Xi Has Amassed So Much Power, CFR's Economy Says

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course, on the Bloomberg The Big Story then worldwide, the President's men heading to Beijing, top officials from the administration arriving for trade talks as China says it's not willing to back down on key issues, and investors are left asking what is the minimum condition for success of this visit. We're joined now by Steven Stanley,

Amherst Pierpont Securities chief Economists. So Stephen, let's put that question to you. What is the minimum condition for success at this visit? Good morning. I think if they if they get back home and they haven't started like a an elean an escalation of the trade war, I'd probably be pretty happy. I don't really expect much out of this. That's how low the bar is. Stephen, Well, I just I mean, as you said, the team is, uh, it's kind of an unique team of individuals who aren't really

unnecessarily on the same page. Um and so I think, you know, I'm not sure that the idea here was to go over there and negotiate some huge agreement. I think they're just trying to, uh, kind of set the stage for the next, the next steps of this process. Respected positions on trade seemed to have hardened, but on other issues there things to be agreements. In fact, progress on the issue with say, let's talk about North Korea. That could be a positive, and it could be a

positive when when trade starts getting discussed as well. Do you see those two issues folded into one another? Oh? Absolutely, And and President Trump has been pretty explicit about that, and uh, not only with China but with others, where he said, We're willing to give you a break on trade if you help us out in other areas. What's your time horizon for how long it's going to take to negotiate this This is a big visit it by any mates, it's an a pull and visit. But how

long would its tight two really sold? Well, it's gonna be months, I think before they figure out kind of what the deal is with these tariffs. And I think these are discussions that are gonna be going on for years. Within this is the Steven Stanley view of the strength of our economy. So let's start over on the right hand. Started the equation net exports, which has to do with China. We need more export growth. Isn't that the amorous Pierponts

solution to all this? Well? Certainly? Yeah. I mean we're at a stage in the business cycle where the economy is pretty strong. Domestic demand is strong and probably stronger than the overall global economy. So that we import German BMW's you know, picked the vehicle from Germany volks Vegazin. Isn't that a sign of a strong America? Sure? Sure? And I think you know, certainly the the administration or the President in particular, wants to get the trade deficit

down and very understandable, um thought. But in this stage of the business cycle, typically the trade depsit is widening. Okay, so we want to celebrate the imports coming in. I guess we all get that. Then the solution is exports. How do you boost the gradient of exports? Right? Well, I think you know, one thing is you have to make the US a a favorable place to do business, and certainly I think the tax reform help that in some in some aspects um, and you have to have

companies that can compete around the world. And then I think what the administration would say is, then you have to make sure that the rules of trade are fair. And I think that's that's why they're going after China and the way that they are is to try to

even the playing field in their minds. How important is the FX market as a backstrop tool of this, Well, you know, it's interesting the dollar has been weakening for the most part over the last year or two, at a time when you would expect it to be strengthening. If you're looking at the traditional things that I, as an economist would look at, you're looking at rates, um, you're looking at relative growth. Uh. Those with those things

would suggest that dollars should have been strengthening. It has turned recently, and it'll be interesting to see if that proved to be a sustained move. And John, I want to interrupt here. We have two tweets from the President which implied a third tweet. We now have the third tweet four minutes ago, which seems to have an ending to it. These tweets are so lengthy, John, I'm not going to read them all. It just takes too long and too much valuable time from Stephen Stanley the President

and three lengthy John. Here's the key phrase, carefully written tweets. Uh goes over this news to Mr Giuliani last night, about Mr Cohen and about Ms Daniels Uh as well. So we have three tweets out. I'll read the final sentence, John, Money from the campaign or campaign contributions played no role in this transaction. But it doesn't read. I will state this not as an editorial comment, but just observing the Bloomberg terminal, it doesn't read as a Trump tweet. There's

a typical Trump layout tweet. It looks very formable. I think that's to take away from a lot of people reading these tweets this morning. But I would also say this just really isn't on wall streets radar, and it's absolutely But I think my point is we finally have the third tweet I think of three tweets. I could be wrong. Let's get to something that is on wall streets, right, John,

the effects market today some significant dollar weakness stunt. It's come back through after a couple of weeks a dollar strength Stephen. A lot of people thought a Federal Reserved decision would be a total non event because there was no news conference but the Federal Reserve. But being quite clear about a symmetrical inflation target for less, can you talk us through what a symmetrical inflation target is as

opposed to just targeting two sure? Well, I think traditionally people have viewed a two percent inflation target as being kind of lopsided. Anything above to the tolerance was very low. So if it's one and a half, that's okay, But if it's two and a half, that's a real problem for the FED. And what the FED has based sickly telling us is that they view themselves as having some

room on either side of two percent. So we've been running below two percent now for the most part throughout this expansion, um, and the FED is wanted to get up to two percent. And what they're telling us is that, hey, look, if we get to two point one, we're not hitting the panic button right away. Um. And I think the key there is partly is where you think the trend

is headed. So if we get to to one or to two two, or even to two three, and the FED thinks that we're going to level off, there that's probably fine. If there were at two and at quarter and they think we're headed to two and a half or maybe even to three, that becomes a problem. So here's the important question I think for for many people in the market, and the reason we saw that we could done it off the back of a lot of this, that the Federal Reserve just endorse in inflation over shoot.

I think they did. I think they said and in a number of individuals have have made that very clear that hey, look we've run below two percent for years, it's fine if we run above two percent for a while. Which takes us to Europe where we have the inflation print this morning, Tom Case, I mean East is important. We have to think about that East. The last year, of course, was in a pro easter. This tion more

inflation in the United Kingdom as well. Right, Yes, so it's a thief and we knew where easter was and the economists still got it dead wrong. So the inflation story in Europe is just not picking up. Stephen. I just want to how much of a problem this is for President Racky. Well, in many ways Europe has been it felt has felt like Europe has been behind the

US in the cycle by a couple of years. Maybe you see it in kind of where they are in terms of monetary policy, and you also see that, I think in terms of where the economy is in certain ways you've seen stronger growth in Europe over the last year, but where they're still having trouble getting inflation to move up toward US target. And hey, that's exactly where the FED was a few years ago. Stevens Stanley Amherst pypon Securities Chief Economists. Great to have us with have you

with us on the program. It is without question the publishing event of the season on China. Beyond timely here with Secretary re minutions, trip to the daily back and forth of what some would say as a mercantile Washington, a mercantile Trump dealing with President G, this new, more definitive, more entrenched leader of China. There is no one who can brief us on this on what she calls the

Third Revolution. That Elizabeth Economy of the Council on Foreign Relations, Elizabeth congratulations on two d and fifty pages of update on President G. What was the biggest surprise of President G and putting together the Third Revolution? I think that the biggest surprise really was just how transformative he's managed to be in just five short years. You know, when he came in, people this is going to be a

reform are along the lines of Dungho Ping. We're going to see more reform and opening up the low profile foreign policy and in fact, piece you know, move the country a hundred and eighty degrees in the opposite direction, you know, reasserting the Communist Party into the economy, into society, much more ambitious foreign policy, much more more repressive and authoritarian at home. So he's really the Third Revolution really is all about the game changing nature. She didn't tan Uh.

Secretary Minution no doubt has a copy of your book well foot noted and marked on the plane going out when he's stopping the fist fights between Lawrence Cudlow and Peter Navarro. If that's the case, how would you brief the secretary on the relationship of Beijing to the major Pacific RIM cities like Shanghai and Hong Kong. What's that

new dynamic? I think, you know, for Beijing has always been the center of political power, and you know Shanghai, Hong Kong or the economics centers I think underseaging Ping, Beijing has only become stronger U. And we see Beijing, you know, making a number of moves, for example, in this relationship with Hong Kong to limit the autonomy of Hong Kong and an essence saying, you know, we know that you're a gateway to China, but we're not going to need you, uh in that respect for very much longer.

And you've got to get yourselves in line politically. I think the Shijunking, you know, is not a huge fan of the go go economic growth. Uh that done Shoking represented, that's embodied in Shanghai. He's got a different view. Well what does that different view and what does it mean for these Western business locations in the third the Third Revolution? Well, I think, you know, again reinserting the party into the state,

don't enterprises, you know, telling joint ventures. You know, we want to have our party representatives on your board reviewing your investment decisions. Uh, you know, the entire push for the status control of Chinese technology made in China. All of these things are still wins for multinationals who had hoped for a more open uh you know, market opening.

You know, less I t theft. They hope to see progress on some of these major institutional types of changes that are needed, and they're not seeing them if you're just joining us, Elizabeth, Economy, the Third Revolution, Jping in the New Chinese State mustery fifty pages terrific briefing. Ian Bremer raves about it, and far more importantly, I think Dr Bremer would agree with me. Orville Shell says simple, simply a well researched book, which is shell isk for

she nailed it, Elizabeth. When you did this, you've got to fold in the new military might of China. You've got to fold in the fears that Peter Navarro has about the economics of China as well. How transparent, how knowledgeable is our true intelligence of the Chinese government system? Do we actually know what they're doing? I think in summers spects we're pretty knowledgeable. We have a pretty good sense for you know, how China's developing its military. It's

new technologies, it's new modes of operation. The really significant advances that they've made under Shi Jinping. He's a big supporter of the Chinese military, and you know said when he first came to power, you know, I'm going to develop a people's liberation army that's capable of fighting and winning wars. Uh. So, you know they've they've been a real beneficiary under sheet. You know, I think where we're less good certainly is understanding the internal dynamics at the

very top level. How do you know the seven members and the committity berro get along. You know, what are the real differences of opinion around Chi jin Ping? He's just amassed so much power that it's really tough to tell, you know, where there might be some dissenting views. Does that make this economic soire that we're in right now nothing more than a show? He won't be there right well, I think it doesn't, you know, mean that it's just

going to be a show. The Chinese has said, you know, we're not going to negotiate, you know, under these threats. They pitched their position when their top economic guy, Leo Hook came to the United States back at the end of February UM and they've said, you know, we're gonna stand tough. You know, this trade war isn't going to impact us that much. We're strong and resilient. So that their negotiating stance they've learned from Trump, right there playing

the brinksmanship at this point. But I think, look, they've got their own domestic economic problems. You know, she didn't things trying to de leverage. They want to know, address poverty, they want to address the environment. They've got a lot of things on their dockets. They're not they don't have a big appetite for a big trade war. But I definitely think there's room. But really quietly, folks, only thirty seventy pages into the Third Revolution, Elizabeth, you have that

single sentence that's timeless. Their number one driving force is to keep people employed and to keep rising incomes, and that regard it's no different than the first the Second Revolution, is it, Well, there's no different than the Second Revolution. The first Revolution wasn't all that exact concerned about right. He was more concerned about political correctness. But definitely, uh, dun Shoping, that was his major objective. I think Hijenping just has a different vision of how to get there

than Dune Shopping. Did you know? Dun Shopping wanted to unleash the capitalist and entrepreneurial spirit of the Chinese people. I have corruption flourished. It was bad, but it's not the end of the world inequality grew. Okay, hi Jinping has a different idea. No corruption, you know, address inequality and if it cost the Chinese economy a little bit, okay, address right now. Are listeners who say, look, the human

rights is appalling. We don't really know the protests. Uh, this is a country that really we don't have anything in common with in terms of culture and values, and we should take a rigid stance. What do you say

to those people? I think, um, You know, pushing back against China when it comes to human rights is essential because it's not just about what China is doing on the home front and places like Shinjong into bed and even more broadly with their new surveillance systems and the penetration of the Communist Party into every detail of the

people's lives. But it's that they're trying to export an element of this autocracy abroad, their training officials in Africa and Latin America and Southeast Asia on how to manage populations, on how to do propaganda, and they're trying to rewrite the rules of the game globally. You know, it's one of the things that to look at the book is you know, changing the way that the human rights regime operated in the United Nations. Okay, but critically this is

really really important. Then how do we respond to this If we have an administration that says essentially we're bilateral or maybe even unilateral, that we've got a State Department, at least with Mr Tillerson that was removed, how do we affect our policy? How do we pivot or show our flag if the Chinese are more asserted of with their culture. Absolutely, and I think it's a big challenge for us right now. We have to rely on people like Frankly, you know, Nikki Halley in the United Nations.

She really does wave the flag, you know, very vigorously on issues of human rights when it comes to China. Uh, you know, we have to hold uh, you know, work with our allies who also care a lot about these issues. And the Europeans have stepped up significantly on issues of human rights as well. So I think there are others out there in the international community who seemed to be stepping into the breach. Of course, nobody can speak with as loud and as important to voices the United States.

So um, you know, it would be great if President Trump would begin to understand the value of human rights, uh, and what that means in terms of promoting America's vision and strengths. Congratulations Elizabeth Economy, the Third Revolutions, she's in Ping and the New Chinese State without question, the New musty. Uh. Very it's very terse, folks. It's a very direct book of great benefit about really focused on Mr g and and with a lot of perspective that I haven't seen before.

Elizabeth Economy, After the River Runs Black, after wonderful books on energy, the Third Revolution, j Ping and the New Chinese State. I'll feature that out on Twitter, uh today. Well, the Federal Reserve kept its benchmark interest rate unchanged yesterday, but acknowledged that inflation is beginning to creep higher. Well with that, in that increase mean increases in interest rates and when would they come? Well here to help us answer this question is that Kate Warren, the Edward Jones

Investments Chief market strategist. She joins us here in our eleven three oh studios. Kate, thanks very much for being here. What did you take away from yesterday's Federal Reserve sort of report? I think the main takeaway is that they're not very concerned with the uptick in inflation that we've seen that they sort of emphasized that they wanted to see a balance around their two percent targets, so they didn't highlight that increasing inflation might be more interest rate increases.

They didn't give any kind of signal about how many they'll do in the future. And uh, I think it was actually a relatively reassuring and if anything, uh, slightly less hawkish uh set of a you know, announcement than I would have expected. But we're still going to twenty five basis points in June. Yes, I think that was quite clear. I think they telegraphed that quite clearly before

this as well as in the statement. You are hardwired to a retail audience that has a monthly statement that comes in and they see bond prices down and yields up. How many months in a row of that grind do we need until all of a sudden it's a bond bear market for bond America. Well, I think that, uh, it doesn't take very many months because most most investors

are pretty sensitive to down prices on their statement. And what's so good with your work at Ellase where you know the history is three months in a row of bond prices down on statements is different. It's seven percent

nominal than it is three nominal. Yes, I think the other thing is there's a flip side to it, which is many investors have been waiting for higher interest rates, and they're actually a little bit pleased to see the fact that on a two year treasury you're now getting two and a half percent, and that actually looks pretty good compared to other things out there in the marketplace. There's another side to this, Okay, So then when they see all the advertisements for certificate is a deposit offering

two percent for whatever many years? Uh, do they give you a call and say, tell us what products you have that can get us this kind of interest rate? Well, we do offer CD. So we are I mean you're getting those calls. Yeah, we're getting those calls. People are saying, hey, this looks attractive, especially compared to the fact that many rates at the bank are still near zero. What's a five year CD not roughly. I don't have any, but the answers hired than it was. You could see that

my hands on radio tenC. Weans that's what we're doing. What you are you can pull out the paper and look at the yield. I'm going to show you the ads. They are full page ads in newspaper, in the in the journal, and a lot of talking about how much that you can get and it says, you know, two point x percent and that's a lot of money. Well, when you think about it, with inflation still at two percent,

at least you're getting a positive yield. And let's meld your economics in now with this, this real world yield dynamic for the public, and that is, okay, rates higher, but every single person listening is going to go, I get it. But inflation is going up to So where's the real yield go? What is the Edward D. Jones bat on a larger inflation adjusted yield? Is it going to happen? We think inflation actually stays pretty contained because

of all the extraordinarily high competition in marketplaces. Companies keep saying they're not able to raise prices, uh and in many cases their input costs are going up. We're seeing disruptive competition in markets. Think Amazon. But high real full faith and credit yield, high real corporate yield, quality corporate bond,

You're gonna see a real yield. Yes, we think that it's not high is not exactly the term idea better And and so I'm saying, I think there's lots of dynamics, including global growth and the fact we're seeing more products services from more places that keep prices moving up very slowly. And therefore you do get we don't see a dramatic increase in long term rates or short term rates even as the FED raisers rates. And that's why, yes, you

get a better real yild. You're saying, say shorter on the on the yield curve on the duration in order to not get hit by the rising rates. Do your customers have a lot of cash to do all the things you're describing? They have some cash. They stayed pretty fully invested, so they're not where does all the new money come from? What do they have to sell in

order to execute? Um? I think it's that they still have cash, uh, you know, sitting in savings accounts or in in cash accounts in other places that they didn't really think of investment money and now looks more tractic to invest their money. Really, And even with the idea that interest rates will continue to increase, you just said they're going to increase in June Basis points, why not wait and get a higher interest rate? Why do anything, let's say between now and the end of the summer. Well,

I'd say it depends on what you're doing. We'd still be saying putting money, put money inequities, stay money in inequities, and keep some in the short term fixed income accounts, because what you're trying to get is a better return than what you've gotten recently. Thank you so much, but it's greatly, greatly appreciated. It has been far too long since I harass Shannon Cross of Cross Research, who writes brilliant, detailed reports on all these technological wonders we talk about

every day. Her acuity is off the chart. We're thrilled the Shannon Cross will join us today on a company shifting from growth to valuenus is Dennis Gartman said yesterday, maybe it will be a widows and orphan stock someday, and that would be Fortress Cook. Shannon, good morning, is Apple? Is it a widows and orphan stock now or is it going to be one someday? Well, I think what

what Apple has done? And it's nice to speak with you again, By the way, Um, what what Apple has done is is basically moved into and trying to move into this concept of recurring revenue stability. You know, we've talked about it for years about the ecosystem and the

value that's there. But you know, they really have put together a very very solid platform and so you know over time, you know, especially with an increasing dividend yield which weeks or wealth increasing divid in payment we should say, because it depends on what stock price is at. You know, it's one of those that I think can be I don't know if widows and children sort of makes it sound really boring, but you know, I think I would

go as stable and predictable. Have you've done as some of the parts evaluations some of your partners in crime, I think as Gene Monster years ago, Piper Jeffrey have done as some of the parts analysis of the Apple

his cross research wandered through that exercise. We haven't because we don't when you look at of the parts and and honestly, I mean going back twenty years ago when I was on you know, Wall Street at a big bank, and and we did some of the parts and came up with huge valuations that never came to fruition because

you have to be willing to separate the company. And I don't think Apple, you know, once step they're much stronger as you know, a whole Uh, Shannon, I want to understand a little bit about Apple and it's pricing, because there were a lot of comments about the iPhone ten and how it was miss priced. Do you believe it was miss priced? You know, I think that it was priced appropriately for the units that they are selling.

I think the street, though, kind of got it wrong in terms of thinking about you know, there was this huge addressable market at over a thousand dollars. I think for Apple, they want to have product at all, you know, at many different levels along the price line, and so you know, they go down below four hundred and they obviously go above a thousand now and so you know, I think that they were testing a new price point. We now know sort of the elasticity of demand is.

And frankly, the company was very happy because they noted that the iPhone ten was the best seller during every week during the quarter all the way through March, so you know, there's a lot of demand for it. I think what it indicated to us is that there was a fair amount of demand for the iPhone seven and perhaps not as much for the iPhone eight. Shannon, does it also indicate that Wall Street analysis of Apple is basically flawed. I'm not sure it's float. I think people

get pretty you know, there there's a hype factor around it. Um. You know, our numbers were always, frankly a little bit below where where people were at, and they kind of came in closer to us UM. But you know, again, it's such a stable company, was such cash flow that, you know, investors I think see through some of the hype that comes out of the cell side on the name. I mean, I look Shannon at the company, and part

of it comes down, as you say, recurring revenue. I take real offense when the media particularly goes breathlessly, oh dollars or four hundred dollars or whatever a cell phone. Nobody I know is doing that. Everybody signs up for this monthly plan racket. That's a source of recurring revenue, isn't it? It is, um, you know, from from a carrier perspective, clearly that's been going on for a long time.

Apple now has the upgrade program. You know, this concept of device is a service is not um you neque to Apple alone. I mean it obviously started with smartphones and that with the carriers, but all of the companies we cover are starting to talk more and more. Where there's PCs, if it's data centerspend everything is going to irradible Well, they would like it to go to irradible kind of pricing because again, it provides predictable, stable revenue. Is that true? That was where I knew you were

going to go there, Shannon. But is there evidence that Apple has more persistent cash flows and dividend growth and share buy back because we're spending forty five ten cents for one of the eight iPhones we're paying for. I think absolutely. And I think that the other thing that happens is when you go to un monthly see again, whether it's Apple or others, people are seeing it much easier to upsell the customer because you know, really you're

paying forty dollars, it's easy, you miss spoke Shannon. You mean to upsell the teenager, Yeah, upsell the teenager. Frankly, you know it's yes, it's easier for me. They can get a better phone. I mean upsell basically, upsell everybody that really isn't paying for the whole the whole planet? Uh is Shannon? When is Tom King going to wake up with Apple earpod earbuds in his ears? Good questions? You know, I have to say, net of the I for what it's worth, nett of the iPhone. I think

the air pods are the best product that apples. You're sc rip up the scripts here. Tell people. Tell people why and why Tom is going to be wearing one care in a couple of months. I ski with them, I ride my bike was them. I can do conference calls with them on a tram and an airport. They're they're a really really good product. They're not cheap, and you have to make sure you don't lose them. Wait if I get your what do you call them? Your poet? Your pos? Does that mean I have to work out?

It means you have to return phone calls? I guess. But you music, they're they're great. Um, I mean they just work really really well and they work well with my phone too. And am I watch and now I sound like I'm I'm, you know, selling Apple products, but

they are really good. But channel But here's the point, and you make it very anecdotally, is that they have created this system where they've got your ears, your wrist, and your eyes and I don't even want to think about other parts of your anatomy that they might end up, you know, taking over. But Apple has managed to do something that I can't imagine any other company at least

currently being able to do. Yeah, it's it's interesting. You know, they really are again very sort of comprehensive in terms of how we work with it, you know, and think about it like wearables are now the size of a Fortune three company, which you know they weren't a few years ago. So it's not just me. I mean there's a lot of people who are who are buying the

incremental products that Apple provides. What's your target? Please? Our target is two hundred UM And you know, I think it's going to be a nice, uh nice year for Apple sort of slow and steady upward, especially with the Sherry purchase support of Apple. Are one so headed to two? Can I want to ask one of one quick question here?

Apple Watch? Was this a footnote that the Apple Watches the best selling watch in the world, Shannon, I don't know if it's a footnote, but I think it's it's indicative of you know, I think Apple over time wants at whether if their's or somebody else, is everybody to have a device on their watch on their wrist that tracks your health and that helps you communicate. And I think the Apple Watch gets you part of the way they're obviously they're f d A and other issues that

they have to get through from more of the hard perspective. Shannon, Thank you so much. Shannon Cross Cross, researcher on Apple over Jefferies, Mr. Litveck. Previous conviction also reversed on appeal, serving a two year prison sentence. 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 Keene before the podcast. You can

always catch us worldwide. I'm Bloomberg Radio