WEBVTT - Volatility Will Stay in a High Range, Gallo Says 0:00:00.080 --> 0:00:13.040 Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:32.800 Bloomberg dot Com, and of course on the Bloomberg Joining 0:00:32.880 --> 0:00:34.680 Us Now, I'm really pleased to says I bet So Gallo, 0:00:34.760 --> 0:00:38.960 Algebra's head of macro Strategies formally head enough credit over 0:00:39.000 --> 0:00:41.080 at RBS. I bet I always gret to catch up 0:00:41.080 --> 0:00:42.519 with you, and I want to start there with the 0:00:42.560 --> 0:00:45.600 market risk assets rolling go over. But the bid into 0:00:45.640 --> 0:00:52.040 treasury is really mild. Why I think today it's seasonal effect. 0:00:52.680 --> 0:00:55.920 Investors bod duration at the end of the first quarter, 0:00:56.120 --> 0:00:59.640 and today there's a little bit of widening in yields. 0:01:00.040 --> 0:01:04.320 Having said that, we think that the growth momentum is fading, 0:01:04.480 --> 0:01:08.160 and UM, you know, all the idea of having four 0:01:08.240 --> 0:01:10.960 or three and a half percent yield conten your treasury, 0:01:11.400 --> 0:01:13.000 you know we're gonna have to wait a lot longer 0:01:13.040 --> 0:01:16.480 for that. So we are still in a bookmarket for bonds, 0:01:16.560 --> 0:01:20.560 and UM duration is still UM is still in demand 0:01:20.720 --> 0:01:23.800 from investors, not just in the US, but also across 0:01:23.840 --> 0:01:26.840 the world, in emerging market, local currency and in Europe, 0:01:26.840 --> 0:01:31.039 because remember, investors want also alternative to treasuries. Treasures are 0:01:31.080 --> 0:01:35.400 slowly losing say fav and status due to also political volatility. 0:01:35.520 --> 0:01:37.560 I bet so the front end is a very different story. 0:01:37.600 --> 0:01:41.520 Though despite the market dropping two down three percent seemingly 0:01:41.560 --> 0:01:44.520 at one point, the bid does not come into the 0:01:44.520 --> 0:01:46.440 front end of the treasury curve. There is a view 0:01:46.440 --> 0:01:48.840 in the market still that the FED will continue to 0:01:48.880 --> 0:01:51.520 deliver great hikes. Is that the right view from where 0:01:51.560 --> 0:01:55.360 you guys are sitting at Algebras. I believe that is 0:01:55.400 --> 0:01:58.840 still the case. And let's remember that the FED is 0:01:58.920 --> 0:02:01.040 hiking in an environment where the e c B and 0:02:01.080 --> 0:02:03.440 the b o J and other central banks are still dobbish, 0:02:03.680 --> 0:02:06.960 so they have the benefit of hiking without the long 0:02:07.120 --> 0:02:09.600 end of the curve moving wider. The long end of 0:02:09.639 --> 0:02:12.480 the curve in the end is very It's much more 0:02:12.480 --> 0:02:15.800 influential for for long term investment decisions by companies and 0:02:15.840 --> 0:02:19.480 also households buying buying homes with with long long end 0:02:19.520 --> 0:02:23.200 mortgages ten t any third year mortgages. So effectively the 0:02:23.800 --> 0:02:27.560 bo J and d c B are keeping the long 0:02:27.720 --> 0:02:30.040 end of the U s treatory stable and making the 0:02:30.040 --> 0:02:35.760 FED a favor. But overall um normalization across global central 0:02:35.760 --> 0:02:38.000 banks it's going to be a lot more difficult because 0:02:38.200 --> 0:02:41.080 growth momentum is fading and you know the impact of 0:02:41.080 --> 0:02:43.680 the fiscal stimus is fading, and instead of that, we're 0:02:43.680 --> 0:02:47.880 having you know, a trade a mild trade war or 0:02:48.240 --> 0:02:52.280 trade uh skirmish at the moment. So what we need 0:02:52.360 --> 0:02:55.760 to regain momentum here is is another physical effort, but 0:02:55.840 --> 0:02:57.799 at this time not by the US but by Europe 0:02:57.840 --> 0:03:00.720 or Japan, and I don't see that at the moment. Well, 0:03:00.840 --> 0:03:02.359 the backdrop to all of this at the moment is 0:03:02.400 --> 0:03:05.080 a higher volatility regimail bet. So we've got the VIX 0:03:05.440 --> 0:03:07.480 north of twenty. It bleeds a little bit lower today, 0:03:07.480 --> 0:03:10.519 but the story has been elevated volatility over the last 0:03:10.560 --> 0:03:12.200 couple of months. We had the Vick shock of about 0:03:12.200 --> 0:03:15.120 a month ago, and what's clear is it's taking a 0:03:15.120 --> 0:03:17.360 long long time to actually clear the decks and for 0:03:17.480 --> 0:03:20.679 volter to roll over south of twenty. Why is that happening? 0:03:20.760 --> 0:03:24.000 Why have we got this elevated volatility ragiume And just 0:03:24.040 --> 0:03:26.240 look at the term structure of the VIX at the 0:03:26.280 --> 0:03:30.880 moment Albert, so counterintuitively, it is still inverted. Can we 0:03:30.960 --> 0:03:34.800 remain like this for a lot longer? I think so. 0:03:34.920 --> 0:03:37.360 The short answer is financial markets are a lot more 0:03:37.400 --> 0:03:41.120 fragile with corninative easing. For ten years, we had a 0:03:41.200 --> 0:03:45.360 recovering the economy, but we have built fragilities embedded in 0:03:45.400 --> 0:03:49.480 the market. Investors have been buying equities for yields, have 0:03:49.520 --> 0:03:52.360 been buying bonds for capital gains. A lot of investors 0:03:52.400 --> 0:03:55.400 have been selling volatility, and markets overall have become a 0:03:55.400 --> 0:03:58.720 lot more one sided, with more passive strategies that that 0:03:58.880 --> 0:04:01.920 heard into the same trades. So we end up with 0:04:01.960 --> 0:04:05.000 a pyramid of trades that we've discussed over the last month, 0:04:05.080 --> 0:04:08.480 where a lot of trades, a lot of strategies depend 0:04:08.680 --> 0:04:12.240 on continued fiscal continued march ary steamuless, on interest rates 0:04:12.360 --> 0:04:16.160 staying low, and political stability, and gradually some of the 0:04:17.600 --> 0:04:20.520 assumptions at the bottom of the pyramids are are are 0:04:20.960 --> 0:04:25.040 basically falling apart. So I think the market, you know, 0:04:25.120 --> 0:04:27.159 we're still in a growing economy, but the market needs 0:04:27.200 --> 0:04:30.040 to deal with this increased fragility. Volatility is going to 0:04:30.120 --> 0:04:32.400 remain high, and this is one of the trades I 0:04:32.520 --> 0:04:35.200 like the most to to to bet on volatility staying 0:04:35.320 --> 0:04:38.240 in a higher range within that bet. Are there a 0:04:38.360 --> 0:04:42.159 lot of opportunities out there? Or is there Vertegalo managing 0:04:42.279 --> 0:04:44.599 for the coupon? I mean, can you actually may whether 0:04:44.640 --> 0:04:46.960 you go along short or whatever the creative aspect is 0:04:47.480 --> 0:04:51.880 the trade. Can you can you actually make a trade happen, 0:04:52.720 --> 0:04:54.560 you know, and get a total return or is it 0:04:55.080 --> 0:04:59.760 to manage to the coupon? In fixed income, we're with 0:05:00.000 --> 0:05:04.120 stills think that duration outside of the US is interesting. 0:05:04.200 --> 0:05:08.320 So European periphery and also emerging market local currency bonds 0:05:08.360 --> 0:05:10.880 in Russia and Brazil. So there is a flight of 0:05:11.080 --> 0:05:14.680 capital away from the U S which has been increasing 0:05:14.760 --> 0:05:16.440 over the last you know, ten years, has been the 0:05:16.480 --> 0:05:19.680 destination of a lot of the serve into other assets. 0:05:19.760 --> 0:05:23.279 So it fixed to come at relative trade works. In equities, 0:05:23.320 --> 0:05:26.880 we're focusing on shorts. Johnny, you want a theme for April? 0:05:27.000 --> 0:05:30.520 What Mr Gallo just said there the bad the idea, 0:05:30.640 --> 0:05:34.040 the observation of money moving out of the US. That's 0:05:34.040 --> 0:05:37.560 a really interesting trend. I think that's been a trend 0:05:37.640 --> 0:05:39.280 through the first quarter as well. A lot of people 0:05:39.360 --> 0:05:40.880 talking about that after the back of some of the 0:05:40.960 --> 0:05:43.160 issues the market issues here in the United States. How bad. 0:05:43.240 --> 0:05:48.240 I didn't miss that short equities, short equities where because 0:05:48.680 --> 0:05:51.960 as a house Algebras has been incredibly bullish on the 0:05:52.040 --> 0:05:54.720 continent in Europe. So so where are you short equities? 0:05:56.480 --> 0:05:59.080 I mean, overall, we still keep a positive bias because 0:05:59.120 --> 0:06:01.880 the economy has grown in but we've been buying protection 0:06:01.960 --> 0:06:04.240 on these sectors that we you know, we thought were 0:06:04.279 --> 0:06:07.080 the most over valued. So we're talking about the US 0:06:07.160 --> 0:06:09.960 and and tech and you know, no one knows if 0:06:10.040 --> 0:06:14.200 the correction has been uh, if the correction is done now, 0:06:15.040 --> 0:06:18.160 But generally the markets which we think are still undervalued 0:06:18.240 --> 0:06:22.640 are emerging markets Europe and Japan, which haven't benefited from 0:06:22.720 --> 0:06:26.560 earnings uplift over the last five six months as much 0:06:26.600 --> 0:06:29.080 as the US and and you know, haven't benefited from 0:06:29.560 --> 0:06:33.159 investor flows as much. So valuations are lower and earning 0:06:33.920 --> 0:06:37.560 earning expectations are a little bit more moderate outside of 0:06:37.600 --> 0:06:40.760 the US. Now, obviously, the question is whether there will 0:06:40.800 --> 0:06:43.760 be another big tail event, another big sell off. No 0:06:43.880 --> 0:06:47.680 one knows the answer to that um, but generally, you know, 0:06:47.760 --> 0:06:52.279 we're we're mildly cautious at the moment um we're closing 0:06:52.360 --> 0:06:55.960 some of our shorts as the market has already corrected again, 0:06:56.720 --> 0:06:59.320 but we do think volatility will stay in a high range. 0:06:59.560 --> 0:07:03.240 So UM, I don't think we are going to go 0:07:03.440 --> 0:07:06.799 back to goldilocks now. Bet so. Your bread and butter 0:07:07.320 --> 0:07:10.280 is credit, and credit hasn't been great in Europe over 0:07:10.320 --> 0:07:12.920 the last month or so. It's been phenomenal since the 0:07:13.120 --> 0:07:16.160 c B started its bombining program. Where are you guys 0:07:16.240 --> 0:07:19.080 on credit right now Europe versus the US, and how 0:07:19.160 --> 0:07:23.720 are you exposed for it? We're looking for places to hide. 0:07:23.760 --> 0:07:27.880 There's less, less and less. Europe is still one of them. 0:07:28.240 --> 0:07:31.280 Balance feets are less levered than the U S. D. 0:07:31.400 --> 0:07:35.160 C B is still very dorvish and worries about periphery spread. 0:07:35.600 --> 0:07:38.760 So in Europe you still have UM, you still have Greece, 0:07:38.840 --> 0:07:42.360 you still have Portugal, and also BTPs in Italy didn't widen, 0:07:42.520 --> 0:07:45.760 even though the election outcome is uncertain, because there is 0:07:45.840 --> 0:07:50.520 demand for substitutes to to dollar assets. Bank debt. Banks 0:07:50.560 --> 0:07:52.720 are going to do better in an inflation in an 0:07:52.800 --> 0:07:55.800 environment where inflation is slowly picking up an interest rate 0:07:55.880 --> 0:07:58.400 or slowly picking up globally, so there's a few niches. 0:07:58.480 --> 0:08:01.880 There is not trade with a massive capital appreciation, but 0:08:02.080 --> 0:08:05.880 you can get a decent coupon in some markets were 0:08:05.960 --> 0:08:08.440 central banks are still Dobbs Alberta Gala, thank you so 0:08:08.560 --> 0:08:11.640 much with Algebras this morning greatly. I appreciate John. That's 0:08:11.680 --> 0:08:14.400 always valuable. You know he's got he's got a real 0:08:14.440 --> 0:08:16.760 European focus. I get there was work at Royal Bank 0:08:16.800 --> 0:08:21.960 of Scotland for years, but it's really interesting about flows. 0:08:22.120 --> 0:08:24.080 It's something I gotta read a lot more about. Yeah, 0:08:24.080 --> 0:08:25.840 and now Better, let's be very clear, has done a 0:08:25.840 --> 0:08:28.760 phenomenal job moving from RBS to to Algebras to head 0:08:28.840 --> 0:08:31.520 up the macro Credit Fund, to Algebras delivering a one 0:08:31.600 --> 0:08:33.760 year return tom in credit over the last year, which 0:08:33.760 --> 0:08:36.080 I think is really significant in the global bond market 0:08:36.120 --> 0:08:38.880 and credit markets have just over seven percent, which is 0:08:39.320 --> 0:08:41.160 one had have a return over the last year for 0:08:41.240 --> 0:08:44.920 many credit investors. Yeah, that was with smoke and or mirrors, 0:08:45.320 --> 0:08:50.359 um smoking a couple of merrors. N Better Gallop Algebra's 0:08:50.360 --> 0:09:06.439 head of macro strategist John Farrell, and Tom Keane with 0:09:06.559 --> 0:09:09.040 this now seth masters for years with Bernstein. He's now 0:09:09.120 --> 0:09:13.040 a private investor looking at Angel like companies. John wants 0:09:13.080 --> 0:09:14.559 to go to Spotify, and I want to do that. 0:09:14.679 --> 0:09:18.920 But quickly here, you are fluent in Mandarin. Right, did 0:09:19.000 --> 0:09:20.840 your mother make you do that? And for a third 0:09:20.880 --> 0:09:23.240 grade or fifth grade or something? No, I did that 0:09:23.360 --> 0:09:26.520 in college. To myself, you inflicted it upon yourself. What 0:09:26.600 --> 0:09:30.400 do you think of striving Upper East Side mothers that 0:09:30.480 --> 0:09:33.000 go you need to learn Mandarin? How do you respond 0:09:33.040 --> 0:09:37.000 to that? I think it's um predictable because the same 0:09:37.040 --> 0:09:39.360 people would have been saying, you've got to learn Japanese 0:09:39.480 --> 0:09:42.520 and exactly um. But I hope that some of the 0:09:42.600 --> 0:09:45.840 kids come out of that really enriched with the ability 0:09:45.920 --> 0:09:48.840 to at least a culture in the history. Yeah, John, 0:09:48.960 --> 0:09:51.000 I had a little different upbringing. My mother looked at 0:09:51.000 --> 0:09:53.640 me and said, you've got to learn English. You know 0:09:53.720 --> 0:09:57.760 where that one. Let's go to spot that work. I'm 0:09:57.760 --> 0:09:59.959 still trying to work it out. Seth. It's always great 0:10:00.080 --> 0:10:01.920 to get your insight on on something. And what I 0:10:02.000 --> 0:10:04.560 think is really interesting about Spotify today is no new shares, 0:10:04.880 --> 0:10:08.240 no new capital, just setting a price in public markets, 0:10:08.280 --> 0:10:10.160 and what we've seen over the last few years in 0:10:10.240 --> 0:10:14.360 private markets, it's incredibly rich valuations and money just literally 0:10:14.440 --> 0:10:19.280 flooding flying towards absolutely everything and anything because an angel investor. Now, 0:10:20.000 --> 0:10:22.480 do you look at that situation in private markets as 0:10:22.520 --> 0:10:25.600 one of which whether it's too much cash being thrown 0:10:25.640 --> 0:10:29.000 at everything, or do you draw a line somewhere to 0:10:29.040 --> 0:10:31.320 say that, actually it doesn't work like that. Well, it's 0:10:31.360 --> 0:10:33.880 a really great question, and I think it's very nuanced 0:10:34.160 --> 0:10:37.880 because there are different segments of that market. When companies 0:10:37.920 --> 0:10:42.720 are first started, they actually aren't necessarily that highly priced 0:10:42.760 --> 0:10:46.079 because the risk is stratospheric. Very few new companies actually 0:10:46.240 --> 0:10:49.960 succeed as they moved through the process of success, though 0:10:50.400 --> 0:10:53.120 at some point they become attractive to venture capitalists and 0:10:53.679 --> 0:10:58.079 maybe then to private equity investors. And what's happened is 0:10:58.120 --> 0:11:01.160 so much money has gone into equity funds and venture 0:11:01.200 --> 0:11:04.800 capital funds that I think right now those areas have 0:11:04.960 --> 0:11:07.920 gotten extremely fully priced, or probably overpriced. That's why we're 0:11:07.960 --> 0:11:11.599 seeing more down rounds and also more I p O 0:11:11.679 --> 0:11:14.319 s coming out below the last private valuation. Well, it's 0:11:14.400 --> 0:11:16.080 very hard to get a read on what Spotify will 0:11:16.080 --> 0:11:18.560 actually price that today there is no IPO price. They 0:11:18.600 --> 0:11:20.319 will bring this to market, they'll bring the bus and 0:11:20.320 --> 0:11:22.599 sellers together and hopefully they'll establish a price in a 0:11:22.679 --> 0:11:24.840 couple of hours, but when there will be a price 0:11:24.920 --> 0:11:28.240 there eventually, But it's very hard to gauge from what 0:11:28.400 --> 0:11:31.199 happened in the private markets what will ultimately happen in 0:11:31.280 --> 0:11:34.480 the public markets. How do you gauge at the moment 0:11:34.600 --> 0:11:37.520 the ability of these companies to go from being private 0:11:37.640 --> 0:11:40.720 to going public and achieving the kind of valuations they've 0:11:40.720 --> 0:11:44.400 achieved in private markets. Well, I think it depends on 0:11:44.520 --> 0:11:47.720 two things. Um One is the specifics of the individual 0:11:47.880 --> 0:11:51.120 deal and to the overall environment in which it happens. 0:11:51.160 --> 0:11:54.319 And the problem is these companies don't control the ladder. 0:11:54.360 --> 0:11:57.760 Spotify probably dearly wishes it had done this a month 0:11:57.880 --> 0:12:01.280 or two ago, but now it's too late to fix that, right. 0:12:01.520 --> 0:12:03.360 The only thing they can do is run their business 0:12:03.400 --> 0:12:06.079 as effectively as they can. And look, the reason that 0:12:06.120 --> 0:12:08.520 they're doing this is because they know they need to 0:12:08.760 --> 0:12:11.280 provide some liquidity to some of their investors and and 0:12:11.520 --> 0:12:14.120 and keep key talent. That's that's what this is about. 0:12:14.240 --> 0:12:16.559 I read the zeitgeist today, and folks, I want to 0:12:16.600 --> 0:12:19.280 make clear Spotify is gone beyond usual Wall Street talk 0:12:19.280 --> 0:12:23.200 to actually people are curious about this transaction. Mark Mahaney. 0:12:23.320 --> 0:12:26.320 RBC Capital has got a big pop out to two 0:12:26.400 --> 0:12:30.240 hundred dollars for share Fine. The real under the real 0:12:30.360 --> 0:12:37.319 backstory is how institutional shareholders will behave versus retail. Do 0:12:37.440 --> 0:12:40.000 you buy that idea that there are two different markets 0:12:40.400 --> 0:12:45.160 and they will react differently on a transaction? Uh, well, yeah, 0:12:45.320 --> 0:12:47.560 I think that there there's truth in that. It's also 0:12:47.640 --> 0:12:50.760 to that institutions are not monolithic and sometimes neither our 0:12:50.800 --> 0:12:55.400 retail investors. The whether or not those two forces coincide 0:12:55.480 --> 0:12:56.960 is the key question, because if you have a lot 0:12:57.000 --> 0:12:59.760 of excitement from both institutions and retail, that's when you 0:12:59.840 --> 0:13:04.000 get nice pops um. Sometimes though, you actually have cross currents. 0:13:04.080 --> 0:13:06.320 I don't know what will happen, obviously, and it's fair 0:13:06.640 --> 0:13:08.280 you don't know, I don't know fair, or you know 0:13:08.400 --> 0:13:11.480 what's going to happen. Jack, I'm looking at the spread 0:13:11.559 --> 0:13:15.000 of buys on Spotify today and the buys go from 0:13:15.080 --> 0:13:18.520 target prices of eight to a target price of T twenty. 0:13:18.840 --> 0:13:20.880 I would say that spread on the buys just tells 0:13:20.880 --> 0:13:23.760 you that many of these analysts have no idea where 0:13:23.800 --> 0:13:25.959 this is going to price today. I would also say, 0:13:26.040 --> 0:13:28.600 based on this Spotify IPO just raise a question whether 0:13:28.640 --> 0:13:31.120 the I p O now is just about the exit 0:13:31.240 --> 0:13:34.320 and not raising capital and whether that's a broader story 0:13:34.679 --> 0:13:36.880 or whether that's a Spotify story. Which one is it? 0:13:36.960 --> 0:13:39.760 Seth I think it can be either. I think it 0:13:39.800 --> 0:13:41.720 depends on whether or not you need to raise capital 0:13:41.840 --> 0:13:44.599 or whether you need to provide some liquidity to the 0:13:44.679 --> 0:13:47.400 moment in private markets if you want to raise capital, 0:13:47.440 --> 0:13:51.079 which you can, So why go public? Where did we Well? 0:13:51.559 --> 0:13:54.160 I don't mean to interrupt, I just this is can 0:13:54.240 --> 0:13:57.400 you can we get set Masters back for our six 0:13:57.520 --> 0:14:01.400 hour program we're doing on Spotify program. We're doing six 0:14:01.480 --> 0:14:04.640 hours Spotify for this is fascinating. Seth Masters, thank you 0:14:04.760 --> 0:14:07.439 so much today and we've got to get you back 0:14:07.440 --> 0:14:10.240 to continue this discussion when Spotify is either eighty or 0:14:10.400 --> 0:14:14.760 what was the other bye? That's from our BC. That's 0:14:15.280 --> 0:14:19.120 that's Mr Mahany. Yeah, when he's a full disclosure. Mr 0:14:19.320 --> 0:14:23.000 Mahoney has a respect of Bloomberg Surveillance as well. Seth 0:14:23.080 --> 0:14:26.080 Masters for years with Bursday and we thank him as 0:14:26.160 --> 0:14:29.960 he goes out and looks for angelic type of companies. 0:14:41.800 --> 0:14:44.320 Michael Jesus with Morgan Stanley, John Farrell help us with 0:14:44.400 --> 0:14:48.840 Michael's USUS son Washington, Morgan Stanley's chief US public policy strategist, 0:14:48.920 --> 0:14:52.360 Michael J's tech getting absolutely hammered over the last few weeks, 0:14:52.400 --> 0:14:55.080 and the presidents had had a hand to play this administration. 0:14:55.120 --> 0:14:58.520 Are we going to see the policy or just the rhetoric? Well, 0:14:58.560 --> 0:15:01.880 the rhetoric at first. Uh. And so the first and 0:15:01.960 --> 0:15:04.320 foremost when it comes to to any kind of regulation 0:15:04.400 --> 0:15:07.520 or tech regulation in particular, is you gotta know exactly 0:15:07.600 --> 0:15:08.840 what you want to regulate and how you want to 0:15:08.880 --> 0:15:12.359 regulate it. And as far as we can see, policymakers 0:15:12.360 --> 0:15:15.080 are still trying to understand the complexity of the issue. 0:15:15.720 --> 0:15:19.440 So um uh. And you know, there's not much existing 0:15:19.560 --> 0:15:21.960 law that we can tell that the president can sort 0:15:21.960 --> 0:15:25.960 of act on unilaterally by kind of rewriting regulation. So um. 0:15:26.040 --> 0:15:28.200 I think the pressure is clearly there. There's clearly a 0:15:28.280 --> 0:15:32.840 bipartisan push um for more regulatory issues on on tech, 0:15:32.960 --> 0:15:35.240 but it's unclear exactly what the path is. So you 0:15:35.320 --> 0:15:38.560 have to you have to praise in that Washington serious 0:15:38.560 --> 0:15:41.520 about this, But what exactly it's gonna look like it's 0:15:41.520 --> 0:15:43.880 going to take wild developed? Well, Michael human, Washington is 0:15:43.960 --> 0:15:46.920 serious about what because there's a bipartisan pushing Congress, I 0:15:46.960 --> 0:15:49.440 assume around the personal data issue. Then within the White 0:15:49.480 --> 0:15:51.920 House there's a separate issue. The President seems to be 0:15:51.960 --> 0:15:55.920 renewing his attack on Amazon. They're two very very different stories. 0:15:56.320 --> 0:15:58.120 What do you lend more weight to at the moment 0:15:58.280 --> 0:16:00.560 as far as you think something might actually happen in 0:16:00.680 --> 0:16:04.920 terms of policy. Well, you know, the the Amazon thing 0:16:05.040 --> 0:16:07.680 is interesting in the sense that it don't clear me 0:16:07.800 --> 0:16:11.400 exactly what the president wants to do, so we're paying 0:16:11.440 --> 0:16:13.960 a lot of attention to it. But you know, other 0:16:14.080 --> 0:16:17.480 than the President expressing a grievance on Amazon, which is 0:16:17.640 --> 0:16:20.360 which you know, by his own words, is related to 0:16:21.120 --> 0:16:24.040 um their media coverage of him as well, it's hard 0:16:24.080 --> 0:16:26.640 to suss out exactly what he wants to change there. 0:16:26.720 --> 0:16:30.760 Whereas the tech regulatory issue, there's actually some some clear 0:16:30.840 --> 0:16:33.440 grievances that need to be addressed. So it's hard for 0:16:33.480 --> 0:16:35.920 me to gain out exactly what the US hypothechically could 0:16:35.960 --> 0:16:37.400 do on Amazon. It's not sure where they want to 0:16:37.480 --> 0:16:40.720 change the tech issue there. There's there's some clear implications 0:16:40.760 --> 0:16:42.240 of what they want to do. Is just a question 0:16:42.320 --> 0:16:44.480 of taking time to actually get down that path. When 0:16:44.560 --> 0:16:51.080 you dovetail your work with your economist, Ellen Zanner. How 0:16:51.240 --> 0:16:56.440 do you treat the new fiscal policy and fiscal realities 0:16:56.520 --> 0:16:59.520 to come? Is it a second quarter event or does 0:16:59.560 --> 0:17:05.240 that way for later in the year. Um, probably more 0:17:05.359 --> 0:17:08.439 of a later in the year story. So we've been 0:17:08.480 --> 0:17:13.120 talking a lot about UM, what fiscal policy actually delivers, 0:17:13.440 --> 0:17:15.440 and you know, we think it's it's pretty clear what 0:17:15.560 --> 0:17:18.120 it delivers from a macro perspective. It adds a few 0:17:18.240 --> 0:17:22.159 tens um, you know our GDP. But you know, the 0:17:22.880 --> 0:17:27.760 question is, UM, what do we actually get for those deficits? 0:17:28.480 --> 0:17:32.000 And UM, do we get something more sustainable beyond that? 0:17:32.240 --> 0:17:33.560 And a lot of that is gonna have to do 0:17:33.880 --> 0:17:37.200 with corporate behavior and what some of the corporate incentives 0:17:37.240 --> 0:17:40.360 created by tax reforms were. And some of our questions 0:17:40.400 --> 0:17:44.119 are basically, UM, did we actually extend the cycle? And 0:17:44.200 --> 0:17:47.879 if not, UM, if the cycle is going to kind 0:17:47.920 --> 0:17:49.800 of end or start to slow around the same time 0:17:49.840 --> 0:17:52.359 as some of these corporate incentives created by tax reforms 0:17:52.400 --> 0:17:55.760 start to roll off, like immediate expensing um, and they 0:17:55.800 --> 0:17:59.000 could possibly sync up with things like a more restrictive 0:17:59.040 --> 0:18:01.480 intersductibility on the corporate side, you get a lot of 0:18:01.560 --> 0:18:05.440 pro cyclical behavior um at the wrong time. So you know, 0:18:05.560 --> 0:18:08.480 all we think about is we we know, we know 0:18:08.720 --> 0:18:11.679 almost by definition that growth is better this year than 0:18:11.720 --> 0:18:14.080 it would have been um without the tax reform. But 0:18:14.160 --> 0:18:16.000 what do they get us beyond that? That's what we 0:18:16.080 --> 0:18:18.399 have to price in now. And that's a lot more complicated. 0:18:18.440 --> 0:18:21.680 And and would you agree with me that within the 0:18:21.880 --> 0:18:26.960 machinery of fiscal analysis, we really haven't seen good analysis yet. 0:18:27.000 --> 0:18:29.760 I mean, this stuff is heavy lifting, and that comes 0:18:29.840 --> 0:18:33.640 in April, we're gonna begin to see people really think 0:18:34.000 --> 0:18:40.200 about what the dynamics are of guns and butter financing. Yeah, 0:18:40.280 --> 0:18:42.679 I mean, I think that's right. And there was obviously 0:18:42.760 --> 0:18:45.199 the big debate around tax reform as to how much 0:18:45.240 --> 0:18:48.960 it would really increase the deficit. The static analysis was 0:18:49.080 --> 0:18:52.840 one a half trillion and um, the dynamic analysis said 0:18:53.080 --> 0:18:55.200 it'll only be you know, once a one point two. 0:18:55.440 --> 0:18:58.280 And you know, then if you believe the president's rhetoric 0:18:58.440 --> 0:19:00.800 or some of the you know, the real optimists within 0:19:00.880 --> 0:19:03.080 his own parties to actually I think it was Secretary 0:19:03.080 --> 0:19:05.440 of Manuchi and who said, actually, we're gonna um get 0:19:05.520 --> 0:19:07.639 in next for a trillion dollars of revenue office it's 0:19:07.680 --> 0:19:11.240 not ann increase the depths at all. Um So the 0:19:11.400 --> 0:19:13.840 the the sort of truer depth inside of the story 0:19:14.000 --> 0:19:16.560 starts to become more clear over the course of the year. 0:19:17.359 --> 0:19:20.399 And you know, then of course the question is, uh, 0:19:20.520 --> 0:19:24.119 you know, going forward over the long term, um, have 0:19:24.440 --> 0:19:27.840 we done as much as we can you know, cumulatively 0:19:27.960 --> 0:19:30.400 in terms of fiscal expansion. Is the room for more 0:19:30.480 --> 0:19:33.959 fiscal expansion in the next downturn? And that's hypothetically one 0:19:34.040 --> 0:19:36.600 of the um you know, one of the issues we 0:19:36.680 --> 0:19:38.280 had that markets are gonna have to account for it 0:19:38.400 --> 0:19:40.000 here and I think it's one of the real you know, 0:19:40.080 --> 0:19:43.120 there's a whole host of policy issues where in seventeen 0:19:43.560 --> 0:19:46.480 you've got good stuff, you've got to account for the 0:19:46.560 --> 0:19:49.200 more complicated story. This is one of them. It's not 0:19:49.480 --> 0:19:51.480 the only thing that's driving markets, but it adds to 0:19:51.520 --> 0:19:54.440 the volatility. And Jim Farrell Michaels has had a great, 0:19:54.520 --> 0:19:58.720 great concept which was this is the dessert before vegetables. 0:19:58.840 --> 0:20:03.200 President O, you would understand that, so you'd have you 0:20:03.320 --> 0:20:05.280 have the chocolate in the ice cream, have the fancy 0:20:05.400 --> 0:20:10.200 expensive cakes that you're known to wander by with. I 0:20:10.280 --> 0:20:13.880 understand you have your less like what children would do. Yes, yeah, 0:20:14.800 --> 0:20:16.960 you do it the other way around. I still do 0:20:17.160 --> 0:20:20.200 because I'm an adult now and I can. Michael Jesus. 0:20:20.280 --> 0:20:22.000 Just to wrap things up, the third policy tool that 0:20:22.000 --> 0:20:24.040 I want to get to you is with trade. And 0:20:24.160 --> 0:20:27.720 we're reporting this morning that NAFTA and the United States, 0:20:27.760 --> 0:20:30.280 the United States pushing NAFTA partners to come up with 0:20:30.320 --> 0:20:33.600 a preliminated deal to announce next week. Do you see 0:20:33.640 --> 0:20:36.600 things settling down on the trade side or ramping up again? 0:20:38.200 --> 0:20:40.720 Can I say both? You can, but you've gotta tell 0:20:40.760 --> 0:20:45.240 me where. Yeah. Yeah, well so, I mean the problem is, 0:20:45.400 --> 0:20:48.440 or at least the problem from an investor's perspective, is 0:20:48.560 --> 0:20:52.119 that in order for the administration to achieve what it 0:20:52.160 --> 0:20:55.199 probably wants to achieve here, which is a relatively benign 0:20:55.280 --> 0:20:58.520 negotiative outcomes, both in terms of NAFTA and in terms 0:20:58.600 --> 0:21:03.600 of China, Uh, it's following a negotiating path that requires 0:21:03.680 --> 0:21:06.159 them to kind of ramp up the risk, ramp up 0:21:06.200 --> 0:21:09.160 the escalatory rhetoric. And so you follow a risky path, 0:21:09.560 --> 0:21:12.640 you sort of play with fire to get to um 0:21:13.080 --> 0:21:17.280 hopefully a benign outcome. So because of that, you're supposed 0:21:17.280 --> 0:21:19.479 to think about this at least from our perspective, we're 0:21:19.480 --> 0:21:21.680 supposed to think about this as we're ultimately going to 0:21:21.760 --> 0:21:24.280 end up in a place it's not two different economically 0:21:24.440 --> 0:21:27.640 from where we started. But the risk that we deviate 0:21:27.760 --> 0:21:31.760 from that path along the way um is pretty bad. 0:21:31.840 --> 0:21:34.320 So there's going to be we think, in the end, 0:21:34.520 --> 0:21:36.440 a fair amount of the escalation, but there's a lot 0:21:36.560 --> 0:21:39.520 of escalation in the interim. So it kind of feels 0:21:39.600 --> 0:21:42.600 like we're headed towards smooth Holly, but we ultimately end 0:21:42.680 --> 0:21:44.679 up in a place that looks more like Bush two 0:21:45.280 --> 0:21:48.360 steel terrfors and was certainly nowhere near smooth Holy. Let's 0:21:48.400 --> 0:21:50.720 be let's be clear about that. The average tariff of 0:21:50.800 --> 0:21:54.560 the United States compared to its compared to yesteryear is 0:21:54.760 --> 0:21:58.080 radically different. Michael Jesus, thank you so much, Morgan Stanley, 0:22:11.359 --> 0:22:14.160 James Sweeney, whar this with Credit sweetz always eighteen ways 0:22:14.240 --> 0:22:16.639 to go with James Sweeney, Let's start there in the 0:22:16.720 --> 0:22:20.040 micro data with the chief economists for for Credit sweet 0:22:20.440 --> 0:22:24.639 Um James Sweeney. When you look at frequent data, monthly data, 0:22:25.440 --> 0:22:28.560