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First Move with Julia Chatterley
Hong Kong Canceling All Flights After Another Night Of Violent Clashes; The Saudi Arabian Oil Giant, Aramco, Takes A Stake In India's Reliance Industries; Western Retailers Falling Foul Of China's Territorial Claims. Aired 9-10a ET
Aired August 12, 2019 - 09:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JULIA CHATTERLEY, CNN INTERNATIONAL ANCHOR: Live from the New York Stock Exchange, I'm Julia Chatterley. This is FIRST MOVE. And here is your need
to know.
Grounded: Hong Kong canceling all flights after another night of violent clashes. Aramco's new Reliance. The Saudi Arabian oil giant taking a
stake in India's Reliance Industries. And in need of a little coaching? Western retailers falling foul of China's territorial claims. It's Monday,
let's make a move.
Welcome to FIRST MOVE this morning here in the United States. I tell you what, it may be mid-summer, but there is nothing restful about the news
flow. We're going to get a whole array of data this week to give us a sense globally of what the impact of the trade war is. We've also had
protests in in Russia, in France yet again this weekend. And of course, Hong Kong, which I think it's helping to set the tone today.
Take a look at what we're seeing for U.S. stock market futures right now. We all lower by around half a percent. We've got bond yields in the United
States under pressure again, too. Gold adding to last week's four percent gains, investors well and truly looking at safe havens once again this
morning.
Yet, for all the recent volatility, the major averages here in the United States ending last week, pretty much where they started. It was still just
around three and a half percent away from record highs for the S&P 500. That's up 16 percent year-to-date. Remember what Liz Young said to us on
Friday.
Dividends -- the dividend yield on the S&P 500 still gives investors more income at this stage than buying a Treasury, buying U.S. bonds. The 12-
month view here is key. For all the gains that we've seen year-to-date, we are up just two and a half percent over the last 12 months. So the
argument there is we're not overvalued for these markets. The question is, can the fundamentals ultimately hold up here?
For now, the U.S. economy remains relatively strong, so says Goldman Sachs CEO David Solomon, who told CNN in an exclusive interview that there's a
low probability of a U.S. recession near term. But trade, of course, remains a key risk, a currency war of some sort could clearly change all of
that, and we continue to watch China's moves here.
The Chinese Central Bank guiding the yuan lower again today, but this is gentle news. That remains key. We'll talk more about this throughout the
show, but it is a sign that economic pressures remain on China as do political ones.
And therefore the protests in Hong Kong remain front and center, too. Let's kick off the drivers there. Protesters occupying the Hong Kong
International Airport for a fourth day in succession. All flights have been canceled as I mentioned. Ben Wedeman joins us now from Hong Kong.
Ben, a lot of the talk on social media, I was watching overnight, again was the police behavior and the action that we saw. What are you hearing from
protesters because it looks a little bit calmer from what I can see behind you?
BEN WEDEMAN, CNN SENIOR INTERNATIONAL CORRESPONDENT: The situation here is quite calm actually. The number of protesters in the airport is just a
fraction of what it was about four hours ago, when there were numbers we had not seen to date.
But the real reason why they've come out here and this was not a planned protest. The sit-ins at the airport was supposed to be Friday, Saturday,
Sunday. Monday, nothing was planned until Sunday evening when it appears that the police decided to take a much more active role in the reacting
with these demonstrations that are happening inside of Hong Kong.
So they fired teargas in a subway station for the first time ever. They injured at least nine of the protesters, among them a young woman who was
hit in the eye with beanbag fired by the police and that picture of her has circulated on social media. So this is why these people came here today
putting up signs like "Stop shooting eyes," which is of course, what happened to that young woman.
[09:05:15] WEDEMAN: And as passengers -- because there are people arriving in Hong Kong -- no flights going out, they are chanting, "Don't trust Hong
Kong Police," the police very much at the moment, the focus of the anger of the protest at the airport.
And on top of all that, after the airport was essentially closed down as far as departures go, they're coming back tomorrow -- Julia.
CHATTERLEY: Ben, it is incredible to see these images, I think when we're outside and we're looking at what's going on in Hong Kong at this moment
that the flights are canceled. What's also going out in social media, we've got the images as well as of mainland Chinese Police, armed police
preparing. And we've seen this a number of times now. I believe this is the third time.
What are protesters saying about the fear? The risk, perhaps that it's not the Hong Kong authorities that respond, at some point, China's Police Force
will respond, the Mainland Police?
WEDEMAN: In fact, Chinese officials have made it clear, according to the Garrison Law of Hong Kong, if the Hong Kong government request Beijing
provided troops in the event of social disorder or a natural disaster, they are perfectly entitled to come in and restore order.
And if you speak them, when you speak to the protesters, they will tell you about the five demands they have and they would like the Chief Executive to
step down. But fundamentally, the worry is that the arrangement worked out between the United Kingdom and Mainland China in 1997, setting up this
arrangement of one country, two systems is slowly falling apart.
It is eroding as China slowly exerts more and more influence on the ground in Hong Kong. This one country two systems arrangement is due to expire in
2047. People here are worried that that end of that period may be much sooner than that --Julia.
CHATTERLEY: Yes, that timetable looks like it is accelerating. It is an interesting point. Ben, fantastic to have you with us. Thank you. And
obviously Cathay Pacific front and center, with these canceled flights warning their staff about joining these protests, too. More on that later
on in the show.
For now, we'll move on to our next driver. Good news and bad news that the world's top oil producer, Saudi Aramco, they reported a 12 percent drop in
net profits on lower oil prices. The good news is though, still making more money than anyone else by a country mile, first half net income almost
$47 billion. John Defterios joins us now.
John, stumbling over my words in my excitement here. That is so incredible net income. It dwarfs tools Apple; poor Exxon-Mobil, $5.5 billion. This
is a beast. Talk us through the details.
JOHN DEFTERIOS, CNN BUSINESS EMERGING MARKETS EDITOR: Well, it is slightly lower than the first half of last year Julia, but as you suggest, that $47
billion, it's in a league of its own.
We often overlook some of the key factors here that drive Saudi Aramco, the proven reserves of 268 billion barrels and very low cost of production.
That's why the margins are so high.
In some fields, they produce for as little as $4.00 a barrel according to sources I have within the company right now. And they are the world's
largest producer by a country mile as you were suggesting, 10 million barrels a day. If you have energy related products, it's up to 13 million
barrels a day.
The Chief Executive Officer, Amin Nasser, in a statement was suggesting that this is optimal performance considering that prices for crude were
down in the first half of 2019. He is talking about very good fiscal discipline going forward. And this has a lot to do with the optics within
Aramco and Saudi Arabia.
As we speak, they're holding a teleconference which I will jump on to after our live shot, and in a sign of openness, it raises the question of course,
whether they're going to proceed with a traditional public offering, and perhaps to put the cherry on top of the cake here, they announced a 20
percent stake into the company owned by Mukesh Ambani, the multibillionaire of India.
This is important because it secures a big stake into the future, the fastest growing energy market and demand of at least a half a million
barrels a day. As you and I have discussed in the past, they have desires to be refining up to 10 million barrels a day of crude by 2030, and the
deal in India will get them very far down the road in that process.
CHATTERLEY: Yes, to your point all about optics here. A giant producer. But if they can boost that refining capacity, which they still would
provide, then again, it helps us plot the path perhaps to that delayed and then delayed and then delayed IPO.
What are you looking at here very quickly, John, are we talking 2020 here?
DEFTERIOS: Well, they say it is 2020 or 2021, but this is the trillion dollar question, and you have to wonder about the valuation. The building
blocks are there, Julia, don't forget they had the bond offering in April with the demand very strong at $12 billion.
They reevaluated the reserves in January, which also was a big tick in the plus column. And they consummated that deal with SABIC for $70 billion, a
big chemical giant. So all those things are done, but I think there's four key questions very briefly here.
Number one, the Crown Prince of Saudi Arabia, Mohammed Bin Salman has a valuation in his mind of $2 trillion, not below $60.00 a barrel for North
Sea Brent, that's going to be a challenge. Iran, the tensions in the region, you could see Iran if they proceed with the IPO, wanting to strike
Aramco facilities is a big question mark.
And then we're coming into a global slowdown, perhaps in 2020, which is not good for oil demand. And the final point, I think there's been damage
against Saudi Inc., we cannot oversee the challenge of Jamal Khashoggi's murder in October 2018, and November 2017, when they arrested some 400
Saudi billionaires in the name of corruption. This has hurt foreign direct investment.
So, I would say Aramco is a lead horse, of course, do they want to rush the IPO to kind of put away those fears that I talked about? Or do they wait
until the market conditions are exactly right? And we'll find out more on the conference call this hour.
CHATTERLEY: Yes, we could be waiting a long time for that though. We look forward to hearing what they say on that call. John Defterios, thank you
for that.
All right, let's move on. Our third driver now, that exclusive interview with CNN with the Goldman Sachs CEO, David Solomon. He says the U.S.
economy looks solid. The chance of recession is relatively low. But you could probably guess, the trade war is one of the huge key risks right now.
Listen to what he had to say.
(BEGIN VIDEO CLIP)
DAVID SOLOMON, CEO, GOLDMAN SACHS: I think when you look at the base economy, the base economy is chugging along okay. And while it has been a
long cycle, it was a very deep recession the last time and it was a gradual slow climb out. So it's not surprising that maybe this has gone on for a
longer period of time.
I'd also say the monetary policy all over the world has definitely played a role in stimulating asset price inflation and growth around the world. I
think the economy is doing fine. There are things that are getting added to the equation, in particular, the trade war with China that is having an
impact.
(END VIDEO CLIP)
CHATTERLEY: The problem is, and Matt Egan joins us now on this, it's tough to gauge what that impact is. Goldman Sachs's CEO saying, yet, we keep
saying it on a daily basis?
MATT EGAN, CNN BUSINESS LEAD WRITER: That's right, Julia. I mean, David Solomon clearly sees the trade war as the biggest risk out there, and it is
worth pointing out that his economics team just last week said that they no longer expect a trade agreement between the United States and China before
the 2020 election.
In other words, this risk is going to be with us for a while, at least if they're right. But what's interesting is Solomon did not sound all that
pessimistic about the economy, at least relative to some of the warning lights that have been flashing, in especially the bond market last week.
You know, he was asked about some of these comparisons that people like Jeff Gundlach have made between the current environment and the pre-crisis
days of August of 2007, and he really does not seem to see any of those similarities right now.
He said he doesn't see any economic crisis as imminent, but of course, Julia, it's worth pointing out that you on Wall Street did see the last
crisis coming at least until it was too late.
CHATTERLEY: Such a great point to make. The other question here, of course, is how the Federal Reserve responds, how global Central Bank
responds here. He made some interesting points about this. Let's listen in to this clip, and then you can give us the context here.
(BEGIN VIDEO CLIP)
SOLOMON: I think it's very, very important that we have an independent Fed, but I would observe and this is not just a U.S. observation, when you
look around the world, and I think this is the result of the fact that the world has in some way gotten used to the very, very significant, you know,
easy money, monetary policy that's a result of the crisis.
Monetary policy to me seems a little bit more attached to markets at the moment and also to politics.
CHRISTINE ROMANS, CNN BUSINESS CHIEF BUSINESS CORRESPONDENT: Is that healthy?
SOLOMON: That's something to watch carefully. I don't think that is healthy, and I think that's something to watch carefully.
(END VIDEO CLIP)
CHATTERLEY: Interesting point to make, perhaps politics too attached to monetary policy here and monetary policy too attached to markets. Try and
scrambling that one, Matt.
EGAN: Right, Julia. So I mean, the two things there -- he is basically saying one, the economy and the market, and maybe even politicians are a
little bit too addicted to easy money after 10-plus years of it. And I think we can all agree that there's an element of truth to that.
But the other point is that he is basically saying that the Fed is being led by markets and to some extent politics. And of course, it really
should be the other way around. Right? I mean, the Fed should be reacting to the economic fundamentals, and then the market responds to that.
So it's interesting to me that he came out and pointed this out as sort of another risk to watch. And of course, you know, that the Fed is supposed
to be the one in charge here.
I just think that Julia, this kind of reflects sort of the whiplash that many on Wall Street have, because the Fed raised rates four times last
year, as recently as December, it was expected to raise another two or three times this year. And instead it slammed on the brakes, and it
actually cut rate. So people are still trying to make sense of sort of the volatility around the Federal Reserve.
[09:15:51] CHATTERLEY: Yes, and look at the tanking that we saw in the U.S. stock markets -- global stock markets -- as a result of the apparent
misstep in December. So yes, that kind of dam died away, it's tough to be a Federal Reserve Chief. Matt Egan, thank you so much for that.
All right. Let me bring you up to speed now on some of the other stories that we're following around the world. The New York City's chief coroner
is confident the disgraced money manager, Jeffrey Epstein died by hanging himself in his jail cell where he was being held on sex trafficking
charges. That's according to "The New York Times."
In a statement, the official say she was awaiting further information before going public with the cause of death. The FBI and the U.S. Justice
Department have opened investigations into Epstein's apparent suicide in Federal custody.
Italian far-right leader, Matteo Salvini is pushing for a snap election backing himself to win, after breaking rank with the country's ruling
coalition, the Deputy Prime Minister filed a no confidence motion to begin that process. Salvini now faces a growing risk that the remaining parties
may team up to try and stop him.
North Korea is threatening to freeze the South out of future talks and negotiate directly with the United States. State media cites a senior
official denouncing joint U.S.-South Korean military exercises. The threat comes after Pyongyang released images of what appears to be short range
missile tests on Saturday.
All right, we're going to take a quick break here, but still to come on FIRST MOVE, China in the cockpit. Beijing ups the pressure on Hong Kong by
targeting its flagship airline, Cathay Pacific.
And financing the future from a brain reading bracelet to a zero emissions car. We talk to the man who is helping to turn science fiction into fact.
That's coming up on FIRST MOVE. Stay with us.
(COMMERCIAL BREAK)
[09:20:42] CHATTERLEY: Welcome back to FIRST MOVE. We are on the floor of the New York Stock Exchange. We are looking at a softer open for U.S.
markets this morning. The major averages have fallen now for two straight weeks with the ongoing global recession fears.
New numbers this week could show German GDP contracting in the second quarter. Remember that would follow the U.K., the United Kingdom data last
week, too. The flight to safety continues here. We've got the 10-year Treasury yield down below 1.7 percent again today. We've got the yen safe
haven currencies gaining. The dollar, right now down about half a percent versus the yen. That'd be the first day of straight gains actually for the
Japanese currency.
Gold as well higher four percent gains as I mentioned earlier on the show last week alone. Let's talk this through. Tobias Levkovich joins us now.
He is Chief U.S. Equity Strategist at Citi.
Fantastic to have you with us.
TOBIAS LEVKOVICH, CHIEF U.S. EQUITY STRATEGIST, CITI: You, too. Good morning.
CHATTERLEY: What do you make of what's going on? And can we tie that to impact on U.S. firms and the outlook for the market here for the rest of
the year?
LEVKOVICH: So I think a lot of it is more about the psychology, business confidence, consumer confidence and things like that, in terms of the trade
issues, or even the protests in Hong Kong and things like that.
But if you actually really rip apart the numbers and kind of look at it, about close to 72 percent direct sales for North America out of S&P 500
companies, there's this perception that it's really more small cap, not large caps.
And then if you throw in the fact that semiconductor sales, while very strong in Asia-Pac, a lot of that is coming back to us and now, it's going
to a facility that produces let's say, a cable box or a smartphone, a server, and that's coming back to North America or to Europe.
CHATTERLEY: Wow. We need to break that down further. A lot of times on this show, we talk about the sensitivity of the smaller cap stocks in the
United States to the domestic economy. If you're worried about the rest of the world, you buy into small caps because you get a safety bonus.
But what you're saying is 72 percent of the international sales or --
LEVKOVICH: Total sales.
CHATTERLEY: Total sales of U.S. companies, S&P 500 companies.
LEVKOVICH: Just for North America.
CHATTERLEY: It's domestic.
LEVKOVICH: Mostly, I mean, what happens in the U.S. to a great degree happens in Canada and Mexico. And I say that as a Canadian, I know it's
always a little hard to do that.
CHATTERLEY: We'll be very careful.
LEVKOVICH: But if you kind of put it together, it's about 75 percent of North American sales, for S&P 500 companies is about 77 percent or so for
small caps. So they're not that far apart. Yet people have this perception or misperception, I would say.
CHATTERLEY: OK, so where's your -- where's your gauge? Assuming everything holds where it is today, we don't yet have a resolution on
trade, the underlying concerns, but resilience, I'd say particularly for the U.S. consumer, what should year-end target for the S&P 500?
Because we made a point that we're up 16 percent year-to-date, but over the last 12 months, we're only up two and a half percent.
LEVKOVICH: So look, we had a very bad fourth quarter last year.
CHATTERLEY: We did.
LEVKOVICH: That kind of reset the bar and gave you the opportunity for the gain. But we've been looking at 2,850 for the S&P 500 since early late
last year. We haven't changed our targets. We think there's a little bit more interesting things within the market. It would be a value versus
growth tilt to this point. It would be interesting.
But the biggest problem we're facing really is if you look at the September-October timeframe, you're likely to see companies having to guide
down the rest of the year, and next year.
Right now, consensus estimates for 2020 is earnings up 10 percent. That's highly unlikely. And we think something more in the five percent ranges,
right? And it limits kind of the market.
We're looking at 3,000 by mid next year. So you know, call four percent upside, two percent dividend. Better than a poke in the eye, but it isn't
like astoundingly great returns.
CHATTERLEY: To your point though about the psychology and the behavioral psychology here. When you've got companies coming out and go look,
actually we need to be a little bit more cautious here. There's lots of risks out there. We're not quite sure what's coming.
I mean, we could get tariffs on the further $300 billion worth of goods hitting on September the first. Can you break it down for me in terms of
the impact on manufacturers, the impact on the service sector because a lot of those that are optimistic say, "Look, the consumer is really resilient
in the United States. The service sector will remain so to."
[09:25:01] LEVKOVICH: Look, I think the consumer sector is pretty resilient and job growth, wage growth are very hopeful. The problem is
that not as much the consumer -- or the corporate confidence, but rather, cost of capital went up very sharply late last year, early this year, and
it hasn't improved a whole lot.
Now, what we're looking at is the Federal Reserve words, "commercial industrial lending surveys," and those have shown a tightening in capital.
And that means the hurdle rates for businesses are higher, and they can't invest as aggressively.
So the consumer is probably okay. But the service sector is also heavily driven by what's going on in the rest of the economy. So when you think of
it just simply as if you're going to not produce as many cars, you're not going to produce as much machinery, well, that has to be financed. There
are legal contracts associated. It has to be shipped around with transportation. So there are services that are affected by very cyclical
businesses.
CHATTERLEY: If you're saying that the borrowing costs for corporate has gone up, that's an argument for the Fed to cut here, as long as that gets
passed on.
LEVKOVICH: So the inverted yield curve is part of the problem. The banks will respond to the inversion of the yield curve and say, "We know that
somewhere out there in the future, there's probably an economic tightening going on or some slow down, so we're going to make sure that we're not
sitting there with very exposed loans," and that's why they've tightened up. And that's not an easy thing for the Fed to fix.
CHATTERLEY: Yes, it's hard. The challenge remains. All right, we're going to wrap it up there. Tobias Levkovich, Chief U.S. Equity Strategist
for Citi. Thank you so much for talking to me.
LEVKOVICH: Thank you very much.
CHATTERLEY: Fantastic. All right, we are counting down to the market open this morning. Plenty more to come. We're going to be back out talking
about Hong Kong and Cathay Pacific. The action with that company with exposure to China was taking to say that their own workers must not get
involved in the protest.
We are also going to be talking about investing in science and technology, making things that might look impossible, possible. We're counting down to
the market open this morning. Stay with FIRST MOVE. You're watching CNN.
(COMMERCIAL BREAK)
[09:30:00] CHATTERLEY: Welcome back to FIRST MOVE live from the New York Stock Exchange and the opening bell for the first session this week. We
are looking at a lower start to the trading week after last week's modest losses, of course, too.
It's going to be an important few days for investors. We've got major U.S. retailers beginning to report their profits. This includes Macy's and
Walmart. Remember, we were just discussing the importance of the U.S. consumer here and the resilience that we've seen within this U.S.
expansion. Is that confirmed by the data that we get from those two?
Also, Alibaba and Tencent reporting this week, too. Two companies very much tied to the health of the Chinese consumer, too. And it's not just
the U.S.-China trade rule that's a concern. South Korea saying today, it is removing Japan from its list of trusted trade partners.
Now, if you remember Japan downgraded its relationship, its trade relationship with South Korea earlier this month. So tit-for-tat going on
over there, too.
All right, we're keeping an eye on Cathay Pacific as well, and back to those protests over in Hong Kong. Cathay Pacific coming under pressure
amid those protests. Sherisse Pham has this report.
(BEGIN VIDEOTAPE)
SHERISSE PHAM, CNN BUSINESS REPORTER: An iconic Hong Kong business is under pressure. Cathay Pacific forced to cancel dozens of flights Monday
night, as thousands of protesters paralyzed the city's major international airport, grounding all flights out of Hong Kong.
Cathy also warning staff Monday that any employees supporting or participating in illegal protests in Hong Kong could be fired, saying it
has quote "zero tolerance for illegal activities." The warning coming after China announced new restrictions on Cathay over the weekend.
They include banning Cathay staff that took part in illegal demonstrations and violent attacks from flying to and from China, and requiring Cathay to
submit names and identification details of all crew flying into and over China for approval.
China announced the restrictions after more than a thousand Cathay workers took part in a strike last week. The strike forced Cathay to cancel more
than 150 flights.
The new Cathay restrictions, on top of the ongoing protests in Hong Kong, are hitting Cathay hard. Shares in the carrier fell nearly five percent on
Monday, the stock has lost more than 11 percent this month, and the pain isn't going to end anytime soon.
One analyst telling me that travelers will cancel and rebook with other airlines to avoid Hong Kong for months to come. Sherisse PHam, CNN, Hong
Kong.
(END VIDEOTAPE)
CHATTERLEY: Just one of the issues that Chinese mainland of course and Beijing is dealing with. Let's talk this through with Brad Setser. He is
senior fellow at the Council of Foreign Relations. He was Deputy Assistant Secretary at the U.S. Treasury during the Obama administration.
Brad, fantastic to have you with us. Oh, I'm starting on a box, and I almost just fell off. Sorry about that.
Let's talk about China right now, because last week, sentiment was dominated by the shift lower that we saw in the Chinese yuan. The decision
by the government to let it weaken, and now we seem to be watching this on a daily basis.
You had some really quite fascinating comments to make about what's going on here, and whether or not the currency should be a bit weaker. What do
you make of what's going on?
BRAD SETSER, SENIOR FELLOW, COUNCIL OF FOREIGN RELATIONS: Well, the natural response to higher tariffs in the U.S. would be a weaker Chinese
currency. It's negative for China's exports, and most countries' currencies, when they are faced with a negative talk, there tends to be
pressure for their currency to depreciate.
CHATTERLEY: And we've seen that in South Korea or in Taiwan -- all of these countries have seen pressure on their currencies and their currencies
have softened. China is just the exception, because the United States is so sensitive. It's a key to that seven level, that psychological level
that was --
SETSER: It was also because China has been sensitive to it as well. The Chinese have generally been managing their currency to try to keep it a
little bit stronger than the market naturally wanted it to be.
The surprise -- to the extent there was a surprise last Monday -- was that China didn't treat seven as a barrier.
CHATTERLEY: That was perhaps optics, political reasons just as a warning shot across the bow, would you agree with that?
SETSER: Yes, I agree with that. I think China wanted to indicate to the Trump administration that it still had some options to hit back, to push
back as the administration moves forward with tariffs, the last round of which seems to have surprised the Chinese.
CHATTERLEY: How viable an option is this? Because I think what we were talking about and we continue to talk about when we see that currency
weaken even gently as it has done over the past few sessions is that at some point, they're going to risk capital outflows, and we know that there
have been capital out flows even subsequently following the 2015 shift lower that surprised everybody and created a great deal of volatility.
How much weakening can China allow without risking those kinds of outflows again?
SETSER: It's a great question. It is one which I don't think there is a good answer to. Since 2015, China has done a lot of things to reduce its
vulnerability to capital outflows. They're much tighter capital controls, and those controls seem to have been effective.
China has made some technical changes in the way it manages its currency to allow it to push back subtly against the market, and though that signaling
process looks to be effective, but if you push it too far, those techniques are likely to breakdown, and the risk is there could be a really big move,
and that could prompt further retaliation from the U.S.
CHATTERLEY: It is not an exact science. Retaliation from the United States, let's talk about the other side here, because President Trump
suggested that he'd like to see the U.S. dollar lower. He then in recent days have said, "Look, we're not going to do anything about that."
What are the options here, given your role in the U.S. Treasury, what are the options here, perhaps, for the United States to weaken the U.S. dollar
because Fed rate cuts don't seem to be doing it, pricing further rate cuts don't seem to be doing it. What are the options? Because it's been done
in the past.
SETSER: The options aren't very good. Fed rate cuts, of course, that's not something the administration directly controls, generally would weaken
the dollar. But in order for Fed cuts to weaken the dollar, other countries, Central Banks need to be on hold.
CHATTERLEY: Yes.
SETSER: So the administration, if it really wants to weaken the dollar, it needs to think about things that strengthen other countries' economies.
The U.S. also has the capacity to intervene, you know, laterally in the foreign exchange market, but it doesn't have a large stockpile of funds.
So it has to be very careful and strategic, because there's a risk that could be ineffective.
CHATTERLEY: Because you're saying that if they were physically going to intervene in the market, they'd have to sell dollars and buy other
currencies. And for that, you actually need to have the money in the reserves to sell in order to buy something else.
SETSER: That's right, and the Treasuries own reserves are quite limited, under $100 billion. That's not a lot for a major currency pair.
CHATTERLEY: It's interesting, the head of the largest Farmers Union in the United States has said, "Look, fine, this White House's administration is
supporting us financially," but clearly the farmers are caught in the crossfire here with China saying, "We're not going to buy fresh
agricultural produce." Do you think when you've got the largest Farmers Union saying we need to weaken the dollar here, perhaps it is pressure
ultimately to come to a trading deal -- a trade deal here with the United States and China?
SETSER: I think the hostility, the escalation between the U.S. and China likely has gone so far, that a deep deal is going to be very hard. The
kind that addresses the structural concerns. I don't rule out though, that you could get another kind of truce, where the U.S. backs off a little bit
on either Huawei or on the last round of tariffs, and China commits to buying some of this year's harvest.
Probably the best hope for farmers, though, is a trade deal with someone else that indirectly addresses their concerns.
CHATTERLEY: To offset the loss of a Chinese buyer. Very quickly then, your probability that we see a materialization of a currency war given the
difficulty for the United States here, the difficulty for China really in weakening their currency, is the probability here actually pretty low?
SETSER: It's not that low. I don't think you can take -- when the President is saying something, the President does control a lot tools, and
until the President stops talking about it, I think you have to put a material risk. I don't think it's a 50/50 risk. I don't think it's a one
in 10 risk.
CHATTERLEY: Somewhere between one and 50?
SETSER: Somewhere between 10 and 50 percent.
CHATTERLEY: Thank you, Brad. Fantastic to chat with you. Brad Setser there. All right, we're going to take a quick break here on FIRST MOVE.
But coming up, investing in the world of tomorrow, Lux Capital co-founder Josh Wolfe tells us why his company is betting on cutting-edge science.
Stay with us. We're back in two.
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[09:42:38] CHATTERLEY: Welcome back to the show and straight into the "Chatt Room" with Josh Wolfe. He is the co-founder and managing partner of
venture capital firm, Lux Capital, which makes investments in tech and science that are quote "on the outermost edges of what's possible, but
possible."
Josh Wolfe is with us now. Josh, fantastic to have you with us.
JOSH WOLFE, CO-FOUNDER AND MANAGING PARTNER, LUX CAPITAL: Great to be here.
CHATTERLEY: You've just raised a billion dollars. You've got $2.4 billion now to play with. Talk to me about the ethos of what you do and what you
look for.
WOLFE: Well, it's funny with investing, people say that the most dangerous words are, "This time it is different." I actually think that you can find
other words that are the most valuable, which are, "It will rot your brain."
Now anytime that a parent has uttered those words has literally presaged the next $10 billion industry. In the 1950s, you had rock and roll; in the
60s and 70s, you had television. In the 80s and 90s, it was the rise of the chat rooms in the internet, stay off those things.
CHATTERLEY: Yes.
WOLFE: And now in the past 10 to 15 years, it's been video games. Video games and science fiction have become the progenitor for all the biggest
innovations that we're seeing today.
CHATTERLEY: But how do you separate and you say this, look, we try and take what is science fiction to science fact? How do you make a choice of
something that perhaps sounds incredible in theory, but will never actually make it in practice versus something that will succeed?
WOLFE: Well, first of all, it comes to the people. Now, you want visionaries and you want people that are really thinking bold, but you also
want honest people.
CHATTERLEY: OK, OK.
WOLFE: And there's a lot of people that are more on the fie than the sigh -- more fiction, more hype. So the number one question to ask as an
investor is, does it work? You know, you get into this situation with Theranos and all kinds of other frauds where the hype is high, it lowers
the cost of capital and you usher in really bad actors.
CHATTERLEY: You mentioned a really interesting one there and we've talked about Theranos on this show. You didn't look at this, you weren't involved
at the time, but would you have gone absolutely no way simply because of the secrecy here. Is that one of the elements here? Someone has to be
very open about what they're doing and what they're not doing?
WOLFE: Well, I think if you're -- you know, the mantra today is FOMO -- fear of missing out. But I think that's going to shift to shame of being
suckered. And people are really worried about being suckered.
And so I think you want to find these attributes of fraud. So you know, you have people that don't share things, you have people that decorate
boards with military people and octogenarians, try to social signal, you know, people with high pedigree, and so there's a lot of signs, but I will
say it's really hard at the inception or conception of a really big bold idea to know if the person is visionary or delusional; if they are
fraudulent and malevolent, or really well intentioned.
And so in venture capital, you put a little bit of money in and you try to test that out and you ask, "Does it work?" You avoid the commitment bias
and then you pull back your funding if it turns out that it's not working.
[09:45:05] CHATTERLEY: Okay, so for how many how many ideas -- do you get people coming to you or you look at the new research? How many do you say,
absolutely not versus the ones where you actually decide though it's the best?
WOLFE: Oh, it's 99.9 percent of the things you're saying no to, right? It is tragedy in a sense, because you get a thousand people that come in, and
maybe 10 of them are actually taking meetings with, and one you're actually funding.
And then of the ones you fund, only a fraction of those work out. This is a very high risk, you know, high reward endeavor.
CHATTERLEY: It's so important. What's the failure rate then of the ones that you then invest in, how many don't work versus the ones that do?
Because you've had some incredible successes, Auris Health is one of the big ones, the robotics company that I know Johnson & Johnson bought. But
talk to me about the failure rate.
WOLFE: Yes, so you have a J&J that buys and orders for $6 billion, and makes up for a lot of losers. Your typical monitoring venture is about a
third of your companies are total zeros. Now, of course, priority, you don't know which ones are going to be the zeros, about a third, you make
your money back and another third, you end up with 10X or more.
So in total, you might end up with 3X cash-on-cash. And then you're delivering above market returns.
CHATTERLEY: A third fail, a third breakeven, a third are real winners. Talk to me about Control Labs, because this is a really interesting one.
WOLFE: Well, this is one you know, in a partnership, you need non-biased people, and I am a really biased person in our partnership, very bullish on
this technology. It is the future of brain machine interfaces.
So this is not about an implantable in your head, which I think is absurd. This is about being able to sense from your muscles and your nerves, on
your forearm, on your hands what your intention is of the thing you want to control.
So whether you are typing or changing the knob on a volume on a stereo or you are flipping the lights, all of those things are your brain telling
your muscles, "I want to control that thing." And in the very near future, you will be able to just think about moving the thing or controlling the
thing without actually touching a button. Your body basically becomes a remote control for everything around you.
CHATTERLEY: When I was watching that video on this, it made me think of "Star Wars." This is a Jedi mind control. And with the founder who looks
like a fascinating individual --
WOLFE: Reardon, yes.
CHATTERLEY: Microsoft Internet Explorer. He said to you, and you said actually, how long is it going to take me to do -- to see this technology
in practice? And he used to reference to Formula One, and he said he could teach you to control a Formula One, how quickly -- a Formula One car.
WOLFE: In just, you know, minutes. I mean, the technology here is about it adapting to you. And this is a trend. I call it the half-life of
technology intimacy. Fifty years ago, you had a giant ENIAC computer; 25 years ago, you got your desktop; 12 years ago, you had your laptop; six
years ago, you got your iPhone; three years ago, you had your iWatch, and then a year and a half ago, you have your AirPods.
The directional arrow of progress, which is what we as investors try to find is trending towards technology conforming to you, instead of you
hunched over a QWERTY keyboard.
So the ability to train those technologies and vice versa is really shrinking.
CHATTERLEY: So when you first started talking about this, you made a jab, I think at Elon Musk's Neuralink, because they talked about -- and we've
discussed this on the show drilling holes into your head, inputting the technology to allow you to download data. You're saying, never going to
happen. They say we're ready to do it.
WOLFE: Well, certainly not ready to do it. Will it ever happen? Sure. You know, I'm a believer in long term. But I think again, science fiction-
science fact, you have to balance reality and what's here, particularly if you're raising money from investors and being responsible and a fiduciary.
So I think there's a lot of irresponsibility in raising the hype. Now, you said before about science fiction, and the gap, you know, is shrinking
between sci-fi and sci-fact and you mentioned "Star Wars."
And there are so many incredible real life inspirations that are happening now. You've got volumetric display, like a hologram that you would see
Princess Leia communicating that is happening in a company like LookingGlass. You've got 3D scanning, like a company like Matterport,
where you can take all of the atoms in a room and digitally scan them into bits. And think about the potential for that.
And so I'm really excited about using science fiction as an inspiration for science fact. But it has to be real, it has to be near term, and if you're
taking money from investors, you've got to be honest.
CHATTERLEY: You've just raised a billion dollars. That's what we started this discussion. How do you convince people to give you money? You're
obviously having this discussion within. You're saying, "Look, we're on the boundary here of what may be impossible may also be possible." What is
it about you that they trust?
WOLFE: Well, I think it's our scrutiny of the entrepreneurs. If we were just you know, throwing out money and just betting on, you know, lots of
people in the field, I think we'd have a very low success rate.
I think some of the successes we've had or $6 billion carry on for $400 million. Luxtera sold to Cisco for $660 million. These are the kinds of
returns where you can say, "We're investing in really hard science," and that hard science is turning into really hard profits. So that's a good
thing.
Now, the kinds of stuff we invest in, it's not 5,000 competitors. We're not investing in the Groupon's and the social media stuff where it's really
hard to pick winners. We're investing in things where there might be only five companies in the space, and so it makes it a little bit easier for you
in the proverbial security selection to pick a winner from five companies, and those companies have really high engineering barriers. They have
intellectual property. They have a talent pool that's really scarce and hard to replicate.
When you find those things and they all come together, it increases the odds of you being successful.
CHATTERLEY: You're also investing in autonomous vehicle technology, 3D printing as well. We don't have time to discuss it, but we are going to
get you back to talk about both of these things. You did have a quote that I want you to repeat, and it was about predicting the future. And you
said, the best way to predict the future --
[09:50:15] WOLFE: Is to invent it. You know, and this isn't my quote, these are from, you know, famous sci-fi authors and -- but it is true. The
best way to predict the future is to invent it and for us as investors, you find the people that are literally inventing the future and to a man or a
woman, if you ask them what inspired you, they almost always say it was science fiction. "I saw something. I read a graphic novel. I was
inspired by that movie. I wanted to make it so," and we provide the funds to fuel that vision.
CHATTERLEY: Awesome. Josh, a pleasure.
WOLFE: Great pleasure.
CHATTERLEY: We'll get you back.
WOLFE: Thanks.
CHATTERLEY: Thank you. Josh Wolfe there, the Cofounder, and Managing Partner at venture capital Lux Capital.
All right, we're going to take a break. Are you in need, though? Someone is. Have some coaching on Beijing's one China policy. Find out why some
Western retailers have faced a Chinese consumer backlash, next.
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CHATTERLEY: Welcome back to FIRST MOVE. And a look at today's "Boardroom Brief" kicking off with BlackRock's juicy purchase. The world's largest
asset manager paid $875 million for a stake in Authentic Brands becoming its largest shareholder. Authentic Brands owns companies like Juicy
Couture and Sports Illustrated.
The BlackRock deal valued at $4 billion, including debt according to "The Wall Street Journal."
Thomas Cook has seen its shares plummet by 20 percent. The world's oldest travel company says existing shareholders will see their stakes diluted as
part of a rescue plan. It's in talks to raise more than $1 billion from its largest shareholder, the Chinese company Fosun.
And Coach and Versace are joining a growing -- is (ph) two brands under attack by Chinese Internet users over the country's One China policy. Both
companies reference places like Hong Kong as countries, which China, of course claims as their territory.
CNN Business Reporter, Hadas Gold joins us now from London.
Hadas, the timing couldn't be worse when you've got the Chinese authorities blaming the United States for fueling the protests in places like Hong
Kong, and then big brands like this do this. Talk us through the details?
HADAS GOLD, CNN BUSINESS REPORTER: Yes, Julia, these are these big Western luxury brands that have important markets in China. You said Coach,
Givenchy and Versace all came into hot water over the past few days over some of these t-shirts that were sold on their Web site.
They're sort of like band tour t-shirts that listed cities on the back. But as you noted, some of those cities instead of noting that they are in
China, as China believes they are listed them as sort of independent. Maybe they'd say Macau in Macau, or Taipei, Taiwan. This angered a lot of
Chinese online, on Weibo.
Coach was the most searched term on Monday, which means that they were getting probably almost a billion search hits probably in one day. And
this caused a lot of uproar. And also these brands have lost some of their important brand ambassadors. These are important models and actresses and
boy band members like Liu Wen, Jackson Yee, and Yang Mi who all pulled out of their partnerships with these brands over these t-shirts.
[09:55:12] GOLD: Now, all of the companies immediately said that they pulled these t-shirts, and that they were old t-shirt designs that were
discontinued, and they put out statements saying that they are fully aware of the severity of this error.
Givenchy said they always respected China's sovereignty and firmly adhered to the One China policy and Donatella Versace herself put out even a
personal statement saying that she never wanted to disrespect China's national sovereignty.
But as you can see, Julia, how quickly these companies acted shows not only how sensitive the situation is right now, as you noted with Hong Kong, but
also how important the Chinese market is to these companies, Chinese shoppers, Julia are apparently responsible for about a third of global
luxury sales.
CHATTERLEY: Absolutely. I mean, Taiwan is a different case, but when you're talking about Hong Kong and Macau, ouch. Hadas Gold, thank you so
much for that update.
All right. Let me give you a quick look of what we're seeing for the major U.S. markets at this moment. We are lower. The NASDAQ as you can see
underperforming. We'll be back in a couple of hours' time to follow the thread. But for now, you've been watching FIRST MOVE. Time to go make
yours.
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