Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Joining us at the desk Jim Milstein, Goggenheim Securities co chairman,
Speaker 2: A legend on Wall Street and in Washington. Jim was
Speaker 2: the Treasury Department's Chief of Structuring Officer under President Obama
Speaker 2: and a very good person to talk to when people
Speaker 2: are very worried about the economy, frankly, and so, you know,
Speaker 2: one thing is that you see investors pricing in now
Speaker 2: two rate cuts this year, they're worth three priced in.
Speaker 2: So the outlook is still a little bit sour, but
Speaker 2: maybe not as dire as before. You see so much
Speaker 2: under the surface because you're also a structuring advisor. Do
Speaker 2: you think that the fear is warranted?
Speaker 3: Well, I think the you know, the chaff said at
Speaker 3: the last interview, he did the really he's looking to
Speaker 3: the Treasury Department into the White House at this point
Speaker 3: to see the direction of their policy. You know, tariffs
Speaker 3: are a big change in the potential economy of the
Speaker 3: United States and the world economy, and so that will
Speaker 3: influence both short term price pressures as well as economic activity.
Speaker 3: So I think he's kind of frozen for a while
Speaker 3: until he sees really where we're going with tariffs and
Speaker 3: how the rest of the world reacts to those tariffs,
Speaker 3: and whether we get a growth slow down as a
Speaker 3: result of retaliatory tarwer you know, high tariffs being imposed
Speaker 3: here and retaliatory tariffs being imposed outside.
Speaker 4: Can we already tell I mean, Jim Farley, the CEO
Speaker 4: Ford said, these tariffs or the threats thereof, are causing
Speaker 4: chaos and costs, and it seems to me that in
Speaker 4: the next round of CPI, PPI and PCE, we're going
Speaker 4: to start seeing that shine through.
Speaker 3: Yeah, I think you're I mean, just anecdotally. I think
Speaker 3: some of us are already seeing prices go up on
Speaker 3: the things we buy as a result of suppliers and
Speaker 3: sellers getting ahead of it. So yeah, I think you know,
Speaker 3: in the short run, tariffs are an increase in the
Speaker 3: price level, but thereafter, you know, it may just stay
Speaker 3: at that level. So the rate of change may not
Speaker 3: be great in twenty twenty six as it will be
Speaker 3: in twenty twenty five when the tariffs are imposed.
Speaker 4: Well, but Jim, all this, you know, all this uncertainty
Speaker 4: in not only tariff policy, but we don't know what's
Speaker 4: going to happen with regulation and tax cuts. Are in
Speaker 4: question right mass deportations that seems to be affecting everything
Speaker 4: from small businesses when you look at the nfib NO
Speaker 4: expansion to you know, Morgan Stanley and City saying, like
Speaker 4: the M and A bankers and the IPO guys that
Speaker 4: we have not really necessary right now.
Speaker 3: Yeah, I mean, listen, I think one of the two
Speaker 3: big pieces of legislation that President Trump got through in
Speaker 3: his first term was his US NCA the tariff deal,
Speaker 3: the trade deal between Mexico and Canada.
Speaker 4: Trade deal anyone's ever seen, according to the White House.
Speaker 1: Yes, and.
Speaker 3: As a result, I mean that's been in place now
Speaker 3: for seven eight years. And US manufacturers, which is the
Speaker 3: sector that the Trump administration now wants to promote. US
Speaker 3: manufacturers laid out their supply chains in Canada and Mexico
Speaker 3: based on the rules of the road established by the
Speaker 3: usmca So you know that no one should be surprised
Speaker 3: that they were surprised by the threat of imposing twenty
Speaker 3: five percent tariffs on Mexico and Canada are two largest
Speaker 3: trading partners, and why are they our two largest trading
Speaker 3: partners Because the USMCAA created a roadmap for how to
Speaker 3: take advantage of relatively lower wages in Mexico and take
Speaker 3: advantage of relatively lower commodity prices in Canada to set
Speaker 3: up your supply chains for domestic manufacturing, you.
Speaker 2: Know, aside from tariffs obviously creating a lot of havoc
Speaker 2: in the market. That's fair to say. On tax cuts,
Speaker 2: one question I have this was supposed to be one
Speaker 2: of the biggest parts of the pro growth agenda, that
Speaker 2: and lighter regulation. But how likely is it that we
Speaker 2: see a lot of those promises come to fruition And
Speaker 2: if we don't, does it stifle that pro growth story.
Speaker 3: Well, let's first be clear and level set right.
Speaker 1: So, the extension of the twenty.
Speaker 3: Seventeen tax cut, Tax Cut and Jobs Act is basically
Speaker 3: the status quo ante. If it isn't extended, you would
Speaker 3: have a tax height hike on households. The corporate tax
Speaker 3: cuts were made permanent, but the household cuts were not.
Speaker 3: So they if they don't extend them, you're going to
Speaker 3: get a tax hike. But if they do extend them,
Speaker 3: it's just the same tax regime we're in today.
Speaker 1: Now.
Speaker 3: President Trump has a campaign talked about further tax cuts,
Speaker 3: no tax on tips, no tax on social security, no
Speaker 3: tax on overtime. You know that would uh. The the
Speaker 3: estimates are all over the places to what that cost
Speaker 3: to revenue would be. But it let's assume it's somewhere
Speaker 3: between two hundred and three hundred billion dollars a year,
Speaker 3: so over the ten year period, another two to three
Speaker 3: trillion dollars worth of UH incremental debt for those tax
Speaker 3: cunts at a time we're already running a deficit, uh
Speaker 3: equal to seven percent of GDP. So let me just
Speaker 3: stop there a little bit, cause this is really to me.
Speaker 3: You know, I guess f If you're a hammer, everything
Speaker 3: looks like a nail. If you're a debt restructuring guy, uh,
Speaker 3: everything looks like a need for a debt restructuring. Today,
Speaker 3: our debt our federal debt to GDP ratio is basically
Speaker 3: one to one. We're running a seven percent of GDP
Speaker 3: deficit this year, okay, which means that debt is increasing
Speaker 3: by seven percent a year, whereas the economy has only
Speaker 3: been growing a two to three percent a year. So
Speaker 3: we're basically becoming more indebted over time because the growth
Speaker 3: of the economy is not outpacing the growth of the debt.
Speaker 3: So there's a massive need for what we call in
Speaker 3: the trade fiscal consolidation. We need to get our house
Speaker 3: in order and create revenues closer to spending.
Speaker 4: Well, and they're hoping to get those revenues with tariffs.
Speaker 4: I guess in terms of the cuts, I mean, Scott
Speaker 4: Beston has this three to three to three plan, but
Speaker 4: it seems so unrealistic to get the deficit from seven
Speaker 4: percent down to three percent if you're only able to
Speaker 4: find like fifty eight dollars and twenty six cents in
Speaker 4: waste and fraud, right, because they're not attacking Medicare and
Speaker 4: Medicaid and military spending, they're trying to fire people at
Speaker 4: us AID.
Speaker 2: Which guys especially as growth is expected to slow. I
Speaker 2: think that that's the part no one's talking about here,
Speaker 2: that how do you grow into that? At the GDP
Speaker 2: forecastulting revised.
Speaker 3: So that's to be fair to mister Besson, he's talking
Speaker 3: about a four year trajectory to get the deficits down
Speaker 3: from seven percent of GDP to three percent of GDP.
Speaker 3: He's talking about goosing the growth rate of the economy
Speaker 3: to three percent, not in the of low twos, high
Speaker 3: ones that we've been in and trying to moderate inflation
Speaker 3: by having more energy production.
Speaker 1: You know, with oil in the sixties.
Speaker 3: You're not going to get more energy production here in
Speaker 3: the United States.
Speaker 1: It's just it's just not return on capital. Isn't there
Speaker 1: for that.
Speaker 3: So let's put aside whether or not that's the best
Speaker 3: way to deal with inflation.
Speaker 1: How do you goose the growth rate? Well, the theory of.
Speaker 3: The administration is that deregulation is going to free animal
Speaker 3: spirits in the business community, that the tariff walls are
Speaker 3: going to create a surge and domestic investment to produce
Speaker 3: because behind those tariff walls you can be more competitive
Speaker 3: against foreign competition. The problem with all of that is
Speaker 3: it takes a lot of time. Deregulation is going to
Speaker 3: take a lot of time. The rules that are currently
Speaker 3: on the books that they want to get rid of
Speaker 3: the agencies actually just can't say done by executive order.
Speaker 3: They have to go through a rule making process. They
Speaker 3: had notice and hearing, and they have to unwind the
Speaker 3: regulatory state. Is going to take even if they move
Speaker 3: with lightning speed, is going to take a year or
Speaker 3: two to fully unleash the animal spirits.
Speaker 1: And with regard to setting up new.
Speaker 3: Production facilities in the United States and reorganizing our supply chains.
Speaker 1: That's a multi year effort.
Speaker 3: So and you're doing it against the backdrop of high tariffs,
Speaker 3: potentially retaliatory tariffs, which could be a growth slowdown, as
Speaker 3: you say, Sali, which means that tax revenues might shrink
Speaker 3: in the in the short term, and god forbid, we
Speaker 3: have a recession and then not only do tax revenue shrink,
Speaker 3: but expenses go up because of all the countercyclical programs
Speaker 3: we have to ease the pain of a recession.
Speaker 2: Even if you see the FED cut twice this year,
Speaker 2: does that relieve these companies of the pain they're struggling
Speaker 2: through refinancing at these higher rates.
Speaker 1: No, the answer is no.
Speaker 3: The so you know, you look at the credit markets
Speaker 3: and the corporate credit markets. There was a huge surge
Speaker 3: of refinancing activity that went on when rates were low
Speaker 3: in the early post COVID period, when the FED had
Speaker 3: driven rates back again down to virtually zero before the
Speaker 3: bout of inflation. Most corporate debt has a maturity of
Speaker 3: five to seven years, so we're now at the end
Speaker 3: of the maturity of that wall of refinancing that went
Speaker 3: on there now, So now we've got a new wall
Speaker 3: of refinancing that's required at much higher interest rates. So
Speaker 3: even if the Fed knocks fifty basis points off the
Speaker 3: low end of the curve, the early the short end
Speaker 3: of the curve, the uh far end that n you know,
Speaker 3: the belly of the curve out uh in the five
Speaker 3: to seven years, zip code companies are that did their
Speaker 3: financing back in two thousand, two thousand, uh, two thousand, twenty,
Speaker 3: two thousand, twenty one are now gonna be refinancing in
Speaker 3: a much higher interest rate environment.
Speaker 1: Uh. And you know it's the As the.
Speaker 3: Uncertainty, the general macro uncertainty creeps into the credit markets,
Speaker 3: you're seeing as slow, not not dramatic, but a slow
Speaker 3: uptick in spreads uh in the non investment grade market.
Speaker 3: And so both h uh, higher base rate and higher
Speaker 3: spreads are gonna create higher interest burdens.
Speaker 4: Why are spreads so tight right now? I mean, especially
Speaker 4: if you see an increase in bankruptcy or a concerning
Speaker 4: absolute number of bankruptcies, why do you have spreads, even
Speaker 4: junk spreads so tight.
Speaker 3: There's a there's just a tsunami of credit availability.
Speaker 1: Right now.
Speaker 3: There has been uh, you know, the growth of the
Speaker 3: private credit businesses, which is unrelenting and can tenuous, you know,
Speaker 3: which in some way is really taking recycling money out
Speaker 3: of the insurance industry, which used to be big bond
Speaker 3: investors and continue to be bond investors into a series
Speaker 3: of specialist funds to do their underwriting. And you know,
Speaker 3: there's plenty of bank liquidity available.
Speaker 1: And private credit. Yeah that was I say private credit.
Speaker 2: Well to that end, is this masking some of the
Speaker 2: pain that's really under the surface.
Speaker 1: What are you seeing.
Speaker 2: Because when you think about a bank, say, well, consumers
Speaker 2: are fine. Consumers are fine, but Bank of America and
Speaker 2: average FICO scores well over seven fifty is almost eight
Speaker 2: hundred for many of its credit lines, and so you're
Speaker 2: not really seeing the American consumer there. You're not seeing
Speaker 2: the painful companies that are maybe being turned away from
Speaker 2: a JP Morgan type firm today.
Speaker 1: Yeah.
Speaker 3: There, I mean, so you take the you know, four
Speaker 3: years of pretty high inflation, and while there has been
Speaker 3: wage growth to compensate that, wage growth is moderating, So
Speaker 3: you're really seeing the consumer starting to be pinched. And
Speaker 3: that's why you're seeing the first set of distress show
Speaker 3: up in consumer oriented companies. You know again, it's this
Speaker 3: is with sign upol credit availability and a change in
Speaker 3: the capital structures, particularly in the middle market arena where
Speaker 3: you have not so much bank finance but private credit
Speaker 3: and private credit is usually one or two lenders. So
Speaker 3: when a company gets into trouble, even a private equity
Speaker 3: sponsored company, you can have a conversation like this about
Speaker 3: what are we doing?
Speaker 1: Nobody else knows about what are we gonna do about it?
Speaker 3: And so there's an awful lot of what we call
Speaker 3: liability management exercises going on in private conversations between a
Speaker 3: private credit fund and a private equity fund, or a
Speaker 3: private credit fund and a family owned business.
Speaker 4: So I'm bringing up these stats a lot lately. That
Speaker 4: bank balances have declined over the past twelve months back
Speaker 4: to pre pandemic levels, this across all income groups. Wage
Speaker 4: growth has slowed over the past twelve months across all
Speaker 4: income groups, and that Americans inflation adjusted debt is rising
Speaker 4: past you know, twenty nineteen levels across all income groups.
Speaker 4: And yet everyone says, never count the American consumer out.
Speaker 1: I've been doing this for.
Speaker 4: Twenty five years.
Speaker 1: It's a good thing to say.
Speaker 4: Yeah, right, why is the American consumer so resilient and
Speaker 4: does that continue?
Speaker 3: It's about credit availability, you know. And just look at
Speaker 3: the federal government, right, as long as people are prepared
Speaker 3: to fund you know, one point seven trillion dollar deficit,
Speaker 3: we can the Congress can continue to spend with abandon.
Speaker 3: As I said earlier, you know, I think we're coming
Speaker 3: to the end of that cycle because we're at the
Speaker 3: point where the debt's growing faster than the economy. But
Speaker 3: as long as there's the last lender there willing to
Speaker 3: lend you that time to finance your spending, you're going
Speaker 3: to take it. When the alternative is you know, a restructuring.
Speaker 1: Yeah, or no iPhone right, Yeah, they're giving them away.
Speaker 1: You just have to sign a contract. Yeah.
Speaker 2: Obviously a lot of things to watch around the corner. Jim,
Speaker 2: we thank you so much for your time. Of course,
Speaker 2: that is Jim Milstein of Guggenheim Securities