. Beyond that, if the bet continues to sort of jam on the brakes, I think the economy is going to slow down. Therefore the curve

will continue to flatten. So that's why I think there is a macro segnal here the curve gets to zero, I think we're working at the market sting don't go further. What does all this mean for something? Is is fundamental is real estate in the mortgage rate because I and I get the curve dynamics and the ten years not going to move that much. But does it mean that mortgage rates stay lower than we normally think? I think lower on a historical basis, but I do think mortgage

spreads are going to widen. The FED is letting the mortgage portfolio run off, so that is going to put some put question on mortgage rate. Mortgage rates have already this in a pretty big amount, so I think. And along with the salt thing, It's still too early to tell what does soul due to home prices um, but that plus higher morge dates, I think it starts becoming a pretty big headwind for the housing market pretty much.

Gregg cant Shall with thee T Security's head of Global Interest from June to Alaska, Meeting investors or interview with The Day on Corporate Finance, on corporate Transactions, Craig Moffatt, Moffatt Nathanson. We were honored that Michael Nathanson would brief us forty eight hours ago, and Craig Moffatt does as well. Craig lex in the Ft today had a price to EBADT seventeen times for this transaction. Comcast is trading at seven times uh ead uh. This trade goes at seventeen

times right now. Are either of these parties going to overpay for Fox? Well, it's a great question, Tom, and I'll tell you you know what what The Comcast stock is has rebounded a bit in the last few days. I think in part because people are at least gratified that they didn't open with too crazy a bit to start this process. Um. But look, let's face it, Comcast stock has been select over the last couple of months, and it's precisely because of that valuation disparity, and you

talked about it. Investors are frustrated it. Why didn't they just buy back their own stock? If they're going to lever up, why didn't they bibar stock, which would have been vastly more creative than this transaction within your wonderful six patient note this morning, we protect the copyright folks of our client. Our guests were not going to send it out to you call Monfatt, Nathanson, Craig, you made very clear that the way this is a creative is

to eat but uh an operating income growth. It's revenue growth, yes, but it's really about two billion dollars synergies and keeping the operating income line going. How does Mr Roberts do that if he wins? Well, look, let's first to put a finer point on it. The biggest reason it's a creative is because borrowing costs, although they've come up a little bit, are still so low, and so almost anything is a creative if you're willing to really lever your

balance sheet. And again that's why I say, while it's a creative, it would have been vastly more creative to lever up and buy back stock if that's what you wanted to do because of that big valuation disparity. Now that said, what do you do with this asset? I think what what Brian Roberts and Comcast is looking at is. Remember this is in the context of also having made a bit for the global distribution assets of Sky, which

are connected but also somewhat separate. I think he sees them both as necessary but insufficient, independently um pieces of a strategy that that is about trying to global with distribution and then dramatically ramping up proprietary content production in the hope that you can create a model very much like Netflix, where you produce your own content in your own studio and distribute it to your customers via your

own distribution platform. To do that, you need a lot of scale, And I think that's what he's looking at with both of these pieces. Craig I was looking at the numbers and uh, Comcast would become the second most indebted non financial company in the US if it goes through with this transaction, boosting its debt from sixty billion

dollars to a hundred and sixty billion dollars. It just raises a question, especially at a time when the media outlook is so uncertain, what's the likelihood that Comcast gets downgraded substantially and ends up as an over leveraged company that has to split up and is struggling. Well, it's it's certainly a legitimate risk. You know. It's funny I downgraded a T and T um on the Time Warner transaction a couple of days ago for exactly that same reason.

Now there is a pretty stark difference here. A T and T is shrinking revenues and it's shrinking. But uh, even after you add um time Warner and and in that case you're levering to a similar leverage point of a close to four times, even if if you counted the right way at a T and T UM. But again, it's a shrinking asset. So that's a much more precarious

situation than Comcast. But look, Comcast would be in an at least in a similar conversation of taking a business that is somewhat cyclical and now much more exposed to advertising, so more cyclical um. And therefore obviously cyclical businesses tend to warrant lower levels of leverage because you have to

be able to manage through recessions UM. But also um, where you have a lot of secular challenges and uncertainties about the outlook of the core business, which in this case, the core business for Comcast would no longer be the cable business. It would just as much be a media business. And that's a business with real question mark. I guess that the sort of flipway of asking this is Comcast leadership has said that they will pay down debt pretty quickly.

Do you buy that? Yeah? I do. Um, the Comcast is not a company that historically has been comfortable with extremely high levels of debt, and they have levered up in the past to make acquisitions. UM it's a business that generates a lot of cash and while they do pay a dividend again throughout the contrast to a T and T, the challenge for a T and T is that the dividend is so high that it gives them

a lot less flexibility to pay down debt. In the early years after the transaction, Comcast would at least have more cash flow to pay down debt. And that's why I think on balance UM you probably could persuade the rating agencies that a temporary trip to four times leverage day UM would be just that it would be temporary, and that with a clear path to using those cash for to to pay down debt, you could probably maintain even after a downgrade, maintain that grade D. We've got

ten more questions, we can't do them right now. Craig Moffatt, look forward to speaking to you soon, and again thank you to Mr Moffatt and Michael Nathanson Moffatt Nathanson for their perspective in conversation this week on this historic transaction. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before

the podcast. You can always catch us worldwide. I'm Bloomberg Radio