Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: The US financial system in terms of currency, bonds, and
Speaker 2: equity are potentially at risk of unraveling in a very
Speaker 2: precipitous way if you get to that point of no return,
Speaker 2: and we just don't know where that is.
Speaker 3: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 3: and welcome to Trump Economics, the podcast that looks at
Speaker 3: the economic world of Donald Trump, how he's already shaped
Speaker 3: the global economy and what on earth is going to
Speaker 3: happen next. So some stuff has happened since we recorded
Speaker 3: our last episode with Martin Wolf, as we knew it
Speaker 3: would when we recorded that episode. We step back to
Speaker 3: consider the root cause of America's big trade deficits with
Speaker 3: the rest of the world. President Trump was getting ready
Speaker 3: to bring out that big poster board of tariff rates
Speaker 3: in the Rose Garden that was supposed to get rid
Speaker 3: of all of its deficits with everyone. Well, we're not
Speaker 3: going to go into the fine print of that plan today,
Speaker 3: or the infamous formula, if you can call it that,
Speaker 3: which produced the numbers. You would have heard that from
Speaker 3: plenty of other people. Plus the numbers might well have
Speaker 3: changed by the time this goes out. But I did
Speaker 3: want to think about what that big announcement has taught
Speaker 3: us about the Trump White House and what will it
Speaker 3: mean for the US economy. Put it another way, are
Speaker 3: we now looking at a US recession coming down the track?
Speaker 3: And if so, how much does Donald Trump actually care?
Speaker 3: Such small questions, but we have big brains to answer them.
Speaker 3: Here in the form of two friends of the show,
Speaker 3: Bloomberg's senior national political correspondent, Nancy Cook, welcome.
Speaker 1: Back, Thanks so much for having me, and we're in.
Speaker 3: The same room for once in the DC bureau. And
Speaker 3: Ed Harrison, senior editor and author of Bloomberg's Everything Risk newsletter, Ed,
Speaker 3: great to see hello. And you haven't been busy in
Speaker 3: the last few days at all, led Everything Risk.
Speaker 4: No, not at all. There are no risks whatsoever.
Speaker 3: Well, let me start with you give us a sense
Speaker 3: of where we've been in the last few days, as
Speaker 3: investors were trying to absorb what had happened last week,
Speaker 3: the announcements coming out of the administration and the president's
Speaker 3: steadfastness around this plan which has really taken a lot
Speaker 3: of people by surprise.
Speaker 2: Yeah, I think that last week you could characterize as
Speaker 2: a panic that was centered around the equity market. Basically,
Speaker 2: the tariffs were a lot more robust than people had anticipated,
Speaker 2: and as a result of that, equity sold off on
Speaker 2: the day after that. Then there was talk about retaliation
Speaker 2: against China, which as of this recording is about to
Speaker 2: go into effect, and that precipitated another sell off on Friday,
Speaker 2: in particular because people did not want to go into
Speaker 2: the weekend heavy on stocks with potentially bad news coming,
Speaker 2: and so then we reverse some of that on Monday.
Speaker 2: Things have been very choppy, but really I think most
Speaker 2: of the first salvo is done, and now we're at
Speaker 2: a point where people they don't know what to think,
Speaker 2: but they're waiting for the economic effects to start to
Speaker 2: occur because these tariffs are going to go into effect
Speaker 2: almost immediately.
Speaker 3: What has been interesting, and I guess this is particularly
Speaker 3: a kind of a trumpnomics topic, is what's happened in
Speaker 3: the treasury market. I think our first ever episode was
Speaker 3: about how important the US bond market was going to
Speaker 3: be to this administration. I think we will quite precent
Speaker 3: on some of that. But you have a bunch of
Speaker 3: tariffs come out, which other things equal, you'd expect to
Speaker 3: increase inflation, and actually the pet of the US Central
Speaker 3: Bank of the ED gave a speech on Friday that
Speaker 3: suggested he was still quite focused on inflation even with
Speaker 3: everything else going on. And yet ED, we didn't see
Speaker 3: necessarily the people buying US debt necessarily expecting more inflation
Speaker 3: and sort of steady interest rates. We saw a bit
Speaker 3: more confusion.
Speaker 2: Yeah, And I think the reason for that is because
Speaker 2: of the panic inequities that really it was just a
Speaker 2: knee jerk reaction to grab other assets you could at
Speaker 2: that particular juncture, you know, flight to quality, and Treasury's
Speaker 2: benefited from that. But now that we have a chance
Speaker 2: to sit back and watch the effects play out, I
Speaker 2: think we're going to see a quite different story coming
Speaker 2: into play the one that you mentioned with regard to
Speaker 2: the FED. The Fed's in a very difficult position here,
Speaker 2: in particular because the inflationary impact of the tariffs are
Speaker 2: probably going to proceed the negative impacts on the labor market,
Speaker 2: just because the labor market is really relatively solid right
Speaker 2: now and it's going to take a little while for
Speaker 2: that to dissipate, and so the FED is going to
Speaker 2: therefore be challenged with three percent, four percent, who knows
Speaker 2: it could be as high as five percent inflation at
Speaker 2: some point, and that is going to limit their ability
Speaker 2: to ride to the rescue.
Speaker 3: Nancy. Going back a few steps, the market seemed to
Speaker 3: have been very surprised by what he announced last week,
Speaker 3: even though in many ways he'd said even on the
Speaker 3: campaign trail that this is exactly what he was going
Speaker 3: to do. What was your thought when you saw those
Speaker 3: very high numbers, much higher than expected, for the tariff
Speaker 3: rates on every country, not just the countries with particularly
Speaker 3: large deficits. What did you conclude in terms of what's
Speaker 3: been driving this administration? Who's been close to the president?
Speaker 1: Yeah, the markets were very surprised by how high the
Speaker 1: tariffs were and the fact that there were tariffs on
Speaker 1: countries but also these universal baseline tariffs. And what happened
Speaker 1: was that Peter Navarro, who has been a huge advocate
Speaker 1: of of these baseline tariffs and really doing high tariffs
Speaker 1: on countries, has so much power in this White House
Speaker 1: at this particular moment.
Speaker 3: Just tell us a bit about him, what's his job now,
Speaker 3: and maybe a bit more about some of the other
Speaker 3: stuff he said.
Speaker 1: So he's a senior advisor to the President. He is
Speaker 1: supposed to be working on trade. You have to remember
Speaker 1: that he also worked on trade in the first Trump
Speaker 1: White House. But there were epic battles in the first
Speaker 1: Trump White House between different people in the administration, Gary Cohen,
Speaker 1: who was the National Economic Director at the time, Treasury
Speaker 1: Secretary Stephen Mnuchin, and they were more of a voice
Speaker 1: inside the West Wing who were advocates of free trade.
Speaker 1: And so it was like these constant battles between Peter
Speaker 1: Navarro and Robert Leitthheuser, who is the US trade representative,
Speaker 1: and Minuchin and Cohen and going back and forth, and
Speaker 1: the trade policy sort of swung back and forth based
Speaker 1: on who had the most influence. This time, there is
Speaker 1: not that same sort of checks and balances from the
Speaker 1: free trade perspective, and everybody is basically on board with tears,
Speaker 1: including people who you wouldn't necessarily think of, like Treasury
Speaker 1: Secretary of Scott Bessant or the National Economic Council Director
Speaker 1: Kevin Hassett. But Navarro has so much influence because he
Speaker 1: went to jail for Trump. He divided a subpoena to
Speaker 1: appear before the January sixth Committee and serve four months
Speaker 1: in prison. What Trump values most in the second term
Speaker 1: is loyalty, and what expresses loyalty more to him than
Speaker 1: someone who went but served behind bars, And so Peter's
Speaker 1: influence just can't be overstated. Now. My sources were telling
Speaker 1: me the Tuesday before the big tariffs came out that
Speaker 1: Wednesday that Navarro had gotten with Trump and had convinced
Speaker 1: him of this idea of the universal baseline tariffs, and
Speaker 1: that the two of them had doubled down. I covered
Speaker 1: Trump since twenty sixteen. What has surprised me this time
Speaker 1: is how undeterred they are by the market volatility, the
Speaker 1: calls from Wall Street and CEOs, businesses freaking out, just
Speaker 1: calling anyone they can find it the administration that Trump
Speaker 1: people feel like he talked about this in the campaign.
Speaker 1: You should have known this was coming. He's not up
Speaker 1: for a re election. You know, he really believes in
Speaker 1: these tariffs and think they're going to change the economy,
Speaker 1: and he and Peter Navarro are really doubling down.
Speaker 3: I don't think I had fully absorbed that Peter Navarro
Speaker 3: was running the trade ship inside the White House. Were
Speaker 3: we aware of quite how influentially.
Speaker 1: Be So I would say a few months ago, there
Speaker 1: was reporting coming out. I was talking to people, and
Speaker 1: it took a while for the Treasury Secretary and the
Speaker 1: Commerce Secretary to get confirmed. So what was happening in
Speaker 1: that vacuum was that Peter Navarro and Stephen Miller, who
Speaker 1: is a deputy chief of Staff. You'll remember him from
Speaker 1: all of the most controversial immigration issues from the first term.
Speaker 1: That two of them were basically the lone voices on
Speaker 1: trade for the first several weeks at the administration, and
Speaker 1: they were the ones driving the agenda. And to me,
Speaker 1: it's very clear that the White House is much more
Speaker 1: comfortable with Peter Navarro this time around than they were
Speaker 1: last time. Last time, they didn't really let him go
Speaker 1: on TV that much. They sort of hid him away. Sure,
Speaker 1: he was close to Trump, but he wasn't like the frontman.
Speaker 1: This time, he is going on TV almost every day
Speaker 1: representing the administration's trade policy, and I just think that
Speaker 1: that's a sign of how much influence he has and
Speaker 1: how much they are doubling down on this.
Speaker 3: At least one person who was also hanging out the
Speaker 3: White House a lot in the first few weeks of
Speaker 3: the administration was Elon Musk and then he and Navarro
Speaker 3: seem to now be getting at it in an entertaining
Speaker 3: but not very mature fashion. Shall we see?
Speaker 1: Well, I think Elon must Stock is dropping in the
Speaker 1: White House and him picking a fight with Peter Navarro
Speaker 1: is part of this. He was not in the final
Speaker 1: meetings on trade that was really sort of the economic aids.
Speaker 1: The Chief of Staff Susie Wilds Stephen Miller was in that.
Speaker 1: Elon has not been part of sort of the final
Speaker 1: decisions on trade. And although he likes to be the president's,
Speaker 1: you know, first best friend, and is on Air Force
Speaker 1: one and is a mar A Lago and it is
Speaker 1: in Marshington a lot and has real walk in privileges
Speaker 1: in the West Wing, trade is not his lane. And
Speaker 1: I think that they are not taking his advice seriously
Speaker 1: on it.
Speaker 3: It sounds like the White House that Nancy is describing
Speaker 3: is not one that's going to back down, at least
Speaker 3: to any serious extent. We'll wait to see. So given that,
Speaker 3: how are you looking at the risks of recession and
Speaker 3: that challenge for the FED of whether it can actually
Speaker 3: do anything to prevent one.
Speaker 2: Yeah, the recession car is a big one because I
Speaker 2: think that people now realize how serious Trump was and
Speaker 2: that it's not just ten percent tariffs, these across the
Speaker 2: board baseline tarffs, which the likes of Bill Ackman said
Speaker 2: they can get behind, but rather something more severe, doubling down.
Speaker 3: On one hundred and six percent or one hundred and
Speaker 3: four whatever it is on top. That's definitely a bit more.
Speaker 2: Severe going into effect literally as we are taping this.
Speaker 2: And so I think that if recession is not your
Speaker 2: base case, it's a very high probability case.
Speaker 4: And that's what the markets are saying.
Speaker 2: You know, the equity markets are down and treasury yields
Speaker 2: are down as well. What I find interesting in terms
Speaker 2: of the recession trade and how this is all playing
Speaker 2: out is currencies. The Japanese yen and the Swiss franc
Speaker 2: are really appreciating in value versus the US dollar. Not
Speaker 2: just as this has played out, but in the last
Speaker 2: day or so, as the one hundred and four percent
Speaker 2: Chinese tariffs have come into play, the Swiss franc has
Speaker 2: really gone ballistic, as if suddenly the United States is
Speaker 2: not the safe haven currency in these kinds of times
Speaker 2: of difficulty. This is a huge transition that the market's
Speaker 2: going to have to deal with and understand what the
Speaker 2: implications are, especially if we have a recession that's not
Speaker 2: just in the United States but global.
Speaker 3: Is there a natural difference of view between the Fed
Speaker 3: and the markets. I say that because if the FED
Speaker 3: is thinking, Hm, we've still got an inflation problem, so
Speaker 3: we're going to have to wait a bit before we
Speaker 3: provide the support for the economy even as the market's falling,
Speaker 3: And if the market's expecting the FED to be late,
Speaker 3: then I guess there's no disagreement. But we are looking
Speaker 3: at a recession.
Speaker 2: Well, I think that the markets are front running so
Speaker 2: many cuts that it's going to be very difficult for
Speaker 2: the FED to deliver them in the timeframe that the
Speaker 2: markets are talking about. Unless it's a very onerous recession.
Speaker 2: It's more likely that they will be late, as you're saying,
Speaker 2: and that they'll be more aggressive if things fall apart,
Speaker 2: because their hands are going to be tied in the
Speaker 2: near term by the inflation that is likely to happen
Speaker 2: almost immediately.
Speaker 4: It was interesting what Power was saying.
Speaker 2: He didn't say it directly, but he was essentially saying,
Speaker 2: we're going to wait. We're not going to make any
Speaker 2: moves whatsoever until we find out what the actual for
Speaker 2: ramifications of the policies are and what the policies themselves are.
Speaker 2: They don't know what the policies are, and so what
Speaker 2: that means is an extended hold period at a minimum,
Speaker 2: and that's not what the market has priced in.
Speaker 3: Yeah, it's interesting. I mean, our own Anawong, who we've
Speaker 3: heard several times on this podcast, is a former FARED economist,
Speaker 3: is our chief US economist. She put out a great
Speaker 3: preace actually just as markets were going through their girations
Speaker 3: on Monday and treasury yields had gone down quite far,
Speaker 3: apparently on the anticipation of lower rates, saying, you know,
Speaker 3: markets are hoping for a FED put and this is
Speaker 3: why that's unlikely, and she went through all of the things.
Speaker 3: I think the fact that the FED is focused on
Speaker 3: hard data, the fact that the Fed's own inflation forecasts
Speaker 3: and inflation risks are thinks that the Fed's very concerned about,
Speaker 3: and certainly J. Powell, the chair, doesn't want to be
Speaker 3: seen to be making the same mistake that was made
Speaker 3: in twenty twenty two when they were quite slow to
Speaker 3: raise rates in the face of inflation. I mean, I
Speaker 3: found that pretty convincing. Nancy, How do you think the
Speaker 3: administration's thinking about the FED? I mean, could they potentially
Speaker 3: rescue the economy provide some kind of flaw even with
Speaker 3: this tariff plan? And I guess the other side of
Speaker 3: that if they don't. Is he going to be a
Speaker 3: useful kind of whipping boy for putting all the blame
Speaker 3: on I.
Speaker 1: Mean, the FED is already a whipping boy for President Trump.
Speaker 1: I mean he has come out already last week and
Speaker 1: said Powell should do something. He's posting messages on truth
Speaker 1: social he is willing to use his bully pulpit from
Speaker 1: the White House to try to act like this is
Speaker 1: the Fed's problem, even though these tariffs are one hundred
Speaker 1: percent of policy of the administration. It's not Congress. It
Speaker 1: is a self inflicted wound or whatever you want to
Speaker 1: call it on the part of the administration.
Speaker 3: They did this.
Speaker 1: He has long had J. Powell in his sight. And
Speaker 1: when I interviewed Trump during the campaign, or different people did,
Speaker 1: there was constantly question like are you going to fire J?
Speaker 4: Powell?
Speaker 1: And do you believe in the independence of the FED?
Speaker 1: And he sort of went back and forth honestly months
Speaker 1: month on the importance of the independence of the FED
Speaker 1: and whether or not he would let Powell serve out
Speaker 1: his term.
Speaker 3: Did he said to us, he said, oh, yeah, as
Speaker 3: long as I think he's doing a good joke exactly. Yeah,
Speaker 3: he's still the safe as long as I think so.
Speaker 1: So I think that that will just continue to be
Speaker 1: a point of tension. And even Treasury Secretary of Scott Besson,
Speaker 1: who I think before what happened with the tariffs, was
Speaker 1: seen as like a grown up who could speak to
Speaker 1: the markets. I don't know exactly how he's viewed by
Speaker 1: Wall Street now. I think that's been muddied a bit.
Speaker 1: But even he sort of had a plan for replacing
Speaker 1: Powell and did not think that Powell needed to serve
Speaker 1: out his term. So I think even Bessen is not
Speaker 1: fully on board with the idea that the FED should
Speaker 1: be as independent as it should be, and it just really,
Speaker 1: I think marks a huge shift. There's so many shifts
Speaker 1: in the Republican Party on how Trump approaches economic issues,
Speaker 1: and the FED is just one of them.
Speaker 3: We've talked a few times on this podcast about kind
Speaker 3: of ordering of things in this administration and how you
Speaker 3: could make the argument that in the first term, Trump
Speaker 3: kind of did the positive things of the economy first,
Speaker 3: and then the negative stuff, the bigger tariffs other things
Speaker 3: came later and actually caused the economy to weaken even
Speaker 3: before COVID, when arguably, from a political standpoint, you'd want
Speaker 3: to get your costly things and at the beginning and
Speaker 3: then have the more positive things. We've certainly got some
Speaker 3: pain coming down the track. We've had the Doge cuts,
Speaker 3: but also most fundamentally, these big tariff increases tax cuts,
Speaker 3: making the Trump tax cuts permanent, maybe some other tax
Speaker 3: cuts on top of that. I mean, that does seem
Speaker 3: to be something the administration is now turning its mind
Speaker 3: to and wanting Congress to act on as fast as possible. Nancy,
Speaker 3: do you think that can be a source of support
Speaker 3: for the economy and the administration.
Speaker 1: I have written a lot of tax stories lately, and
Speaker 1: Republicans now have moved up the timeframe of when they
Speaker 1: want to get tax reformed done given what's happening with
Speaker 1: the tariffs. Where they thought, oh, they could do it
Speaker 1: at the end of twenty twenty five when the tax
Speaker 1: cuts actually expire, now they want to do it as
Speaker 1: soon as possible, hopefully by even July fourth. I think
Speaker 1: that's a little optimistic, but people on Capitol Hill think, okay,
Speaker 1: maybe by you know, Midsummer or towards the end of summer.
Speaker 3: So August there was a bit of movement on this.
Speaker 3: Even this weekend on the Hill.
Speaker 1: Yeah, there was the Senate passed a budget resolution which
Speaker 1: will give them a vehicle to do tax reform and
Speaker 1: some parameters about how much money they can spend. And
Speaker 1: I think that the Trump people, including Peter Navarro, are
Speaker 1: going on TV and saying, well, look, these tariffs are
Speaker 1: just one part of the economic package. We also have
Speaker 1: you know, less restrictions on energy deregulation, the tax cuts.
Speaker 1: I think the question about the tax cuts is, yes,
Speaker 1: they want to do a big tax bill, but a
Speaker 1: lot of those tax cuts are just going to be
Speaker 1: extending existing ones. And I don't know if that is
Speaker 1: going to be you know, extending people's existing tax cuts
Speaker 1: is going to be a giving them a tax increase, right,
Speaker 1: not giving them a.
Speaker 3: Taxing cust car because I didn't have a tax right.
Speaker 4: That's not how.
Speaker 1: People think about it. And so I just don't know
Speaker 1: if that is going to be enough to actually juice
Speaker 1: the economy the way that they think it will compared
Speaker 1: to the stark policies that they did on tariffs, which
Speaker 1: were really surprising and quite large and ed.
Speaker 3: I guess this gets us back to how the financial
Speaker 3: markets would view this. I mean, I have to mention
Speaker 3: that that Senate resolution contained a really not very responsible
Speaker 3: approach to scoring the cost of making those tax cuts permanent.
Speaker 3: I think we're talking extra five trillion dollars in debt,
Speaker 3: but it was scored as almost zero on rules that
Speaker 3: no one thinks make any sense. But even if this
Speaker 3: gets past this tax cut bill or the making permanent
Speaker 3: of the previous tax cuts, if it sends a message
Speaker 3: that there is no physical restraint of any kind of
Speaker 3: serious degree in this White House or the country, and
Speaker 3: an ocean of red ink way more than is even
Speaker 3: in the existing numbers. We look at our numbers, our
Speaker 3: forecast for the US debt, they're about one hundred percent
Speaker 3: of GDP. Now it's going to maybe one hundred and
Speaker 3: fifty percent of GDP over the next twenty thirty years.
Speaker 3: And that's assuming that the text cuts are not made permanent.
Speaker 3: So surely that's not going to put a floor under
Speaker 3: the sort of confidence in the US.
Speaker 2: As you were saying that, I'm thinking about Liz Trust
Speaker 2: and what happened there, when suddenly you're looking at oceans
Speaker 2: of red ink. Over the longer term, it's going to
Speaker 2: lead to a depreciation of the currency, greater inflation, and
Speaker 2: ultimately it could create a crisis of confidence about the
Speaker 2: United States ability to govern itself and its finances. The
Speaker 2: numbers that we're talking about really are are mind boggling.
Speaker 2: Because we're already at six percent debt to GDP in
Speaker 2: a booming situation where growth was at three percent. What
Speaker 2: if you add tax cuts on top of that, the
Speaker 2: baseline being three percent are being six percent, and you
Speaker 2: add tax cuts that are going to make that even greater,
Speaker 2: then you're looking at permanent deficits of eight nine percent.
Speaker 2: It's just absolutely mind boggling. I think the markets would
Speaker 2: throw its dizzy and it could be very destabilizing.
Speaker 3: It's interesting you mentioned this trust. We had a great
Speaker 3: column that was by our columnists in Europe, Lionel Laurent
Speaker 3: and Marcus Ashworth. Imagine the UK Liz Trust moment only global.
Speaker 3: They're saying, the US is the closest thing to a
Speaker 3: global superpower we have, and that means when it's leaders
Speaker 3: are in the grip of excessive over confidence, similar to
Speaker 3: that scene in the UK's Liz Trust meltdown, Everyone not
Speaker 3: just America, pays the price. I guess I'll give a
Speaker 3: final word to you, Ed. You mentioned something about the
Speaker 3: safe haven status for the US.
Speaker 4: That's what I was thinking as you were reading that. Well.
Speaker 3: Donald Trump has said he doesn't like this dollar being
Speaker 3: so strong, so be careful what you wish for. But
Speaker 3: I guess that the risk is the combination of you know,
Speaker 3: question marks around central bank independence, question marks about runaway
Speaker 3: borrowing and debt, not to mention stepping out of the
Speaker 3: global trading system in the way that he has now done,
Speaker 3: or at least appears set on doing. That's quite a
Speaker 3: trifecta that could really be very damaging to the US
Speaker 3: standing in global financial markets as well.
Speaker 2: Yeah, I think that George Soros would talk about reflexivity,
Speaker 2: that you get to sort of a point where things
Speaker 2: start to feed on themselves, and we don't know where
Speaker 2: that point is on various levels, both in terms of equities,
Speaker 2: in terms of people pulling their money out of US
Speaker 2: dollar assets. We don't know what that means in terms
Speaker 2: of the US dollars falling, and we also don't know
Speaker 2: what that means in terms of foreigners owning bond and
Speaker 2: what that means for interest rates. So all three of
Speaker 2: those things the US financial system, in terms of currency, bond,
Speaker 2: and equity are potentially at risk of unraveling in a
Speaker 2: very precipitous way if you get to that reflexive point,
Speaker 2: to that point of no return, and we just don't
Speaker 2: know where that is.
Speaker 3: And on that bombshell. Ed Harrison, thank you very much,
Speaker 3: Nancy Cook, thank you, thank you for listening. We focused
Speaker 3: a lot on America in this episode, and particularly on
Speaker 3: Wall Street and the White House. I'm thinking, even as
Speaker 3: I said here, that we should think about how the
Speaker 3: rest of the world should respond next week. Note to self.
Speaker 3: Trumpernomics is produced by Moses and Dam and Summer Sadi,
Speaker 3: with help from Chris martinlu Amy Kean Cale Brooks, Rachel
Speaker 3: Lewis Chrisky and Jared Rudderman. Sound design owned by Blake
Speaker 3: Maples and Brendan Francis Newnham is our executive producer.