Rebooting the China Relationship

it's good, it's good. Well this week on the show. Come next week, President elect Joe Biden will become the forty six president of the United States. Our guests this week has worked in senior economic and trade policy roles under five different US presidents and he spent twenty five

years of golden sacks. He'll walk us through with the new administration's policy proposed could mean for both the economy and markets, and as usual, we will finish the episode with our tradition, the craziest thing I saw in markets this week, Sarah, I'll give you one teaser. Uh, once again. My craziest thing in markets is bitcoin related. I know a lot of listeners crave that bitcoin content. And for the craziest thing segment, it's a it's a deep well

to go to. For sure. I'm gonna go ahead and say I did have a listener reach out to me on Twitter, and I have a feeling that your crazy thing might be the same as his. All Right, you might. You may think so. You may think so, but I think I gotta I think it's gonna be a curveball. But before we get to that, let's talk about the the important issues of the day. As Sarah pointed out, our guest this week, UM has one of the most fascinating resumes. I think I've I've ever read uh five

different US presidents from Nixon all the way up to Obama. Sarah, I think the way you define yourself in this day and age is by the company you keep over zoom uh. And I'll give you an example. I read My last zoom call was with a bunch of guys I went to high school with. And it was a Saturday night.

I think a guy's had a few drinks. Maybe one guy fell asleep during the zoom and started snoring and if if if you zoom a talent, but if you know al zoom works as we all do by now, the microphone and the video follows who's ever making the noise. So we'd be trying to talk and catch up and this guy would start snoring, and that he'd dominate and then we don't have to wait for him to get his snore out, and then we start talking about we try to rush it in and then another big storm comes.

Our guest, on the other hand, has a much better zoom uh story for us. He was recently zooming with the Foreign Minister of China, So hopefully no one fell asleep and started snorting snoring on that zoom call. But we're very happy to have him back on the show. He is started mentioned just a really phenomenal interesting career, long time at Goldman Uh, several really interesting white house jobs. He's currently managing director at Taman Advisers. His name is

Bob Hormetts. Bob, welcome back to the show. Thank you very much. It's always a pleasure to be on this show and I enjoy Bloomberg. I particularly enjoyed it when I get up in the morning at six am, come in and drink a triple Lotte Espresso. These days, Bob, we go to expresso to go on Tom Kean show. You needed at least three expressos or three latdays to get up to that level of proficiency and energy that Tom exods, right. I think I'm not I'm still not

ready for Tom after that many lattases. So I don't know. I think I think you need the latte's and a and a and a resume like hers to talk to Tom at that hour, Bob. So, uh, but let's talk about that. I think China, the relationship with China right now, I think is is at such a fascinating point, obviously with the change of the administration. So tell us, you know, tell us about that zoom call. I hope no one

was snoring. But also what's your sense of sort of you know, how Beijing is viewing the relationship with the US as we sort of turned the page on on this White House. Well, there are different levels, uh, in

this relationship. One clearly, President Jijiping has aspirations of Chinese leadership of the global economic order, uh and perhaps political order of the first part of the twenty one century, and really wants China to play a global leadership role and help shape the global political and economic order of this period, and in part over the last several years, because the US has really not played a very proactive role in shaping the order or in supporting alliances or

international institutions, the Chinese have seen the opportunity to take advantage of this opening and to exert leadership. So that's really part one. Part two is that shi Jin Pain has strengths and the role of the Communist Party in China. Uh. He is clearly um one of the most dominant UH personalities and strongest leaders China has had since the revolution in four in the hand of the revolution the Declaration

of the Peoples Republic of China in nine. Uh, you know, there was mouth, there was Don chall Pain, and now we have the very powerful leadership of Shijin Pain. And he wants to not only ensure the strength of his leadership, but the continued strong role of the Communist Party. And three, he is clearly intent on developing China's role as a global technological power of the first order in AI, quantum computing,

five G, any number of things. He feels that China was passed over because of its own internal weakness and because of the West sort of um leaping ahead in the last two industrial revolutions. He wants China to be a leader in the technological revolution of the twenty one century, and that means competing very hard with the United States and putting a lot of money into this competitive effort.

Uh And and there's certainly a greater degree of nationalism in China than before, and a lot of tensions with the US over intellectual property protection, how to deal with businesses, trade secrets, a whole range of things. But the last point is that the Chinese also and this was emphasized by the Foreign Minister h also want to be able to work with the United States in certain areas where there is the potential for collaboration. Certainly there has been

a history of cooperation on medical issues. Chinese doctors work in virtually every hospital in this country. China is working on advanced medicines, including vaccines and therapeutics. China also wants to play a major leadership role on environmental issues. And if the US, now under Biden, wants to regain its leadership on environmental issues, we're gonna have to find some way of working with China, as the Obama administration did.

And then there's the financial area, where if you go back to two thousand and eight, the financial crisis of that era was resolved in large measure because of the cooperation between the United States and China. The People's Bank of China and the FED, the US Treasury in the Chinese Finance Ministry worked very close to the other. So

it's a competitive relationship. We're dealing with a country that is far more competitive and far more areas than the United States has faced at any time during the postwar period, and we have to figure out how we can strengthen our own competitive capabilities if we're going to compete with China, and that I think is one of the things that

President Biden will want to emphasize. So what's the expectation do you feel on how the Biden administration is going to go about walking that line between competition and cooperation. I think of the last four years, and clearly tariffs had effect an effect on the economy and markets. We've heard of stock delistings back and forth and back and forth whether or not those in the US can invest

in Chinese companies. What do you think the Biden administration is going to target here well, I think as the Biden administration's tone each to each China will not be as strident as um the Trump administration's tone. But I do think that Biden and both Republicans and Democrats and the business community in general want a tougher line on China.

And then the United States has displayed before on such things as intellectual property, the rules with respected data privacy, how far earned companies are dealt with a whole range of things for trade secrets of American companies. So I think he's going to uh not revert back to the uh softer period of of the past, but we'll take a harder line. I don't expect an immediate withdrawal of some of the tariffs uh. And I don't expect another grand round of trade negotiations is so called Round two.

I think you will try to get China to comply with the commitments of Round one. But I do think two things will happen. First, the United States has to decide what it really wants from China. Can't just present a whole menu so called Chinese menu uh and say we want you do all these things. We have to figure out, preferably on a bipartisan basis, what the priorities are from our own part point of view. Second, how

we work with our friends and allies. And I think this has been a deficiency over the last several years, that we we have so many trade hassles with our friends and allies using various parts of Trade Act or Trade Act, that they are not in a mood to really work with the United States on China, even though many of our objectives vias of each China are similar

to the objectives of other countries like Germany. For instance, the Chinese book this big robotics company called Puca, and then the Germans wanted to buy a large, comparable, not the same, but comparable Chinese company. Chinese said no, and of course the Germans said, this is not fair, it's

not a level of playing field. So I think that if we're smart, will not only develop our own sets of objectives, to find out what other countries objectives are and figure out where there are ways of working with other countries collectively to convince China to adhere to certain

rules and norms and practices. And that means working with Japan, South Korea, the EU, and countries such as India and others, and related to that, I don't think the Biden administration is going to immediately in part for domestic political reasons. Um they're the Republicans who don't like it, Democrats who don't like it. That is to say, a new t p P or the new t p P M. I don't think Asas is going to come back and join

that right away. But I think there are elements of the current tpp that the United States can support, and the United States can certainly work the other with members of the new t p P on these of each China, on issues where there is common ground, there's a certain common sense of a mutual objective, so we don't have to rejoin it, but we do need to work with

it in the in the near term. In the medium term, I think there'll be a lot of talked about the United States rejoining some kind of t p P like mechanism because it shows cohesion economically in the Pacific, but are also demonstrates that the United States is back as a major player instead of pulling back on the economic front, is collaborating in a more effective way on the economic front.

And the t p P is a vehicle that was designed to do that, and since the United States pulled away from it, we have sort of left that vehicle to others. The Japanese have done a great job of leadership of that, but the United States still needs to play a role in it, Bob. So many of President

Trump's policies were motivated by the trade deficit. Um and here, you know, as he prepares to sort of right off into the sunset China's last trade report, it looks like their exports, UH, their their trade surplus UH is at a record high. I mean, I guess you can, you know, you can look at some of the U S data and see that our exports to China as as a percentage of of exports have have risen significantly. And obviously the virus has just uh really clouded these numbers pretty severely.

But I wonder, you know, when you look back on everything that was done to shrink that trade deficit, I wonder, a, um, will it work eventually once we're through the other side of this virus? And b is that sort of hyper focus on the trade deficit a good idea from the American perspective? Is it sort of our our main problem

or is there you know, is it? Is it kind of overblown that to focus on it so so severely, Well, I would, but this way it would be nice to have a trade relationship with China that is more imbalanced

than currently. But the fact is that trade deficits or surpluses in this case deficits really are The economists will have models that demonstrate this, that there is between what we save and what we spend, because what we if we spend a lot more, the economy grows and we we import more from abroad, and then we have to borrow the money to make up the difference, which is why we're able and why we have to in effect sell more farm bonds, the far the bonds, some more

bonds abroad, and that essentially it means that we are increasingly in debt, not only to our own people, but if we're going to be borrowing more and more money, as we probably have to do to get the economy going and to deal with COVID relief, then we have

to get some money to pay for the treasury. Someone has to buy these treasuries, and it comes from abroad, whether it comes from China which has not been buying a lot of treasuries lately, or other countries like Japan, which has where we're going to have a financial deficit and a trade deficit um if we do not generate a higher level of savings than before, and if we continue to borrow a lot of money as as we

are now. So I'm not particularly worried about um this in the near term, but I think over the medium term, the key point for me is not so much the numbers of the deficit, but are we competitive in the key areas that are the essential twenty one century technologies that are going to be important from our own economic point of view, and other countries like China consider them

important from a Chinese point of view. So it's our competitive strength in these new areas of technology and in manufacturing in general, and in services that are critical to me, not some numerical uh metric, but our competitive strengths. And that's where we have to put more money into science, technology, mathematics, physics, and and all the so called stems to make ourselves

more competitive in a very competitive world. And we're we That means investing in education, That means more training, That means people who have not had the benefit of training and technology get opportunities to do that, which means improving the school system, not just very high quality schools like Wrong Science and Stuyvesant here in New York, but strengthening community college is strengthening schools and getting people energized about

mathematics and physics and science and technology. Because we're competing with a lot of very competitive Chinese. If we want to compete, we have to have competitive workers and researchers and others in the United States. That's the challenge. Then, more to me, more than a given number, Can you break down the thinking on that a little bit more? For us? The idea that you can have a higher deficit and more spending as long as you are competitive,

is it? Is it simply the return on investment? Well, and then it gets complicated because you if you have if you have large deficits for a sustained period of time, you're building up a lot of debt to other countries. Of course, you have to pay that debt. Now at the moment, it's not so hard to do because interest rates on treasuries, which is what foreign investors had to buy a lot of uh that interest rates quite low. When interest rates start going up, as now many predicts

they will with all this borrowing. Then the debt servicing becomes a bigger burden, and it becomes a bigger burden to the federal government because it crowds out other programs, and it means the United States has to in effect pay more to other countries that will led us the money, which is money that's not spent here. So I think what Bob is saying is that my English degree did not really help this nation become more competitive. I should have majored in accounting. I knew it, or or science

or something stem. You know, Bob, you mentioned the fiscal deficit and the federal debt and who's going to buy all these treasuries. I mean, obviously the Federal Reserve is the big the big buyer these days, you know, and sort of the notion of modern monetary theory has really picked up a lot of steam lately. People say, you know, don't don't fret over the debt and the deficit. Um, if you issue your own currency, you can always pay it back, that that sort of thing. Um. I'm guessing

you're not in that that camp. I would assume, well, I, I you know, it's a time issue more than anything, I do think that we need while we're in this UH period of COVID and and a lot of people's lives are being disrupted, a lot of companies are closed and down, and there's a lot of pain the cities and states. And I want to add this as an important underlying underlying point. We're gonna need legislation that helps individuals who are harmed by the shutdown and by COVID.

We're gonna need to help companies of a wide range of companies in fact, but particularly small and medium sized businesses. Many of them are being forced to shut down. We're going to We're gonna also need to help cities and states. They're absorbing a huge amount of the burden, you know, Medicaid and and and the states. This is a very

expensive proposition in these states. Unlike the federal government, the states can't print money, and many of them are forbidden to have deficits by their constitutions, so they are having to lay off people. They're having to cut back on services that in an effect is particularly harmful to low end people. It is in New York and UH and and and and disadvantaged UH socioeconomic groups. So I think, UH, if money needs to be spent, obviously it shouldn't be

spent wisely. But if money needs to be spent now UH to deal with these issues, it should be And I'm all for UH President elect Biden seem to be President Biden coming up with a bold spending program for COVID relief, for state and local governments and for other things. And I'm also of the view that UM infrastructure is critically important. Eisen Our understood this after the World A World War two in the Korean where he launched the

Interstate Highway program. Why did he do this? Obviously we needed new highways, but he wanted to be able to create jobs for people who were coming back from the wars. So we're really a now in a similar situation where

a lot of jobs have been lost. We've got to create new jobs, and we need to deal with people who were hurt by COVID, whose companies are being forced out of business, who are losing their jobs, and state and local governments in particular need a lot of help, and that should be a critical part of this built because these states and local governments, if they off people and they cut back on services, there's going to be a lot of social unrest in many of these cities

and states. So, UM, that's the current environment. Said it was a timing issue. Over the longer term, UM, there needs to be a way of of paying back at least some I don't expect all, but at least some of the money that's been borrowed. Now. I don't think this is gonna be easy, and I don't really know

that they're easy ways of doing it. In the past, there was you create a lot of inflation, and inflation enables the federal government to get more money because you people move up in the tax bracket, and then they can help pay off the debt. But I think for the moment, the reality is we're going to have a large debt for a long period of time and and big uh growth, high growth expectations or high inflationary expectations, or very substantial increases and taxes are probably not likely.

And therefore we're going to probably have to learn to live with these deficits and the these debts and and perhaps deficits, but certainly debts. And the FED, as you pointed out earlier, is going to be putting more and more paper on its books, is going to be in effect printing more money. So the FED is going to have a very very high balance sheet for a long piod of time. And on modern monetary theory, um, whether one believes in it or not, and there it's controversial.

The reality is the FED is forced into it because it has to lend at low rates because people need the money and may can't service debts at high rates federal government included, So the FED prints money um in effect buys bonds with at very low interest rates, which effectively is spreading money and UM. And that's gonna happen

for a long time. If the Fed starts raising rates or rates started going up, all these people who are leveraged to low rates, companies, individuals, homeowners are going to start having to use a lot of the money they make to repay debts. It will slow the economy down.

So the FED actually is sort of forced the position where it can't really allow rates to go too much because it was slowly economy down very quickly, and then the federal government would be at state local governments would be paying out more money, which means other programs would suffer.

And I'd add one caveat However, and that is these low rates are very painful to savers, particularly the elderly, because they you know, they thought, gee, if I've if I've made twenty dollars in my life, I have two thousand dollars in savings I put in the bank, or I buy treasuries, I get a nice interest rates. That's what they thought several years ago. And I get a nice interest rate of maybe two or three percent. That's what a lot of people would have thought several years ago.

But it turns out now that the interest rate that they get is you know, a fraction of that. And so for savers, particularly conservative or elderly people who've saved a lot of money, they're getting so little in return for their fixed income savings preticting treasuries. But also and then corporates, you know, I a great corporates that they're suffering.

So the the longest rates maybe and are good for the overall economy, and and uh, the spending is very good for people, disadvantage people in cities and states, and we need more of it, but the low interest rates can be very disadvantageous too, conservative elderly savers, and we have to bear that mind. It's a it's a big cost for elderly conservative savers. All right, Mike, I think it's that time though. It absolutely is the time, Bob.

This is our our fun time of the show where we talk about the craziest things we've seen in the market. This week started what that I'll get started with a one that came in from a listener. Uh. And again, you can call in your crazy ideas to us, your crazy things on the hotline, you can send them to us on Twitter. The absolute coolest way to do it is to send it to us over the Bloomberg terminal. And that's what Steve Kaminski of Jump Trading did. Very exclusive,

though it is very it's an excuse love club. Yeah, I'm not gonna say that your chances are getting on the show or greater if you do it this way. But I'm I'm not saying it's not either. But he writes and says, love the pod you do with Sarah. Thanks for all the great market content, tent and context. I had to throw that in. I had to throw in the compliments and he points out this asset. Uh, Bob,

you might have some thoughts on this. We like to talk about the alternative asset space in the Crazy Things, and Steve is pointing out a nineteen fifty two Michel Mickey Mantel baseball card just sold for now, let's play prices, right, Sarah, what are you paying for a nineteen fifty two Mickey Mantle baseball I can't guess because I've seen the numbers. It's not fair the numbers. You just see. If the numbers, what's your bid? Bob? I might pay hundred dollars maybe,

Now let's hear what it is. I'm way low. I'm not a great stock picker. I'm not a baseball baseball card picker. Even better, even better, Bob, you would not win that auction. It went for five point two million. And as Steve says, how does a collectible how does a collectible card bubble pop? I don't know, I don't know, but five point two million for a piece of card boards? Remember the tool of Craze and Holland. People are paying millions of guilders for a tool of bulb um. So this,

I can't say, this totally surprises me. But then the question is, if you're looking at five years was it, what is that tool of bulb or what is that baseball card game be worth? If it's worth well, you know what it might be if you were a toolip buyer, Um, five years from the time about the tool, it probably

wasn't worth. It's a pretty unbelievable I also want to mention Mike brought up the podcast hotline, and I want to bring you that number in case you would like to give us a call that six four six three two four three four nine zero, leave us a message, and of course we might even play it on the show. And sorry, that was that was our listeners. I'm gonna give you my own crazy thing, which I promised was

about bitcoin. Now, as journalists, obviously we're not supposed to give buy and sell recommendations on investments, and that's probably a good thing. Let's let's all be honest. Um. I think I'm safe in giving this one recommendation though, and that is, if you do buy bitcoin, and you store that bitcoin on your own personal hard drive that's password protected, do not forget the password okay tattooed on your arm. If you have to write it, write it down somewhere.

That The Times had a story on a guy Bob who put all his bitcoin two million dollars worth of bitcoin and he he can't remember his password. No more pressure, Sarah, I can even outdo that though. Uh. Forbes had a story basically quoting the BBC about a guy in Wales who threw away his hard drive with three hundred million worth of bitcoin on it seven years ago. And he's been buggling the town in Wales, Newport, the city of Newport and Wales. He's been bugging them for years about

letting him go explore. They're dump their landfill to try to find this hard drive. He's offered to give them I think a quarter of the of the hall if he can find it, so offering him seventy million if he if he lets him go and dig up this uh, this hard drive. Bob, what do you think would you? Would you be out there digging in the landfill for I thought about it, Sarah. If you, if you two will join me, we can we can split it up three. Well, yeah, we'll suit up, we'll get out there and get our

little trash pickers. We'll be ready for it. And my hunch was read Mike, I do want to say our listener who did right in and it's at Chris M d d C same crazy thing as you this week said, it's definitely craziest things worthy forgotten password or the guy digging in the dump. I've never gotten password. It's pretty good, all right, Sarah, What do you have for craziest thing? All right? Well, you just made me think of one more,

so I'll share two then one. Also on the bitcoin spectrum, Lindsay Lohan, Uh, someone paid her on CAMEO to hype up bitcoin. So all of a sudden, Lindsay Lohan is now out there hyping up bitcoin. But I the one that really got me this week was there's this company called zoom Metica. It's a pet medicine company. And I don't know if either of you actually watched Tiger King back in the early quarantine days. It was my obsession.

I watched it every day, ripped through those Netflix episodes. Well, Carol Baskin of Tiger King was also paid on CAMEO to talk about this company's o Medico is a penny stock companies now up. This year, we saw more than one billion shares trade in a single day. I mean, just unbelievable the types of things that you see these days. They got their three d bucks worth for that. Oh yeah, no doubt about that. How about you, Bob, seen anything crazy this week? Uh? There are a lot of things

that are crazy going on. I I must say this is one that I find difficult to answer because we at TINAM and trying to take a long term view of what's going on, and I try to go boy short term cziness, you can call it about crazies. We

have a lot of research. We do the research about long term trends and how they affect our clients, and I sort of stay away from the short term issues that that are that are funny to talk about but don't really help to think about the kind of long term issues that we as investors, we as a company, we as a country you have to work on. So I'm a more long term inclient. But I always enjoy here in your h crazy things of the of the week.

Thank you, Bob. I imagine your clients appreciate that approach to They're not going to be impressed by the by you digging in the dump looking for a bit qually hard drift. I don't think that well, of course, unless I find it in the first day or so, and then it's worth it. I think I'll of with the dumps of whales for the time being, but if you find it, let me out you'll be You'll be my

first call. Absolutely hands down, but it is. It's been an absolute privilege having you on the show today, Bob Hormett. Thank you for joining us. Thank you for letting me participate in the show. It's always a fun show to be on, and I appreciate being What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple podcast.

Some more listeners can find us, and you can find us on Twitter, follow me at at Sara Pontzack Mike is that very anonymous, and you can also follow Bloomberg Podcasts at podcasts. Also, thank you to Charlie Pellett of Bloomberg Radio and the voice of the New York City Subway System. What Goes Up is produced by tober Foreheads and ahead of Bloomberg podcast is Francesco Levie. Thanks for listening, so you next time