Transcripts For BLOOMBERG Bloomberg BusinessWeek 20170311 :

BLOOMBERG Bloomberg BusinessWeek March 11, 2017

Megan this, comes from south koreas cooperation with the u. S. Building the thaad, a shield designed to prevent a north Korean Missile attack. China, who is sensitive about border issues, sees it as a Security Threat and has urged its population to stop traveling to korea. For some areas, that was a huge part of their markets and is having a devastating effect on tourism and business is hit by chinas approach. Oliver tell us about that tourism. There are some interesting examples of what Chinese Tourists do in korea. Megan it is a strange market where people go, karaoke, specific outlets catering to this market of Chinese Tourists and the strange activities they pursue in korea. These people who built up their entire business say 70 , 80 has declined. One person writes that it feels like im staring down a dark tunnel. Oliver yikes. Carol china using the power of it its purse. Megan they goes back to tensions in the south china sea. Oliver in the market section, lets talk about stocks. In particular, there is something called recency buys, affecting how people view expectations. Megan im glad you brought it up. [laughter] we are in this prolonged bull market. We have seen outsized returns, and people are now thinking they will continue to get this outsized return. That is the phenomenon described aptly as recency. Officials are saying dont expect 7 or 8 . It could be half that or lower in bonds and stocks if we see the end of this bull market. Since the Trump Administration, we have seen another pop in the market and how long that will last. I never get in the business of predicting the market. Be my guest. [laughter] oliver you look at the length of the bull market and time alone does not end bull markets, but the longer it goes, it does slow down and returns dont keep up. Megan particularly when you look at the outlook of not just the u. S. , but europe and the challenges of the u. K. , brexit, but also corporate earnings and whether that is sustainable. Will we continue to see larger corporate earnings feeling the market . It is interesting, but this article is a warning to people who continue to pump money into the market thinking they will get the same kinds of returns. L lets talk about the cover story, it talks about cigarettes. Megan this is one of the stories i am proud of. It delves into something i think most people would never think, but the cigarette industry itself is admitting cigarette consumption will sunset and they have to move to other products. And this article draws a connection with Silicon Valley and Cigarette Companies attempting to reinvent themselves with marketing you are used to in tech companies, from how you consume tobacco as a product from he did sticks to the new contraptions used to inhale tobacco, to the Research Facilities they have set up. One part of the article describes these communities, fooling around with these heat sticks, part espresso store and it is fascinating putting a hummingbird on the packaging and going in and ecofriendly direction with the industry. It is a must read. Oliver we did get details on the story from felix gillette. Story is about this future of cigarette technology, and how Big Tobacco Companies companies are excited about going digital. Carol is this above and beyond Electronic Cigarettes . It started with Electronic Cigarettes. I think what happened is that Electronic Cigarettes came out of left field. They were not created by the tobacco companies. And it was this market that sprung up overnight, and suddenly he grew into a multibillion dollar business, and from the Big Tobacco Companies perspective, they saw the tobacco consumer was restless. It freaked them out a little bit. Carol restless meaning they were not smoking as much . [laughter] they were looking at ways of consuming other products, and so they scrambled to acquire and launch their own ecigarette brands. In the meantime, they have taken a step further where they are now really getting fully on their Silicon Valley, hosting ted talks, launching tech incubators and venture funds. Carol somewhere in flavor country, the marlboro man is turning over in his grave. You are talking specifically about phillip morris. That is the Worlds Largest publicly traded company. Lets focus on them. What are they doing . They are most excited about this new smokingnonsmoking futuristic tobacco gadget called the iqos. It is somewhere in between a traditional cigarette and an ecigarette. It is basically a hybrid. Oliver explain what that is. For those of you that do not smoke or smoke traditionally. I have not seen it before. You get these tiny rolled tobacco like miniature cigarettes, and then you jam one into this holder and it looks like some sort of futuristic pen device, and it heats the tobacco without combusting it. There is no smoke, no foot fire. In theory it is healthier than , smoking a traditional cigarette, and there are also flavored. But the difference between that and an ecigarette is that it has some tobacco in it as opposed to nicotine. Iqos does. It is this category called heat not burn. They are excited about it. Actually they launched in 2014 , in japan and italy originally. It has a fan base that is growing. They have 1. 4 million regular users now. They spread out across europe, interactively working to bring iqos to the United States. Oliver the ecigarette is used as a former cigarette smokers who still want to smoke something. It is like a nicotine patch, replacement. Phillip morris is saying you have this new delivery mechanism. Lets ride with that idea and include tobacco in it. Yes, exactly. That gives them an advantage in some sense over these ecigarettes that youve seen pop up, because it does use real tobacco and has this whole decades and decades worth of learning about how to manufacture cigarettes incredibly efficiently, so they are putting that to use and melding that onto the techie gadget, the cigarette device. Oliver turning high tech cigarettes into a cover image was the job of rob vargas. Rob thinking about how the Tobacco Industry wants to be more like Silicon Valley. A Silicon Valley icon is steve jobs, and the most recognizable cigarette images the marlboro man. We hybridized those. Oliver this is a combination. Iqos device. E tell us about the color choice here. It is pretty straightforward. Rob i would say most people are familiar with the steve jobs image from the biography. We were looking at them sidebyside and wanted to get the color right, the hand positioning, and the classic steve jobs glasses. Oliver this is very straightforward. It is just an image. I guess you feel like those are Strong Enough images that will people will recognize what you are talking about. Rob the headline is what you see on the back of your iphone, which is typically designed by apple in california, except in this case it is marlboro in virginia. Oliver up next, what may have been the boldest promise donald made, and purple drink, how a cough syrup cocktail went from hiphop to mainstream. This is Bloomberg Businessweek. Oliver welcome back to Bloomberg Businessweek. I am oliver renick. Peter coy wrote this weeks opening remarks about how President Donald Trump is more likely to expand the National Debt than eliminate it. The issue is not whether he pays off the National Debt. The issue is how much it will go up. Every time you run a deficit, you are adding to the debt. The trump budget as far as we can see and falls quite large budget deficits. Think about it. He wants to preserve Social Security and medicare untouched, massive personal and Corporate Income tax cuts, get rid of some of the obamacare levies, and then raise defense spending. Any one of these alone is a plausible goal, but when you put them together against a backdrop that we already have budget deficits the deficit is the annual gobetween spending and revenue. Revenue accumulates, and the last time we had no National Debt was 1835. Oliver it has happened before . [laughter] for one year we paid it off, then we accumulated that again. Oliver what president has put them biggest dent in the debt. The debt became high and world war ii with a lot of for time spending, then as a share of gdp, which is an important measure, fell dramatically for decades. It is the ability of the country to carry that debt, so a large economy can carry more debt than a small one. Gdp is your savior. That is where it gets interesting with donald trump. Carol he thinks you can grow your way out of it. Oliver exactly. Conceptually he is right, the best and least painful strategy, strong Economic Growth generates more tax revenue because people pay capital gains, wages, and the debt problem goes away by itself. So you might recall that during the Campaign Trump talked about 3 or 4 growth, occasionally numbers like 5 or 6 . Carol in your dreams. Pretty much. We have been growing around 2 , and the Congressional Budget Office says the next 10 years, the potential growth is about 1. 8 . Oliver what kind of growth which you need, so basically if you are cutting taxes in order to be able to decrease the debt, you would need to get a lot more of those taxes through the growth, right . So taxing at a lower rate, but if you are taxing more because there is growth, you can offset that. How much growth would you need . Arthur laffer always said that we are at a point where higher taxes decrease government revenue because they choke off the economy. If we cut taxes come you have more revenue. That has pretty much been disproven. Yes, there is an accelerating effect from lower taxes on growth, but it is not enough to offset the cut in taxes, so to answer your question, we would need infinite amounts of growth, because youre going in the wrong direction. Oliver the upcoming showdown in washington dc about a border adjustment tax proposed by the Trump Administration, and republicans crush classaction lawsuits. That is ahead on Bloomberg Businessweek. Oliver welcome back to Bloomberg Businessweek. I am oliver renick. You can also catch us on the radio on sirius xm channel 119. In the politics and policy section, the political and corporate battlelines being drawn around a border adjustment tax. The republicans in congress and the Trump Administration want to reform the tax code in the biggest way since the reagan administration. They want to do things like lower Corporate Tax rates, Advantage Companies that make things here and tried to bring back of these profits back to the u. S. How do you do that . Paul ryan has come up with this border adjustment tax. You take the 35 corporate rate and brings it to 25 , but only applies it to domestic income. Exports are exempt. What you have is a stark line that has been drawn down the middle of Corporate America where companies that import a lot like walmart, the gap, best buy, they are saying no way. This will kill us. You have exporters like boeing that would love this because it would lower their tax burden significantly, so you have political lines incorporate lines being drawn. Carol they project it would bring a lot of money over the next decade. Right. The way to think about this is this is basically a way to get their tax overhaul done. They need money. They need it to be deficit neutral to do this complicated procedure roman numeral in congress that would allow them maneuver in congress that would allow them to do it without democratic votes. To do that you need to keep it deficit neutral. This comes up with an estimate of 1 trillion of tax revenue over a decade that would help offset the lost revenue from lower rates. Your exporters love it, where is your retailers, it will immediately raise costs for retailers in the goods they bring in from overseas, and they argue it would raise prices on things like avocados, furniture, etc. Carol it will. It is simple math. If something comes in with a tax on it, it will cost more. Here is the trick of the whole thing, and economic theory that says if you do this, the dollar will appreciate over time. That will offset, increase the buying power basically of u. S. Consumers and offset all of the ups and downs and even things out. That will take years. Oliver it will chip away on what the exporters make. Without a doubt. It would disadvantage the competitiveness of u. S. Goods overseas if the dollar is stronger. This idea that the dollar will rise and everything will even out is pure economic theory. There are vat taxes in europe, a border adjustment tax has never been done in the real world. We talked to and Midsize Company that makes luggage and imports a lot of material from overseas. They say they would have to spend years to get suppliers to lower their costs. I would not be advantaged by a stronger dollar, and if i would be, it would be years and i would be profitless until then. Oliver also in the politics and policy section, the tort reforms pushed by probusiness groups and republicans alike. In 2005, a law was passed that restricted classaction lawsuits and made it easier for defendants to bring them from state court to federal court, but since then, it has become clear that that was not sufficient in the eyes of business in terms of restricting classaction, so business interests are going back this year and with the Republican Congress and a republican president , they are pushing a group of bills, hoping to further curb classaction lawsuits and civil lawsuits in general. Oliver what are the requirements that this group was to put on legislation . There is a whole range of them. I will mention the significant ones. In terms of security classaction lawsuits, one of these bills would prevent a law firm from repeated the representing the same plaintiffs in classaction lawsuits. That may sound relatively obvious, unless less you know how Securities Class Action lawsuits work in which you often have a small group that are repeatedly representing the same Pension Funds that are suing on behalf of their investors suing companies. So if this provision were to go into effect, it could be a death knell for that relationship between the law firms and the Institutional Investors who bring a lot of those cases. Carol it does not sound like a big deal, but could be a big deal. Exactly. In the field of consumer classaction lawsuits, one restriction is that legal fees would have to be based specifically on a percentage of the money that plaintiffs recover. That sounds reasonable on the face of it, but in fact, a lot of consumer classaction lawsuits seek to change corporate behavior, and the amount of money that the class members will get is the minimum or zero, and that could discourage noise from bringing lawyers from bringing the case in the first place if their percentage is based on zero. Oliver it is a way to disincentive finds plaintiffs or prevent certain cases . Very much the former. It is a series of changes to incentives, because congress cannot outlaw classaction lawsuits. People have a right to bring civil cases in federal court, but tinkering with the rules in many small ways it is supposed to make it much more difficult for a plaintiffs lawyer to say i will bring this case. Carol your story points out a provision of this bill, the broadest proposed which would allow class actions to move forward after a judge certifies that all plaintiffs suffered the same injuries. That is pretty difficult too. It is. The rules already require commonality among plaintiffs, but this would make it a stricter requirement that there be preliminary litigation over whether the injuries are very much the same in terms of their nature and scope, and that would be yet another disincentive to bring the cases in the first place. Oliver lets talk about one thing you mentioned here, which is the litigation industry. I found it to be an interesting phrase. I remember talking with friends not from the u. S. Is that you guys sue each other. This how we sure that you make sure people to not do wrong. Is, there is a litigation industry where people make money off of this. There is. This is a facet of american life, particularly of business life, and companies are aware of their potential liability. That is why they have big inhouse legal staff and Risk Compliance officers that make sure they behave themselves in a way that wont invite litigation, but there is no out that there is a litigation tax doubt that there is a litigation tax on business. That is just the nature of the beast in this country. Oliver up next, the arrest of a chilean smuggler and his role in distribution of illegally mined gold in the United States. A Virtual Reality from that helps you visualize the hack in firm that helps you visualize the hack in real time. This is Bloomberg Businessweek. Oliver welcome back to Bloomberg Businessweek. I am oliver renick. What a Chinese Company wants with the chicago Stock Exchange, and why the illegal gold trade ,as exploded in the past decade and using virtualreality to catch ha

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