U.S. Facing Diplomacy Problem, Shiller Says

with you. I'm just wondering what your tanning clients at the moment. As you see the big numbers, the big price action of the last twenty four hours, how do you keep them calm? Well? Think about it. When the trade talks first surfaced in March, we all thought that this would be a little bit of posturing and this would blow over, and the numbers were not too large.

But now things have escalated and we have to recognize that people are trying to connect the dots and figure out will this create a headwind two earnings, Will this create some damage to capital spending? As companies try to think through what it means. And it's early, we don't know yet, but you can see why that is indeed causing markets to step back a bit, and we expect this volatility to continue. But that doesn't mean you get

out of stocks. It means you are careful. It means that with active management, we can try to position our portfolios appropriately to focus on companies that could be less affective. But I do caution that we know that the broad based impact if psychology is affected in a negative way, you know, could could, could be real. But again, the companies are in very good shape today. The economy is strong, so we're not in any way suggesting clients change their allocations.

Had to digest news flow when you don't know what the news is, and there were several reports about restrictions the Chinese investments, and the Treasury Secretary went out onto Twitter um yesterday morning and said the statement that will come out will not be specific to China, but to all countries that are trying to steal our technology. Then the Trade Adviser Petter Navarro over at the White House, he gave an interview to see NBC and he said

the followings. The whole idea that we're putting investment restrictions on the world, please discount that there's no plans to impose investment restrictions on any countries that are interfering in any way with our country. That is not the plan. Um, Kathy, how do you know what's going on? If I can interrupt you? And what was amazing about what you just said is moments later the White House came back and back pedaled from what Mr Navarro said, I mean moments

after he made those comments. So it's very difficult Tom, just to have a clue what is going on? Was going to learn this study. Yeah, I do think that the market has accepted that there is, let's gently say, conflicting comments coming out of Washington, and that's been going on for some time. This is not new, and therefore there may have been a little more complacency because there have been all these conflicting statements. But as I said before, what we do see now is that there is some

actual damage starting to come from these tariffs. And that's that's the realities. What is the actual financial impact of some of these decisions that are being made. Well, let's be clear here, the real financial impact not so much here in the anounted States, but abroad, Chinese equities, the

Shankai composite into a bear market. We know how sensitive the administration in China is to financial markets, and I just wonder whether the Chinese actually had the stomach to really take on a trade to um Kathy, do you see the Chinese having the stomach to do that. Yeah, And and as you know, the Chinese have talked about

other things that they can do besides trade wars. In particular, they can halt licenses, they can slow down imports, they can do all sorts of things at the docks, and and there's and of course the Chinese have currency issues, and they have the fact that they owned many US treasuries as well, So they do have UM multiple levers to pull. But but some of them could be quite consequential. And we aren't expecting there to be dramatic change because of that, but certainly UM it is. It is tough

for all parties involved. Remember, the global economy has grown in recent decades because of an improvement in free global trade, So to hinder that becomes a very big global issue, not just for the two countries we're talking about here, very much so, but maybe more of a problem for the Chinese. UM I failed to see why the Chinese

would interfere with the docks. I failed to see why the Chinese would get involved in in factories on the mainland because they are so vulnerable to the direction of capital flows and the last thing that they want to do is start spooking potential investment in the country. I mean, what's the incentive for them to do that? Kathy, Well, I don't think it's much of incentive, but it's I do think there's a there has to be some way to get back and say we are not going to

just take whatever comes our way. So I do think you're seeing a lot more discussions between other countries about how they can work together. And as you know, China has many other trading partners, so there's lots of discussions going on behind the scenes. We have to recognize that.

So you say, stays, I was to risk our sense hearing out of states, we do say stay exposed and um, as you know, because earnings have been good on valuations that have actually come down, right, the SMPS trading around sixteen times earnings now, which is certainly not far from average. So even though these these clouds are here, we would certainly not want our clients to get out of stock. Remember when we used to rotate, we'd rotate. We're rotating into this? Are we going to get back to rotating?

So rotating is something that people have talked about for years, as you said, and actually yesterday you saw we did actually see the fank stocks lose some lump stem steam. And the question is did they rotate into something else? And doesn't look that way. It looks like there was just a little sell off yesterday. That's one day. I mean like over three months or over eight months, do we still rotate? Yeah? I can't remember. It isn't it is, remember, and part of its part of the reason why not

is because everything is so interconnected. It's very rare now that you have one industry, your sector that people think is immune to whatever buffeting factors. But think the split and technology kind of made a whole lot of sense up until yesterday, Kathy on the chip stocks come under pressure because of what may or may not happen with China and the internet companies outperform um many of those

companies with really strong secular growth stories. Did we just throw everything count yesterday and just a broad based risk averse day? I think yesterday everybody throw everything out. But also it's always normal to sell your winners when things get jittery, so you would expect some of the stocks that have done the best to sell off the most when there's a brash sell off. Does it raise any questions about evaluations in certain pockets of the equity market?

It does, although you know, you know, the nice thing about some of the stocks that have done well is that the valuations are not that out of line. Whether it's an Apple or a Facebook, they're you know, given how strong the earnings are. That's a it's a different story perhaps for a Netflix. Yeah. And the corporate bid as well, just as a final question, the corporate bid for many of these companies now out of the market

because we're so close to learning season. How critical do you think that was yesterday going going into the next couple of weeks. There's always technical factors, So I'm not going to try to guess on which one way we'd like you to. I do think the bigger issue now though, the trade issue is the bigger one by far, because this is this is significant, This is really throwing a wrench and what everything has driven been driven by in

reaching decades. You predict there will be more Harley Davidson's I I'm not going to predict that, but I do think that's what people are going to be looking for and looking very carefully. Um. And if you if, if you're a company, and you have any of these things on the march, and I would indeed expect to see some more of them. Yes, Kathy Fisher, thank you so

much for greatly appreciate it, really really well timed. You're we bring in our next guest, and Nobel Laurea, Yeah, and Yale Professor of Economics, Robert Shillip professor always quite can't shot with you a student of economic history, not just me, but you still and I guess we always will be. Um, what would you compare the current era in history too? Any parallels? You can't parallel everything, you know,

there's so many things going on in one time. But one thing that comes to my mind is that's the year of the smooth Holly tariff. President Hoover signed it into It was a big increase in tariffs, and at launched a trade war. By nine thirty two, uh said hit There. Hoover was was arguing that there wouldn't be a trade war but he gave it up, and you know what, those tariffs came down. I think that we learned a lesson from Smooth Holly. We have to remember

it again. We have to read history. So Smooth Holly, I remember the average tariff being something around across all US. I mean, professor, We're nowhere near to that, are we. Well we've come down and see. The thing that happened is uh that that tariff began to be viewed as a sign of grotesque lack of enlightenment. That you punish your name. Beggar thy neighbor was the term. They'll fight back, and you know it was part of the process that

brought us World War two. It generated such a conflictual and hostile atmosphere, uh that it wasn't a good idea. Admittedly it was a higher tariff. Uh. Well, you know, we don't know where Trump would like to go, but I think he's probably scaling it down in terms of the public reaction and will continue to. The starting point is different, as is the goal. Um. The ultimate goal is to get the Chinese remove the barriers to entry.

How successful are we likely to be and that ambition, Well, we have an existing structure called the World Trade Organization, and the US under President Obama filed complaints with the w t O and that was in process, but it didn't fix the problem. So we have a big problem. Admittedly that the Trump is right about of international diplomacy, that the World Trade Organization doesn't have enough teeth to

uh to fix the problem. But I don't know, you know, the experiment that we're going through now, which what strikes me about it is the tone is so angry that I'm I don't think that Americans in the long run want this kind of angry international arena. We we could go for hours here, John, I thought those questions were great. But John fare and I interviewed David blanch Flower of Dartmouth the other day, and I want you to follow

up with that. Professor blanche Flowers said, we're not fully employed. Every politician, not every most politicians, most market people tell us we are fully employed. You've got a piece of chalk in your hand at Yale and your lecturing. Are we fully employed? Well, we have a lot of people who have left the labor for us, I suppose. But see, unemployment is rather hard to define because it's a matter of intention. If you've left the labor for us, and

I consider yourself retired. That's not unemployed. But what is What is your real feeling about it? Maybe you left and retired early because it didn't look good. I think there's a certain fuzzy He may be right that it's not as strong and as good as it appears through the national statistics. When we look at this, and to bring it back to John's observation of history, where is this nation after the election? If we assume Mr Trump is one term, maybees to term. Who am I to say?

But is President Trump in his movement of populism? Is it a one off or does it endure? Well? That is an important question. I'm gonna focus that in too. Look at his tax cuts, notably the corporate profit tax cut. UH brought the top statutory rate down from That's a huge tax cuts. So I want to know is that going to last? Is it going to be reversed by subsequent governments? That is the big question when you're looking at valuations in the market. The market has bought into

these are permanent cuts. My nothing is permitive, of course, but my guess is that this is a cut that will last even if Trump and the Republicans lose their control that they now have. Uh I will bet that we won't see it. Going back on Bob Shoulder, thank you so much. Professor of Economics University and of course a price taker at Stockholm where also wherever they do the mill mile pro Robert Schulder of Yel. It is

a good time to speak to David Goldman. That can be about derivative mathematics and debt Defeatman, or it can be about China. He is a student of China. He takes a long view. He is of course writing in Asia Times and with Macro Strategy LLC. David Goldman, wonderful to catch up with you again. And one of your latest essays you talk about how you need to speak

to those opposite you. You use the example of scientists in World War Two, where we took the German scientists, including Werner von bron Over to make things go in science in America. We're not speaking to China, are are we?

What will the price President Trump pays China at this point believes that the United States, in the person of Peter the Borrow, for example, wants to stop China from realizing it's economic conditions, and this it considers a repeat of the opium war demands of they will hunker down. The problem that Trump addresses, which is real, is that we're losing our technological edge. The solution to it is not to try to stop China from developing its technolog

school edge, because we can't. The solution is to do much better than they can. And my first proposal to the administration is organized a systematic brain drain. Pick off China's best talents, get them to the United States working for us, because that's where the preponderance of highly educated tech professionals is going to come from. That's what we did with Brexit. We saw Brexit, we said brain John

Farrell over to America. It was a brain who did whom the favor there is, David, I hope you've got my back here. I do hope you have um. The technology transfer is dues the issues around intellectual property. The President has a point here, doesn't he David m oh Absolutely he does. China now pays more for I P than any other country in the world billion dollars a year that paid virtually nothing ten years ago, probably should

be three or four times that. But even if trying to paid top dollar for everything they took from this instead of stealing from and paying for others. We still have the problem that China will eventually leap frog us if we remain staging. And the problem is our rate of innovation, particularly in anything to do with manufacturing, has come to a whole. Were very good at acts, but we're not very good at manufacturing. That's all gone overseas.

And unless we reverse snap, as the President says, we're in big trouble. But we're not going to do that by preventing, for example, wet from buying plow conscious, don't us have trash program to produce their own skips, which is what they're doing right now. Blah the way Huahwe now has an unlimited budget from the Chinese government to produce substitutes. It will be more expensive, you'll be you'll be creating in ifficial dual supply chains. Yeah, that's bad

for profitability, it's bad for world economy. But China will do it. The trick is for us to leap fraud China turn some of their industries into the equivalent of eight track tape players by creating new much so David,

the Chinese brazenly unveiling the made in China goals. And I just wonder whether the United States can get Europe and the rest of the world on site to really sort of break down what the Chinese are doing, how they're subsidizing it, the barriers to entry that they'll put around that effort as well, and whether the world acting

together can really stop that from happening. Well, you can't stop the Chinese from using the Chinese economic models to trying to advance their industry, but the weakness of the Chinese model as you put vast amounts of social resources into existing technologies. Our trick, our advantage is innovation. We want to create new technologies. For example, uh, twenty years from now, we're not going to be paying ten billion

dollars to build the fabrication plan for semi conductors. There will be different physical processies which we reduce the cost by eight. We should have a Manhattan Project program to replace the existing chip pad technologies. Let the tiny is build massive chip plants, then go in and do something entirely new and bankrupt. And that's what Basebil we did to rush it during the Cold War. Can we incentivize

manufacturing investment in America. Can we use your Global Wall Street, David Goldman and tax credits and investments and to keep the investment here to create American jobs. Well, sure we can. I mean, we'd it and they're During the regular administration, we were spending about one point through one point four percent of GDP on fundamental research sponsored by the federal government.

There was a public private partnership where DARPA or other government agencies NASA would fund the basic research and then companies would commercialized that. That's what we've got lasers, uh inexpensive and fast, microchips, lap panel displays virtually everything that goes into the different economy. Then now we're spending roughly half that amount lower the to GDP and the president doesn't even have a scient advisor in the Whitehouse. Well, yes,

we've done it before I was there in the regular administration. Then, David, not enough time, tod, Let's do it again. David Gouldvin with Asia Weekly writing there, greatly appreciated on some interesting ways to engage with China. Jane Fowley with US at Rubble Bank in London, thrilled that she could be with us this morning as we look at the market turn green on the screen. Is current mentioned? But within that, Jane Fowley is foreign exchange is litmus paper. What is

the dollar dynamics right now? What is the dollar bet that is out there? Well, you know, I'm still adolable, and I think if we look at the performance of the dollar, so it's not about February, I think we can see it's it's that performed almost every market. It's that performed that G ten. It's that performed all of Asia, all of Latin and almost all in Eastern Europe too. It's just the Ukrainian currency hitut has that performed it. So we're looking at a very very strong dollar, and

I think there's two real reasons for that. First of all, we have the Federal Reserve of because it's been tightened and interest rated at a time when much of the rest of the the G ten central banks have been coming out and asserting that they're done credential, so you have interest rate differentials. And then, of course you have that spark in this capital outflow from emerging markets back into de turn back into to the US. The US dollar and the environment that we have right now with

pay attention is only enforcing that risk of version. We are hearing from different shops some bold calls and currency movements which are almost all strong dollar and weaker other thing including yen. Some calls out from one ten out in one twenty. Do you have the same baldness at Rebble Bank? Not? On On the end, I think the dollar en, if you like, is is perhaps a little bit tougher in this environment where we have the dollar

at performing. But generally speaking, you know, I would say that it is the the Japanese end that is the more tried and tested safe haven. So in the sort of environment that you might see with with tradables, then you'd accept the end to strengthen as well. But I think, you know, there's a couple of things which have perhaps undermine them when it comes to the US dollar in

the last few months. The first, of course, with interstruct differentials the start of year, many people thought that the Bank of Japan could be pushing away from this ultra easy policy. This year that's been really pushed back against by the Bank of Japan now. But the other thing is is the Korean situation. Of course, a year ago we were very much in the midst of of a of a crisis there that people were worried about the

missile flying overhead above Japan. That particular threat has has been lessened, and I think that has reduced some of that safe haven demand for the year. But you know, if we look ahead trade tensions, they are something whereby people do fly to safe havens, and I think the yen, you know, will stand relatively firm in this environment despite the interesstruct differentials favoring the US dollar. Jane Fawley, the dollar versus the Euro, what are your what are your perspective?

What are the chances of the of the dollar going to let's say one oh four, one oh five against the Euro in the next let's say a year. Well, I would say that one four, one five is still a long way away. My forecast is a much more

moderate one twelve. Will it get down that far, Well, you know, never say never, but I think, you know, we've got to try and think of the factors that would really undermine the euro, because I think what we have at the moment, we have at the story of dollar strength, um flow coming out of emerging markets back into the dollar. But you know, I think, you know, some of this could have gone back into the euro.

If we were in the fundamentals that really characterized the euro in twenty seventeen, when things look good for the Euro. Growth was better than expect to, the politics were better than expected. But since then we've got this much murkier Euroe. Well, that's where I was going to go, is I mean, you know we've just had the election in Italy and you have a political crisis or at least a political

confrontation that is building in Germany. Um what? And and then of course you know Britain is supposed to have exited the European Union. Uh what? What kind of could you create a scenario on which you could see a big sell off in the in the Europe? Yeah, I mean we've seen it before. Certainly, we just don't need

to go back to the to the Eurozone crisis. So yes, we would have to have real concerns about the cohesion of the system, you know, to really set the euro chumbling intersect differentials will will set your dollar on a course lower. But I think we'd have to be really worrying about some degree of crisis for it to to really accelerate. Now, if we think about what might happen, I mean, you're quite right. You've just pointed out that the weakness of mercle that could be a shock for

the euros. Well, these are things that actually people know about. I mean, it's not I'm just reading off the headlines. There are probably a lot of things we don't even know about. Well, I think when we kept to October, now this is going to be interesting because around about them we have the presentation of the Italian budget. Now, I think that could really release some strains again in

the in the Eurozone. But having come through the prices, having you know, put measures in place to to strengthen their hooking coherent of the system. I'm not really visited visiting that we could have another crisis, but I certainly do think that there will be factors out there which will make the market worried. So I do think that

the euro is going lower against the US dollars. I mean, I mean this brings up more general question from you know, single point estimate on a given currency pair, which is Jane, we've all seen this before, which is a rationalization of weakening em currencies in every step of the way down, well meaning people try to think through what it means and what it means for e m and too often it ends in some form of crisis. Why would we

think otherwise this time? I suppose it's a crisis for whom I mean, certainly if you look at some of the ems, you look at Argentina, yes you have a crisis. Will there be a crisis and Turken in the next five years, maybe there will. So some countries certainly are a little bit more vulnerable than others to crisis, and certainly emerging markets just by the very findition that they are emerging markets are at more more risk. Will the

Euro have another crisis? Well, you know, certainly the European official community doing everything that can to try and avoid that with structural reforms. But clearly, this is a new currency,

this is a new system. It is it is very difficult to bring together so many different countries and push them together with one currency, so that there's going to be cracks and strains, and in the next recession that will highlight that the cracks and stones within the e m U and and certainly you know that's a situation which will certainly undermine the Euro. So I do see going forward in the next tenth that thing, maybe fifty years bounds of euro strength of euro weakness. Jane, Thank

you so much. Jane Fally greatly appreciated from raval Bank with perspective and for an exchange. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple podcast, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio