oliver: welcome to "bloomberg businessweek". i am oliver renick. inside theng to from magazine's headquarters in new york. managing threats from north korea and how smugglers are bringing gold into miami and how technology is changing big tobacco into looking more like silicon valley. all of that ahead on "bloomberg businessweek". ♪ carol: we are here with editor in chief megan murphy. you look at the strain between

china and south korea. megan: this, and's cooperation with the u.s. building the th aad, 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 china's 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 i'm 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, let's talk about stocks. in particular, there is something called recency buys, affecting how people view expectations. megan: i'm glad you brought it up. we are in this prolonged bull market. returns,een outsized and people are now thinking they will continue to get this outsized return. describede phenomenon aptly as recency. officials are saying don't expect 7% or 8%.

it could be half that or lower in bonds and stocks if we see the end of this bull market. 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. 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 don't 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

continue to get carol: the same returns. a great cover story -- to get the same returns. carol: a great cover story. then: this is one of 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. 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 store --art espresso

and it is fascinating putting a hummingbird on the packaging and going in and eco-friendly direction with the industry. oliver: we did get details on felix -- from >> these companies are excited about going digital. this above and beyond electronic cigarettes? >> it started with electronic cigarettes. electronic cigarettes came out of left field. they were not created by the tobacco companies. it was this market that sprung suddenly he, and 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? ways ofwere looking at consuming other products, and so they scrambled to acquire and launch their own e-cigarette brands. in the meantime, they have taken a step further where they are fully ony getting their silicon valley, hosting techalks, launching incubators and venture funds. flavorsomewhere in country, the marlboro man is turning over in his grave. you are talking specifically about phillip morris. let's focus on them. what are they doing? >> they are most excited about this new smoking-non-smoking futuristic tobacco gadget called the -- it is somewhere in between a traditional cigarette and an e-cigarette.

it is basically a hybrid. oliver: explain what that is. 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 10 device,and you -- pin and it heats the tobacco without combusting it. endearing, it is healthier than smoking a traditional cigarette, and there are also flavored that's the difference between that and an e-cigarette is that it has some tobacco in it as opposed to nicotine. iqos does. it is this category called heat not burn.

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. usedr: the e-cigarette is 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 . let's ride with that idea and include tobacco in it. >> yes, exactly. that gives them an advantage in some sense over these e-cigarettes that you've seen pop up, because it does use real wholeo and has this 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. thinking about how the tobacco industry wants to be more like silicon valley. is steve valley icon jobs, and the most recognizable cigarette images the marlboro man. carol: this is a combination. a common: this is nation. tell us about the color choice here. it is pretty straightforward. i would say most people are familiar with the steve jobs image from the be all the free -- from the biography.

we 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. may havep next, what been the boldest promise donald made, and purple drink, how a cough syrup cocktail went from hip-hop to mainstream. this is "bloomberg businessweek" . ♪

oliver: welcome back to "bloomberg businessweek". i am oliver renick. peter cory wrote this week's 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 ,ecurity 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 -- -- accumulates, and the last time we had no national debt was 1835. oliver: it has happened before? >> 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 so a largeat debt, 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. 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? rate, butat a lower if you are taxing more because there is growth, you can offset that. how much growth would you need? saidthur laffer always 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 not enough to is offset the cut in taxes, so to answer your question, we would need infinite amounts of growth, because you're going in the wrong direction. upcoming showdown in washington dc about a border adjustment tax proposed by the

trump administration, and republicans crush class-action lawsuits. that is ahead on "bloomberg businessweek". ♪

oliver: welcome back to "bloomberg businessweek". i am oliver renick. catches on the radio on sirius xm channel 119. -- 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. 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 prophets back to the u.s. -- profits back to the u.s. how'd you do that? 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 , the gap, bestt 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. get is basically a way to 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 to do it without democratic votes. to do that you need to keep it deficit neutral. with an estimate of $1 trillion of tax revenue over a decade that would help a four come offset the lost revenue from lower rates. 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 and economic theory that says if you do this, the dollar will appreciate over time. , increase theet 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. europe, avat taxes in border adjustment tax has never been done in the real world. 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. would not be advantaged by a stronger dollar, and if i would be, it would be years and i would be profitless until then. the politics and policy section, the tort reforms pushed by pro-business groups and republicans alike. passed005, a law was that restricted class-action 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 class-action, 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 class-action lawsuits and civil lawsuits in general. oliver: what are the requirements that this group was to put on legislation? a whole range of them. i will mention the significant ones. in terms of security class-action lawsuits, one of these bills would prevent a law firm from repeated the representing the same plaintiffs in class-action lawsuits. and may sound relatively oculus, 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. toif this provision were 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 class-action lawsuits, one restriction is that legal fees would have to be based specifically on a percentage of the money that plaintiffs recover. the sounds reasonable on face of it, but in fact, a lot of consumer class-action lawsuits seek to change corporate behavior, and the amount of money that the class the minimum get is or zero, and that could discourage noise 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 class-action 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 plaintiff's lawyer to say i will bring this case. carol: your story points out a provision of this bill, the broadest proposed which would move class actions to 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 thereer requirement that be preliminary litigation over whether the injuries are very much the same in terms of their nature and scope, and that would toyet another disincentive bring the cases in the first place. oliver: let's 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. there is a litigation industry where people make money off of this. >> there is. a facet of american life, particularly of business life, and companies are aware of their potential liability. that is why they have big in-house legal staff and risk compliance officers that make sure they behave themselves in a way that won't invite litigation, but there is no out that there is a litigation tax on business. that is just the nature of the beast in this country. 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

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 has exploded, and virtual-reality to catch factors. all that ahead on "bloomberg businessweek". ♪ oliver: we are back with "bloomberg businessweek" editor in chief megan murphy to talk about must reads in the magazine. some market stuff come in particular transaction happenings in the stock exchange industry. this involves the chicago

stock exchange, which has long lumbered in the shadow of the big or. .hey -- big board they are now in a transaction with a china-based company, a $27 million deal. it doesn't have any expense running an exchange, but the idea would be for the chicago this exchange to focus on thing smaller companies and giving access to capital for chinese companies. this is a small deal, but if this turns out to be a market for that and an inroad, yes, it will be an important avenue for capital for these companies. on the flip side, it raises questions about whether they have aptitude, whether they have controls in place, whether investors will be fully apprised of the risks with these companies. carol: let's talk about something and global economics. toknow the president wants

do these things to boost economic growth, but some measures may be impacting foreign tourism coming to the u.s. the number so far in terms of the reports of how tourism will be impacted into the u.s. is quite grim, tens of millions of people potentially no longer coming to visit. look, can we connect this directly to donald trump? it is a sampling. new york will be hit hard. people are alarmed about this. it is a direct loss of jobs if there is fewer tourists. tourism is a huge and fight till place for job growth in this country. disney officials are alarmed about it. so whether or not this is the being and gang of the trump affect, there is an impact in the tourism industry. industry being heard by trump policies, turns

out it's not such an enriching project for himself, given that he does tourism. megan: that is another interesting thing looking at his business. even some of his cabinet member stay in his hotel and washington when they are in washington, but this has been one of the questions, will the trump brand rise or fall? next.ta is his two sons are active in pursuing deals around the world come up a new hotel brand. it is interesting what happens there. in terms of tourism overall, the early numbers aren't great, but let's see what happens. the greatestw if american renaissance is ahead of us. we will have to see the renewed travel ban as well. about a story in the features section, gold smuggling, which i think i learned about for the first time. megan: who knew gold smuggling

was this easy. ups was a young guy who grew and his father ran a pond shop scalearted a small business. he decided he wanted to make it big and started gold smuggling. it really traces the flow of cumbersome and how that process is in extracting it even legally, and him literally taking it it in backpacks and suitcases to miami. apprehended,irst he had 44 pounds of gold and a roller bag. it is a fascinating tale of this interesting corner of the smuggling market worldwide. we got more from reporter michael smith on what it's like to be an international gold smuggler. >> he is a fascinating character.

thats raised in a family ran a chain and still runs a chain of jewelry stores in chile , and grew up in the business and started working after his father got sick and dropped out of college to run the family jewelry store. got himself into the global gold smuggling market that feeds the gold we use and everything basically. he basically created an enterprise, a multinational enterprise that ended up shipping tons of gold to florida , then into the global market. carol: before reading your story, i never thought much about the gold market. how big of a market is and who is buying it? >> if you look at studies done just from latin america, there is also smuggled gold from south america. there is almost 50 tons of gold

that comes from five countries in latin america to the united states, gold not officially reported on the books if you will of the customs agencies and latin america, so basically illegally obtained gold that is legally brought into the united into thed in turn sold international market. we are talking about jewelry companies mainly, but electronics companies. gold in our phones for example, and also all kinds of industry, so basically there is a huge demand for gold in the world right now. it has gone up i about 1000 tons of year in the last 15 years, and they need gold, and a lot of it comes from these illegal mines. thoughti never really about gold smuggling. it makes sense that it happens, but i think, if you think of counterfeiting or printing fake cash, with gold, the illegal michael, tell us about

the origin of illegal gold and what makes it illegal. elementsare two bank , in latinments america, colombia, peru, ecuador, brazil, bolivia, you have vast regions of the forest,y that is rain and in the rain forest, there is a lot of gold in the ground along rivers, and these territories are controlled by criminal gangs from drug trafficking organizations to smuggling groups to armed groups columbia, and they basically control all mining done there on an unregulated basis. worries about the environment or labor, and they basically get the gold out of the ground and have to bring it so they find ways to lie about the origin of the gold and say it is coming from some legitimate mining operation when

it isn't, and that allows them to exported by lying on customs forms on the country origin and in the united states to get it laundered so they can be sold legally. carol: what is fascinating is here was a well-off city kid. the family had a gold business. and yet he went from being legitimate to being, dealing with the legal gold. how does that happen? because he is an ambitious young man, and when he got into the business, he seems to have a good sense of business and is an entrepreneur and decided he wanted to make more money, and he found out there are buyers out there willing to buy any gold you bring to them to feed this black market that exists. he found ways. it wasn't very hard. he started googling gold producers in peru. he heard there is a huge underground black market for

gold, and he found a guy who introduced him to other people, and he started making buys. he found sellers and buyers and became the middleman and figured out it didn't seem to be that hard come until he got caught. oliver: speaking of law enforcement, in the security section, a cybersecurity startek is using virtual reality to catch hackers. carol: it was obviously different, and something i could literally, visually understand, which is unusual. which is the whole point of it. often when you are talking to people about cybersecurity, you are talking to companies and people affected by cybersecurity. it is so hard to understand what they are talking about. there was a focus on the presentation layer, the user

interface, to make it easier to understand which are looking at when you're looking at a network. they started in 2013. interface has always been really cool. they hire this guy from hollywood involved in special effects from trenton legacy to legacy to design the graphics. now they have developed a virtual-reality software so instead of looking at numbers and bar charts and graphs on a screen, you can put on a headset and fly through your network. , sos virtualized as a city something you would fly through. you would know your neighborhood. be like a policeman on the beat who would notice something out of the ordinary. carol: how do you know something is out of the ordinary?

what you see? >> different neighborhoods are different business areas. corporatepend on the network, but you have financier, accounting here, sales over here, and you notice that in sales this building that is normally blue, meaning there is nothing going on and there is no canat, is read, so then you -- red, so then you consume closer and see what is happening. you will know exactly what you're looking at because each structure has a different shape depending on what it is. if it is a mobile device, it is hexagonal. if it is a cloud database, it is a different shape. the width and height is aced on bandwidth and net flow, so it is making it more intuitive, and you can view it as superficial,

but the idea is that right now it is very hard to get a view of a net work, and you need to make it easier for analyst to do that. theer: up next, controversial purple drink costsg alarm for a are manufactured. this is "bloomberg businessweek" . ♪

oliver: welcome back to "bloomberg businessweek". i am oliver renick. in the features section, an investigation into purple drank, and the do-it-yourself combination of cough syrup and

soda popular with hip-hop artists. carol massar and i talked with megan murphy. carol: this looks of the companies behind this mixture known as purple drank, a popular high in the hip-hop community in the south. this story focuses on houston and how it was an integral part, cough syrup, a component of that high you get by drinking this and how these companies, and it is a small corner of the overall drug market, but these bottles of cough syrup trade as high as $1000, $2000, and are specific to their flavors and color. purple drank is what we focus on. theaugh about it, but country is in the throes of an opioid epidemic, unseen scale, a threat to so many communities now. the radarder

percolating away in cities like houston, and law enforcement, how different it is to combat these highs. is what i love about the reporting. he digs into it. it is under the radar. it is not so well-known. thewonder about whether corporate community, the drugmakers, how much they knew about it and the street value of this drug. megan: that is the thing. it is a small market and a small number of producers involved in producing this syrup that is specific to this thing. how much can they do to combat it when it is off the shelf combinations. when they are aware of it, what they can do to limit street usage and trading in it. this talks about how changing even the kind of bottle this year is made in to give it a different taste, and therefore

how it less valuable, and much drug companies are aware. it is not just this market, but other markets. can they control it? can you crack down on it? there are obvious legitimate uses for this product. is that it about it delves into this hip-hop community in houston who feels like they are being taken advantage of. oliver: tell us about that community. the reporter did a great job. he is from texas and witness this firsthand. i remember the first time i heard about the product was when little wayne was hospitalized. that has been how it has proliferated, its use and reference throughout hip-hop and big musicians. megan: that is the thing. you mentioned little wayne. talkingry goes into

about justin bieber and he was a purple drank consumer, and its prevalence and that community. there is artwork that features some of this in it. community, it is that , a community where a lot of things proliferate through the lyrics of music. people replicate what they see people doing and what they hear people doing. i think he goes into this and gives you a window into that very tight community in houston. next, google learns it takes more than fast internet to build the next silicon valley. and nintendo's mobile future. this is "bloomberg businessweek" . ♪

oliver: welcome back to "bloomberg businessweek". i am oliver renick.

is on theso catch radio on serious xm channel 119. xmus on the radio on serious 10 119. in the technology section, google's effort to provide high-speed internet has not been enough to inspire a startup mecca i can to silicon valley. ber is superfast internet. things,do incredible upload, download netflix movies in the blink of an eye. if you have large files like photographs, no time spent at it ising the internet, so noticeable and very fast. oliver: basically it went by the wayside. there is talk about how big it changes it was going to spur, but it faded from

view. >> i would not say exactly that. in the few cities were people have it, they really love it. the thing was google was going to roll it out in cities across the country, and it isn't quite a few cities across the country, but the company which once was working superfast to get google fiber out across the country has pulled back a little bit, and into cities where it went in and people were initially so excited , now they just have faster internet and the other were has worn off a little bit. carol: let's talk about kansas city, kansas, the first city to get google fiber. it did attract some entrepreneurs. tell us his story. >> there were quite a few people

who saw this and thought it would be great for their business to have google fiber to seted to kansas city up businesses, and one of them is this guy who heard about it and within days had driven to kansas city, kansas to check it out, then moved there and set up his business. he was the only person i could really fine for whom google fiber actually had a business use case, because he has a sports photography platform, and he really needs high speeds, particularly for uploading photographs, but then i talked to other entrepreneurs who said they liked it but could not find a business use case for it, and even if they had it, their customers did not have it, so even if they found a way to move bulky files around, they would probably get clogged up on the customer end.

a lot of the entrepreneurs who moved to kansas city moved away because they did not find it as useful as they helped. oliver: what happened as those entrepreneurs came to places like kansas city? perhaps they could not find a business use case for google fiber, but tell us about how seed money went to these areas and how whether it ended up feeling growth in the start up space. right, in the startup community in kansas city, they thisso excited and thought would put us on the map, investors will come piling in, and it will kickstart our startup scene. the problem is that investors outside almost everywhere except silicon valley are still fairly conservative. if you go to an investor in a place like kansas city and say i have this business idea. i don't really have much revenue yet. profit is years away and i don't

have assets, the investor will say thanks, i will invest in something else. in silicon valley, if they believe in your story enough and think there is a good market and you can pull it off, you might be able to get some money. in kansas city, it turned out it was really hard. oliver: also in the technology section, details on nintendo's effort to bridge mobile gaming with the living room consul. >> this is an effort by nintendo anduild a hybrid home mobile console from scratch. it is a jumbo tablet with controllers built onto the sides , and you can pick it up to go with you when you want to go play in the park. you can play on the couch with it. betsr: what are the big nintendo is making? for better or worse, they have been making big bets and one thinkii when they said we

people will get up and move around and interact with games in a way that hasn't happened. what do they need to do differently to make the switch work? , the big bet was on the dual screen experience with enoughlers and would be of a differentiator that people with want something different than what they were used to from the xbox or playstation. is problem they ran into they made it too difficult to program. it was hard to get outside developers to make games for it, so they are hoping by turning the keys to a software-centric , they have team built the switch such that it will be easier for outside companies to come in and make great games for the system. carol: in terms of developing

switch, it was more software guys come not hardware guys. they brought in a younger team to develop the project so they could get right at the younger audience who would hopefully be buying it. >> correct. a lot of the nintendo lifers who had been developers turned the keys over to some of their earlier veterans of graphics development and those people brought in a couple dozen name designers in their 20's and 30's to throw ideas on the wall and figure out how they would use it in what capacity in the living room, and to translate that experience outdoors. iterations ofious nintendo consuls, the hardware is not quite what you would expect as a fan of playstation or xbox. they are counting heavily on the software to be the big differentiator to make people

want to keep playing with each other. oliver: "bloomberg businessweek" is available on newsstands now an online at bloomberg.com. more bloomberg television starts right now. ♪

♪ >> coming up on bloomberg best, the stories that shaped the week in business around the world. in the u.s., fierce debate over a travel ban and health care plan. >> members of the united states senate have said it is a nonstarter. >> it is dead on arrival. >> china sets its economic targets, and britain accounts for brexit. >> i call it cautiously optimistic or upbeat, but with few giveaways. >> jamie dimon fires from the hip in an exclusive interview. >> the banking problem's not his biggest people say. >> wilbur ross draws the battle lines on trade. >> we have been in a trade war for decades. >> plus, executive insight from