tv Bloomberg Real Yield Bloomberg June 17, 2018 4:30am-5:00am EDT
rishaad: welcome back. there were plenty of promising optics at the u.s.-north korea summit in singapore, although few details were resolved, and the negotiations still remain. bloomberg television spoke with several experts on geopolitics and global diplomacy about what the summit achieved, and what lies ahead. >> i think people are overanalyzing this. we have a framework now for discussions. the one, i think, significant benefit we have that no one is talking about is a reduction in tension. i haven't heard president trump mention fire and fury. and i haven't heard the north
koreans talking about turning seoul and washington to a sea of fire. we have had a significant reduction in tension. i think this is of value. nobody is talking about the brink of war. i haven't had anybody saying that they were saying it a months ago. this is just the beginning. the devil is in the details, no question about that. we will know when we get the north koreans to the negotiating table how we move forward. there's a lot of heavy lifting to be done, and i think mike pompeo will have a significant amount of work to do. like i said, this is just the start of a very long journey. there will be potholes and speed bumps along the way, but i think it is fair we should test north korea's diplomatic intentions and see if we can come up with something that will advance american interests in the region. >> when you boil it down, what did the u.s. or its allies get, with the suspension of u.s. rok
military drills? this is something that caught south korea and its government offguard. >> that was a surprise to me, too. i think most experts felt that we should not trade our legitimate exercises with an ally for commitments from the north koreans. we think they shouldn't do that. i was surprised that that. i think it is a mistake to make such a move without consultation, without allies. -- consultation with our allies. we will have to see how that works out. the president uses a vague term, war games, i don't know whether he means all military exercises, all joint exercises, or just certain exercises that improve the movement of a great deal of equipment. this is something that needs to be worked out and certainly requires consultation with south korea and japan.
i'm glad that pompeo went off to consult with our allies immediately after the meeting in singapore. >> on the plus side, let's give him president trump and kim credit for meeting and for having a collaborative session. the atmosphere was very good. on the question mark side is will kim actually perform as he indicates and move toward denuclearization? on the negative side for the u.s., is if there are moves to take u.s. troops off the peninsula or cancel military exercises absent similar and equivalent moves from north korea, that's a loss for u.s. and u.s. allies. >> how about the other, peripheral parties in this, watching from afar? did china get a good victory here and is japan asking what we conceded?
>> i think china would say anything that reduces u.s. military presence in the region is good news. and secondly, any step that reduces confidence in u.s. allies in u.s., if it surprises south korea, if there wasn't a consensus, then we gave a good friend a shock, and that is good news for china as well. you have to manage a relationship. >> my concern, of course, is the south korean relationship. i think we have to be very careful not to create a situation where south korea thinks we were taking them for granted. a lot of people have pointed out that the south korean president is very concerned that the show goes on. this is something he pushed for. but he is equally concerned about showing to the south korean public that he can manage the u.s. relationship. there's a major disconnect like this, and that's not going to help him. so i think it is appropriate
that secretary pompeo go to south korea first. there are also big issues for the japanese, who have some real concerns about the fact that there's nothing in the agreement about missiles. and finally, if this is ev addressed, and if we really get traction with north korea, and we look back and say how do we do this, i think china will be part of that picture. i think that is also something the administration has had trouble getting their minds around. rishaad: central banks and central bankers were another focus of attention this week, with policy decisions coming from the federal reserve, the ecb, and the bank of japan. here's some of what distinguished guests on bloomberg television had to say about developments in monetary policy. >> i want to get your initial reaction, not so much to the 25 basis point hike, because that was expected, but the hawkish tilts from the fomc and the
expectation that there might be four hikes total through the end of the year. >> right. well, when you read the statement, the language, especially in the first paragraph where they describe the economic outlook for the next three years or so, lots more hawkish wording. but what was striking to me was when you go to the numbers, the projections that the various fomc participants provided, really not much changed at all from the last time they did a dot plot back in march. it's not much. it's true that the sequence of dots for the current year, 2018, now suggests that there are four rather than three, but that is just the movement of one dot. when you look forward at the projections, their projection for gdp growth really peaks in 2018, then there is a
deceleration in 2019 and a further deceleration in 2020. the unemployment rate comes down a little more, so that's a little more robust. but the inflation rate is flat throughout this period. really, not much changed in the numbers themselves. so yeah, it is a somewhat more hawkish tone overall, but is especially when you look at the numbers, it's not a hugely hawkish position, in my view. tom: let us talk about the institution we observed yesterday, the central bank of the united states. boy, are they trying to get out front of the data and game and guess. within your years of research, can any central bank do that? >> well, i think what's unusual -- it's difficult to look back to the past and to find a clear model of this.
i think that they are taking the opportunity to normalize interest rates, and i have to say personally, that is something i welcome a lot. perhaps here, we have missed a few chances to do that. my concern is that when we do next enter a downturn, the central banks don't have a great deal of ammunition. the more headroom they have to respond if we do have a more serious market situation or economic situation developing, the better. i rather welcome what the fed is doing. it is clearly a little bit risky, but as they point out, monetary policy is still quite accommodative at the moment. i'm in favor of what the fed is doing. vonnie: emerging markets benefited, really, from this decision and this press conference today by the ecb, and almost from the fomc decision yesterday. how does the divergent story play out now in the next three to six months?
>> one of the things we are seeing is one of the ramifications is dollar tightening. when the global economy was doing so well last year and outperforming the u.s., the fed could raise rates in the dollar was weakening. now when the fed raises rates, the dollar will strengthen. that's an additional form of tightening, an additional form of potential pressure in terms of dollar fundinglobally there is some tightening of conditions globally, fed tightening is starting to be felt. it's proceeding as planned. they want to tighten policy, they want to cool things off. it is working more outside the u.s. than inside the u.s. right now, but that means we should probably continue to see the dollar strengthen through the year as they proceed with rate hikes. mark: why would there be an urgency to make a statement on rates? the economists we surveyed before today said it wouldn't come until december.
why did he feel the need to make an announcement on rates, or give guidance on rates? >> i think maybe he wanted to push back the rate hike expectations because of what he mentioned about the external environment, the geopolitical situation, the soft data in the euro, especially compared to the u.s. i think it made the balance smooth. in qe on the other hand, not being too hawkish and not moving too far from the interest rate. i think expectations, given the way the council gave some space, to move next year. i think this is the main reason. i want to see more data from the euro area, more positive data, and i think they want to see how the u.s. develops and whether or not this affects the euro area. as you mentioned, the forecasts are not taken into account at the moment.
"bloomberg best." i'm rishaad salamat. let's resume our roundup of the week's top stories with an emphasis on company news, starting with a significant announcement from electric carmaker tesla. >> tesla titans. the electric carmaker plans to slash around 9% of its workforce. the ceo, elon musk, just tweeted this, saying it is part of a, "difficult but necessary we -- reorganization. just to be clear, this is salaried staff and does not include production associates." is that right? >> that's right. when he explained this in his letter, he made it clear it is not production workers.
point being the model 3 won't be , disrupted, they won't pull people off the assembly line, anyone who's directly involved in the production of the car. maybe some of the support staff around it might be touched, but it will not be production workers. >> thereby answering the question all investors have, which is will this affect the production targets for model three? no. >> that is what he is strongly saying. >> daimler has been ordered to recall 774,000 vehicles in europe following an accusation it used illegal devices in its diesel engines. the move follows consultations with the german government in berlin yesterday, which the ceo called constructive. the carmaker escaped more costly measures, such as fines or a hardware fix that has been very important to the auto industry and the german government. >> the cost is very low. it will cost them something like $75 million, $80 million max. the software will be approved by
the german authorities. we have seen that before, in multimillion vehicle recalls from audi and volkswagen. these goals are immaterial. what is important is they have a solution now. they make peace with berlin, and they get the cars properly fixed. >> shares in chinese telecom equipment maker zte took a dive after it agreed to pay at least $1 billion in penalties and overhaul its management -- one . this as part of a settlement that allows it to resume business after two months hiatus. apart from the billion-dollar fine, what are the implications for zte? >> well, $1 billion is an extra fine on top of fara have to pay. and to put that in context, that's about equal to four years of operating income at zte. beyond that, the implications
are that they have to fire their whole board of directors, all of them have to go, according to the deal they signed with the u.s. department of commerce, and they need to get rid of all their senior management. anyone in a senior vp position or higher. in addition to that, any staff or executives involved in the deals that sold equipment to iran or north korea. that's a got them into trouble in the first place. i calculate we are talking 30, 40, maybe 50 different people could be caught up and fired from the company. that's quite a lot, and would make it difficult for zte to get up and running quickly, even if the sanctions are lifted against them by the u.s. department of commerce. >> has agreed to buy envision health care. envision it's a provider of physician services to hospitals. it's been a long time coming. walk us through how it has done. >> sure. this is really the culmination
of a month-long strategic review. as you say it started last , october. activist jeff smith disclosed a stake in the company and was pushing for takeover options. the company said today that throughout the strategic review, it contacted 25 different potential buyers, including carlyle, onyx, different consortiums. united health was also considered as a potential buyer. and kkr emerged as the leading bidder, and we will see where it goes from here. >> the rolls-royce is said to be cutting 4000 jobs as they try to simplify its business and boost profit margins. the retrenchments would bring the total number of jobs to nearly 10,000 since 2015. >> we know that they will focus predominantly on hq. rolls-royce has already said they are looking to shift their headquarters in victoria to
central london, which will help them shed costs. but on a bigger scale, the bigger question, why now? i think the ceo, who came in about three years ago, has been quite frustrated by the lack of progress that rolls-royce has managed to achieve in terms of the turnaround. this is kind of a crucial next step in what they hope to achieve. >> hainan airlines plans to raise a billion dollars by selling shares to investors. this is part of a restructuring plan. they are offloading up to 20% of its listed shares to 10 investors. what is this money going toward? >> hainan has been in this really aggressive expansion mode, flying to nonstop destinations in the u.s. and europe. obviously, this money they will be raising from their shareholders will help them in buying planes, and probably addressing some of their pricing going forward.
>> -- stock fraud. by his own account, muddy waters was involved in $20 billion in overseas stock exchanges. today he is back with another. >> so we are short tal education group, which is a china-based for-profit education company. >> is not a small company. this is a $26 billion company. the stock is up some 2500% in the past five years. you say it's a fraud? is that right? >> yeah. it's a real business, but its profits are fraudulent. when you look at the appreciation in stock price, some people might say, why would they do this? i would point to the value of the chairman's holdings. three years ago, his holdings were only worth about $900 million. today, they are getting close to
$8 billion. there's your answer as to why. to be clear, it is a real business with real students in real learning centers, it's just not able to grow nearly as profitably as its been portraying. >> qualcomm has cleared the last hurdle for its $43 billion-dollar takeover of nxp semiconductor. bloomberg has learned that chinese regulators have okayed the deal that has been pending for more than 18 months. acquiring it means qualcomm can lessen dependence on the slowing market for smartphones. >> we understood china had approved the deal, which is important to qualcomm. is it in jeopardy? >> it could be. this deal has been a political football between the united states and china for some time, at least that's what qualcomm believes, although there are legitimate reasons for antitrust authorities to look at the combination. it's a little bit ironic, too, because qualcomm has blamed the
television. maybe they will become your favorite. here's another function you may well find useful, quic go. it will lead you to quick takes, where you can get important context and fast insight into timely topics. here's a quick take from this week. >> after the end of the korean war, north korea was virtually cashless. everyone worked for the state and was provided for by the state. and in the communist bloc context of the day, it worked. in 1989, north koreans were more than twice as wealthy as their comrades in china. >> now we think of them as a hermit people. -- kingdom. >> william brown spent his career analyzing north korea for the cia. >> they were integrated reasonably well into the soviet plan system of countries. >> the loss of support from the soviet union after its collapse in 1991 led to a series of great famines in north korea.
>> the famine pretty much ended the public distribution system, in which the north korean state fed everyone through the ration system. the government couldn't supply food, so people went off on their own. >> since then, a strange hybrid economy has emerged. part government controlled, where rations are allocated by the state, and part graymarket, where currency is earned in the market economy. for example, a textile worker in the state-run textile mill earns around 3000 won per month, which has a street value of about $.40. but the worker pays nothing for housing, utilities, and receives food rations. her sister might legally work for an export company. she's allowed to get 30,000 won per month, with fewer perks. another sister could work for a chinese company and earn 300,000 won per month, but with zero perks from the government. >> all state workers get paid through this incredibly low wage
system and are dependent on rations. the ideal situation is for one person in a family to work in a stsyem, and other people in the family work in the marketplace and earn real money. >> it's a highly inefficient system, and per capita income, north koreans are eight times poorer than chinese and 20 times poorer than south koreans. rather than reform, the government sought to fill a shortfall of hard currency by trafficking illegal goods abroad. according to numerous reports, this illegal business is run by an agency known as office 39. >> it's an office that organizes principally to raise u.s. dollars for the ruling kim party. >> a study from a washington-based human rights group tres the criminal ventures back to the 1970's, when about a dozen diplomats were expelled from scandinavian 's countries for smuggling.
later, the government switched to foreign organized crime syndicates to sell things like counterfeit pharmaceuticals and heroin, manufactured from state-mandated poppy farms. north korea's government has dismissed such claims, and some analysts have also questioned the data. since 2005, intercepts of north korean smuggling have fallen sharply, though more recently, claims of cyber theft have proliferated. meanwhile, kim jong-un has started speaking to south korea, about opening up for investment in restricted economic zones, and is talking about switching to a more china-like economic system. whether that is a true change of heart or a tactical retreat in the face of sanctions remains to be seen. rishaad: that was just one of the many quick takes you can find on the bloomberg terminal. you can also find them at bloomberg.com, along with all the latest business news and analysis, 24 hours a day. that will be all for "bloomberg best" this week. thanks are watching. -- thanks for watching.
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♪ jonathan: from new york ty, jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, an optimistic chairman powell seeing the fed up for a third or fourth hike this year. draghi delivering more dollar strength. emerging markets suffering another tough week. we begin with a big issue. the u.s. economy looking anything but weak. >> the economy is very strong. strong and resilient.