There are no 100% Embargoes, Tannebaum Says

The numbers out of Europe today, the economic confidence numbers the best in like two decades that data are out of Europe has been good the US as well. What about em SO the e s I said, SI record highs, p M, IT record highs. All. The news out of em has been pretty solid too. I think the global economies are entering two thousand and eight on a reasonably strong footing Q and I think it will be quite strong um. The one area of concern I have at

this stage is China. Some sense that China's economy is already starting to turn this big recovery clup swing that we saw in already starting to perhaps lose a bit of steam, and I think that could be the big story that starts to emerge over the course of theition. How do you get a lead on what's happening in China? What are the data points that give you that picture? Neil Well, the first thing is you ignore the official data because the official data are going to tell you

that the economy is remarkably stable, strong and stable. Where if you've heard that before six and a half percents of that um We have our own activity proxy. Other companies have their own activity proxies to we use it. We built it from the bottom up. Gives us a real time measure of growth. Has been pretty good at tracking the cycle too. That currently puts growth at about five year on year, but that's already dying from over

six percent about six months ago. Our senses, it gets below five pretty quickly by perhaps the middle of this year, and perhaps as low as four by the end of the year. So now the story was we got towards year end last year and the leaders kind of pumped up the economy for the annual get together to make things look good, and then they took the foot off the accelerators we came towards new year. Is that the

reality that's part of the story. There are other things going on to Obviously, there was a bit of before the Party Congress, there's a bit of policy stimulus um. There's been a pollution cracked down in the northeast of the country. That's weighing on the industrial sector. We've had new property controls that's weighing on the construction and real

estate sectors. The big story, though, the really big thing, is that potential growth trend growth in China has slowed, and we've got to get get away from the idea that China is an economy that grows at six or seven percent annually. That's just you know, it's much richer now. It's got these big structural problems over capacity, over investment. The norm for growth is going to be about three or four percent over the over the next ten years.

So before we all get barish about China, tell me, do they still have the capacity just to put the foot down on the accelerator again, push up the numbers, make everything seem pretty and we all have to back off once more. They do. But the point is that you get less banged for your back each time you do that. And what's more, each time you do that, all you're gonna do is add to this ever increase in debt pile too. I think they're becoming increasingly aware

of this. Don't think you'll stop them doing it this time around either. I think it probably will lose some policy later this year, but that comes with a bigger debt part, It comes with financial risks, and ultimately I think perhaps a much harder adjustment at some point. Further down the line is e m study in economics, in finance, in investment? Is it the same methods, models and reaction functions?

Is ten years ago of globalization? I say this with the loss of Peter Sutherland, who had so much to do with the Uruguay round to Louisium was it was a great loss for international economics. But are we using the same models that the late Peter Sutherland uh new at the Uruguay round or is it? Is it a whole calculus now? I think it's a it's a different calculus. I mean, if you if you wind back twenty years, it was all about trade. It's all about the Washington contents.

Is liberalization trade liberalization? Get your fiscal house? Is there a consensus now? But I think there's a consensus insofar as that's been good and developed growth obviously, and so deniverate growth and development. That's that's good, But much more emphasis now I think goes on the financial side and

should go on the financial side. This financial liberalization opening up to capital flows, huge capital inflows can create big destate like okay, but as China, just to go to China and Mr mccross there right now, are they playing you know with the proverbial fair deal. I mean Secretary Clinton I've always given credit for for really emphasizing the word fair deal within her political economics are the is the financial flows into China and a fair is it

a fair set? So in terms of financial flows, the capsitual account is pretty much closed, so you can't really get money in and out of China in the same way that you can in any other em More, indeed, the US on the trade side, obviously there are big issues the currencies managed. The government picks winners, it backs them with subsidies. UM So no, I don't think I think you know this. This is where the administration, Um,

I think it has something to fall back on. There is there is a sense in which I don't think that the playing off field is level. It's almost in that medieval that's the wrong word. But how can China be a global player? How can e M have stability word of the weekend, How can they have stability if they don't allow one of the legs of the tripod to work, which is capital flows. I mean at this stage that that leg of the tripod is absolutely critical.

Keeping that capital capital account closes absolutely critical because what happens if you open it up Suddenly Chinese residents can put their money elsewhere. Sudden you get this big downward pressure I think on the remmbee big caps and outflows, and that's what could ultimately I think precipitate financial problems of financial stress in China. So so the caps that account being closed at the moment is absolutely critical to Beijing. And that's why we're not going to get any liberalization

on meaningful liberalization anytime soon. Well, Neil Tom's question is based on the idea that they're ready even to acquire any kind of global leadership role. It doesn't appear to me that they are. Do they want want at this point they'll see any signs that they actually want one. I think they do in certain areas, So one belt

one road. They're interested in kind of creating markets for particularly Chinese industries that have had this legacy of over capacity, is a big steel construction finding markets for that stuff to go off into. They're interested in the classic trade deals um, and that's what we see with the our CEP to recept the Chinese version of TPP. Essentially it's

all about trade liberalization opening up markets for China. I think they're less interested in kind of broader global leadership of the salt sort that we would think say the US or Europe taking on in terms of these classic trade deals. Classic trade deal to me is given get are they ready to give? Well, this is the question

that they're they're they're ready to get. The The market access is about market access in China, particularly on the services side, that I think that Europe in particular is very interesting in and that's where we've seen a bit more reticence on on behalf of the Chinese at this stage. No Shameron always quite a can't choun with you. I'm capital he can Almos Chief American Emerging Markets Economists, No sharing alongside Tom Kine, Jonathan Farrell with this, Dan Tannebon

p WC. Daniel Tannebaum is truly one of the nation's experts on the minutia of sanctions. Dan, I want you to go bigger to where we are on multilateral versus unilateral trade and sanctions and just international discussions. Peter Sutherland, the late Great Peter Sutherland dying this weekend, UH was so much part of GAT and gap a gat rather in the Uruguay round as a multilateral days a day over for the moment, it seems that the multilateral days are hanging on by a thread. Um. You know, there's

still multilateral efforts at Bay. It's kind of the next steps of sanctions seem to be less multilateral, and I think you know, you saw it towards the end of the summer into the fall, a number of good multilateral actions with respect to North Korea, but some of the next steps that have been recommended by Ambassador Hailey in the u n UM have generally fallen flat. This has included efforts to designate Chinese flag vessels that were sending

petroleum shipments to North Korea. The U n has generally shot that down. We haven't talked about that. So let's look there their boats out there in the stormy winter Pacific and the Chinese are ascending. Is it illegal oil? So it's not there are it's not illegal entirely. There have been certain restrictions that were in place around North Korea UM oil shipments, but they're not a hundred percent embargoes, So you know. On Friday, actually China tightened energy supply

limits to North Korea. Beijing said it with limit exports of crude oil and refined petroleum to the North. Previous restrictions didn't apply to crude oil, which makes up the bulk of China's energy options that are sent to North Korea. So this is very very new. It only went into

effect on Friday. UM. What you'll likely hear out of the Trump administration though, is to the Chinese government, especially with some of the tensions and the Ciffiest deals that have fallen short or Ciffius approvals that have fallen short, is prove it proved that the sanctions are actually being enforced effectively. So this is a critical question. When you hear the media and the politicians talk about your world, is it informed depends on who is talking about it.

I think again, it's very easy to look at sanctions and say we're not doing business with X country. But as you know, it's a lot more nuanced than that. It's a lot more complicated in terms of what you can and cannot do. I mean, the short answer, and this is the easiest talking points, is there's no hundred percent embargo on anyone. There's always something that's carved out. Now whether everyone needs to know about this, MANU leave it to people like me who dwell over all this

stuff is a different issue. But it's complicated. It's gotten more complicated. It used to be if you look at Cuba, we're not doing business with Cuba. That was largely true. Today there's no program that's quite akin to that. Just under a week ago we were at the Razia Group.

We did the whole radio program from there with em Brema, the founder in chief of the Arasia Group, and in their report for risk this year, they talked about global institutions and the erosion of global institutions, and you mentioned the u N. What is the United States is placed in the u N right now? And how do they get the other permanent VITA holding members, the likes of China, Russia, France and the UK to come along with them. I think at the moment, we're perceived as just another voice

at the table rather than a leading voice. I think there's been enough discussions where we've been potentially perceived to

be on the wrong side of the issue. Um it's degrading our position in the u N. The challenge especially and if you look at North Korea, where the UN has been somewhat helpful in trying to create arbitrage and restricting North Korean business is the next step that we have is more larger institutions, especially those in China, being directly targeted under sanctions for supporting North Korea should that be found to be true, and that next step is

something that would it would be difficult to be multi lateral on because this is evident that one nation might be bringing to the Security Council that kind of shows up another Security Council member. Some people would say that the likes of China and Russia have been a problem in terms of getting them on side of the United States. That predates the this administration, It predates the Obama administration as well. Was it a new approach needed? Was the

Nicki Haley approach to the u N needed. I've always been a fan of status quo if everything was generally fine, I think we seem to be drawing further and further away from our allies on the Security councilor at least on some sort of multi e lateral views. The stage that we're at now where there was talking the u N of designating Chinese flag vessels that fell short. There's been talked for months of designating larger Chinese banks that are found to be supporting North Korean a material way.

That hasn't happened yet. So there is to the many Trump supporters that we have listening, there are a lot of people listening to support parts are all of the presidents let's call it general agenda. Can can you state that we will see action on trade or is that just a fiction of of a part of America that wants certitude and action and solution to what they see is decades of grievance. I think you have begun to

see action. So the Ciffiest Approval process, the quasi secretive government body that is designed to vet certain deals that have an impact on national security. In the technology space, there has been a number of trans actions that have been turned down in Ciphius of Chinese acquisition of US companies being in technology or financial services. So I think as a mechanism Siphius is being used more and more to deny trade where historically you wouldn't see some of

these deals turned down. And I got this John this weekend and a question or was it the vet's third visit to the vet this weekend? Is when you when you look at what the president can do? Can he do in the Dantan Obama world? More executive orders? The important thing to note is executive orders in the sanctions space aren't new through the Obama and the Bush administration. Executive orders have been used historically to drive sanctions agendas forward.

Um sanctions have generally not been legislated like they had with cats A last summer, which was actually the first time that Congress is an accurate sanction. So that's where you get rid of cats in your house. Well, so now CATS is I don't have the I can't even remember the acronym because but CATS is essentially congres sational driven economic sanctions on on North Korea, on Iran, on Russia, versus sanctions that were generated by the Treasury and State

departments signed off by the executive through executive order. There is more that can be done through executive order, but that's more of the same. It Actually Obama and Trump and Bush have always used executive order to drive these types of issues. Dan Tanneba PwC Principles anxious lead fantastic And to Dan's point, Tom using Cyphius, the Committee on Foreign Investment just to hold up deals, just to hold them up. Never mind say you can't have this deal,

just hold them up, keep holding them up. It makes it so difficult to do business with the United States that foreign companies might think twice. And I think that might be the message that Cyfius is trying to change. In particular, I mean one that I can think of where I think the three times they applied for approval and just kept letting the deadline lapse. Okay, d Dan Tu, thank you so much. With p WC, she has been

a shining voice of market economics. She's had the huge advantage of being out of the Midwest, based in Chicago, working over the years for Bank One, mazer Rod Dance Wank Economics, and we are honored that this is her first interview with Grant Thornton with someone with a bow tie It's just very good that your first interview was

someone with a bow tie. It is dance congratulations. What I what I find fascinating knowing of Grant Thornton back to I believe it was, and the merger with Thornton Baker, and you know what Grant Thornton does, which is tactical audit and tax work. So the first question McGuire has got to ask you, Grant Thornton, is this tax bill are we going to make it to April fift What did you tell the good people of Grant Thornton about

the reality of their tax legislation. Well, actually, Grant Thornton is also a consulting firm and doing a lot of work with middle market. But yes, the tax bill is clearly important to them, and they've got an incredible group that does policy work and they know Washington like the back of their hand. So I mean, the tax bill is complicated. Unfortunately, there's a lot of glitches that need

to be ironed out because it was done so quickly. Um, it is good news, as we've seen already for Wall Street. The question is how will the loopholes be dealt with? And that is something that Congress still has to deal with going forward as well, and it's one of the uncertainties going forward is what are the unintended consequences of some of the loopholes and how will they close them?

Will they be able to close them before we get to actually enacting the tax package and people taking advantage of Let me bring in John Pharaoh l l C here to help out the CEO of Hindsight Capital. Um, Diane's always going to catch up with you. We're gonna have a really murky earning season begin with the banks on Friday. They're gonna have some one off charges and they're gonna try and give us some guidance as well.

When you fold that into the kind of things you just said, how much longer is it going to take to really get a clear review of how this is going to play out? Well, actually think it's going to be a lot longer. We are seeing your already baked into the cake, of course, is that companies are going to do while off this. We've seen the one off bonuses that some companies have announced as they're going to

get an advantage from this tax bill. But you made a very good point, and that is many people weren't expecting that they also had to take the charges for repatriation. Even though they don't have to repatriate their profits overnight, those charges are going to be coming right away, and I think that's a very important thing that you know, many people hadn't really counted on, and so now we're

seeing that going. That's going to come through, as you said, as a murky season as people try to tease out what the tax bill is, what's real, and where the profits really are. The good news is we are in a synchronous growth global economy, and in fact we know these are essentially corporate tax cuts. This is going to be an advantage for the corporate sector. The interesting thing

as well is the unintended consequences. China is already offered to way taxes if you locate there, although you have to use all your profits and reinvest them the way they say, which I wonder how many firms will actually do that, big big point. Another question I've got for you are caught up with Gary con the President's chief economic advisor, formerly of Government Sanks. Of course, Gary thinks that the market and economists are underestimated and the capex

boost this tax bill could bring. This year. Um, do you share that view? Well, Capex has already come back, and so the good news is it's hard to tease out what effects the bill actually has itself. It will move some Capex boward, and we've added a little bit to growth because of the tax cuts, but the real impact has already begun because we've had synchronous growth and we're running on our cylinders. We've seen durable goods already pick up in the second half of the year. We've

seen the manufacturing sector already pick up. So that all happen before the tax bill, and we'll be building on that momentum as we move forward. And I think that's the really important part is fundamentally, it's not just a tax cut that people are making decisions on. They're making decisions on underlying economic fundamentals are better now? Well are they?

Can you can you tell that the clients of Grant Thornton that the President's right, we can have a sustain three percent GDP is that the outcome and the victory lap ultimately for the fire and fury of this president.

Three percent sustained is very difficult to get um And in fact, in the fourth quarter we think we're going to get about two point four percent, which is the year at two and a quarter percent or so for the year or so I sustained three percent is very hard to do until unless you actually change the equation on productivity growth, and any productivity growth we get off of corporate tax reform will take years to actually um sort of materialize. We're coming off of very low levels,

and we've got against us the demographics. We've got very little labor force growth, and curbs on immigration has further limited that. So we're going to have a good year. What we worry about is having a good year at the expense of future years, because these tax cuts will not pay for themselves and in fact will be higher interest rates down the road because of the rising debt and deficit. Don Swank, now the chief economist at Grant Thornton.

Eric Freeman writes these terse terse notes always rich with content for US Bank and Eric, Uh, You've got a single sentence, which I think is really important in capturing the fear that so many have as we go up, up, up, melt up. Where are we nine four? I'm still not used to that number. Quote. We are paying close attention to whether risk assets can withstand to sell off in some of the leaders and strongest performers. That to me really captures it is we all understand they're these high flyers.

What does the rest of the market do if the high flyers correct? Yeah, that imagery I think is important. Tom. It's almost like a relay race. Where can technology, for example, hand the baton off to um industrials or you know, telecom services are real estate obviously very small sectors. But I think the key thing, and then a lot of people are talking about it is will there be a

rotation out of growth and into value? And while we still think that information technology has some solid fundamental underpinnings, particularly in the back of the tax changes, that there needs to be some leadership stability, if you want, other words, there needs to be the ability for that baton to be handed off from some of these stronger parts of the domestic and international likely markets to some of the

areas that have lagged. So should that occur, which we think it will, that just adds to the again a strengthening base, if you will, of the global equity picture. Well, you know, I was wondering about some specific companies and I know you don't cover specific companies. But the reason I bring them up is because you talk about the ones that are in the headlines. We know about those. But I just give you an example. Musics now, musics

vu z I. Yeah, musics now. If you go to wait a minute, that's a Lisa Brandow with on on six letters and the symbols. The symbol is vu z I. It's got fifty employees. It's based in Rochester, New York.

And guess what they help make. In fact, they do make the glasses that Amazon is UH offering and revealing at the Consumer Electronics Show that allow you to wear these glasses not just for fun than artificial intelligence, but for industrial uses, imagined glasses that would be able to instantly give you the inventory level in a particular factory,

for example, or a warehouse. And so my question to you is how do you go about finding these eric in a world that's dominated, as Tom would say, by these bigger stocks like you know, uh, Facebook or Alphabet or song but views the music. I mean, you're talking about a stock now that is already up, you know another nine percent today was up eighteen percent on Friday. I think number one it being the product of Tom and my home region of Upstate New York, and it's

it's certainly an interesting area. Um So Tom and I haven't have a fun affinity for anything that comes out of that that region, but see I had to look for that one. The uh, you know, it's an important point them. I think, you know, one of the areas that you touched on in your comments is companies like

that that are focused on increasing and improved productivity. Those sort of second and third derivative plays that we we call them at US Bank that are not as mainstream, but certainly you know, speak to a part of the economy that needs help and that is offsetting what I know. You know, Dian's wanted a really nice job of covering it in the segment before me. Just that absence of

productivity growth. Some argument cyclical, some arguments it's structural. But companies like this helps still avoid that basically make us produce stuff more quickly, and so that you know, that speaks to some of the factors that are really driven the global equity market have been growth factors. So companies that are again helping to make up some of that gap. The fact that we're aging as as a society. As you know, some of the ingenuity starts to slow down.

You have a wave of companies like this that can certainly add to add earning. So those second and third derivative plays we think are the next leg higher in the sequity market. Whether this is the US banking course, we're looking western an upstate New York. Here we say good morning to all of you. I mentioned earlier, Clinton New York and Colgate cold, but that's nothing compared to

Clarkson University. Paul Travers of Musics is out of Canon ATC and Clarkson, which is somewhere south of the North Pole, and he gets cold up there. To say the least, let me talk about another bit of creative destruction or innovation in Western New York, and that is the death of Kodak. I mean, Eric, you and I grew up with all of that. Do you worry about obsolescence among

the top one under toor topies? We do? We think, Tom, it's uh, it's certainly a as information travels quickly, and you think about just how quickly things like retail trends can shift, and even things you had a nice segment before about mobile payments and what that means for the future. Obviously, firms like ours US Bank, we think a lot about the banking industry, what what the industry looks like out five, ten,

fifteen years. So that idea of obsolescences is certainly an important one, and clearly you have some leadership in certain sectors that seemed to be driving the obsolescence of of other of other companies. But again paying attention to that rate of change, if you will, that first and second derivatives are really really important. One of our themes here, folks, is going to be the technology overlay. Literally interviewed the interview and everything that we do. Eric Freeman, thank you

so much with u BS Wealth Management. Love what he said there about the reaction at the high flyers come in. 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 S