Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: say the chaff the White House Council of Economic Advisors,
Speaker 2: Stephen Mara and MS the Chairman, Welcome to the program.
Speaker 2: Sarah Warm, Welcome to Bloomberg Surveillance. I've got to ask
Speaker 2: you the number one question on the lips of a
Speaker 2: lot of people on Wall Street at the moment. Is
Speaker 2: this a negotiation or the new rules of the game?
Speaker 2: How would you frame things for people this morning?
Speaker 3: Good morning, and thanks for having me. How I frame
Speaker 3: things is that it could be either. You know, I
Speaker 3: think the president is female for his negotiating skills. The
Speaker 3: president is renowned for pulling deals out of a hat
Speaker 3: when nobody thought it was even possible. I remind everyone
Speaker 3: that the Phase one China deal in twenty eighteen, sorry
Speaker 3: in twenty nineteen, was a fantastic deal for the United States.
Speaker 4: That the President created.
Speaker 3: It covered intellectual property, it covered market access, it covered
Speaker 3: purchases of agricultural commodities, it covered currenting manipulation, that covered
Speaker 3: all sorts of things.
Speaker 4: And it was a fantastic deal.
Speaker 3: And unfortunately the Biden administration walked away from it and
Speaker 3: refused to enforce it, and that was a.
Speaker 4: Big loss for America.
Speaker 3: So the president is famous for being able to create
Speaker 3: deals when nobody thinks he can. And so that's what
Speaker 3: it can turn into if other countries come and offer
Speaker 3: the right things that persuade the presidents.
Speaker 5: Well, let's talk about the right thing.
Speaker 2: So, as far as we know, Viennam came to the
Speaker 2: table and an offer to drop their taffs to zero.
Speaker 2: That was rejected. The EU offered to drop taffs on
Speaker 2: industrial goods. That's been rejected. What would be the right
Speaker 2: kind of offer? Are they aware of what the right
Speaker 2: kind of offer would be?
Speaker 4: Right?
Speaker 3: So I think that a narrow focus on terror, on
Speaker 3: teriff rates is insufficient because the truth is that the
Speaker 3: non tariff barriers pose enormous, enormous barriers to trade balancing.
Speaker 3: Over the long run, countries have to open their markets
Speaker 3: to US exports. And I don't know exactly what combination
Speaker 3: of what combination of details they have to make in
Speaker 3: an offer, but all I can say is that negotiating
Speaker 3: is better than not negotiating.
Speaker 2: Even the difficulty at the moment, and you're aware of this,
Speaker 2: I'm sure is that they're unclear whether it's about barriers
Speaker 2: to entry or just the deficit, because they are two
Speaker 2: different things.
Speaker 5: Which one is it?
Speaker 3: Of course there are two different things, but they're they're
Speaker 3: you know, deeply related, and you know, inextricably related. If
Speaker 3: you reduce your barriers to entry, you open your market
Speaker 3: to US exports, of course, the trade deficit will responded
Speaker 3: to that.
Speaker 4: I think that there's no question about that.
Speaker 6: When you talked about yesterday, I know you gave a speech,
Speaker 6: you talked about this way of burden sharing and some
Speaker 6: other measures partners could take to potentially get to a deal,
Speaker 6: things like even writing checks to the treasury.
Speaker 4: How exactly would that work? Well, I think there's a
Speaker 4: variety of ways that could work. You know.
Speaker 3: For one thing, they could just, you know, sort of
Speaker 3: simply say, hey, you know, America is providing us with,
Speaker 3: you know, with a defense umbrella, which creates prosperity, which
Speaker 3: creates peace, which allows us to prosper economically. They could say, hey,
Speaker 3: America is creating global trading system, backed by backed by
Speaker 3: this defense umbrella, which which again allows us to trade,
Speaker 3: which creates our prosperity, and we're going to help share
Speaker 3: the We're gonna help share the cost of those things.
Speaker 3: We're gonna, you know, we're gonna we're gonna send some
Speaker 3: money to the United States to help it provide those things.
Speaker 4: I think that would be a fruitful outcome.
Speaker 3: But of course, but again, of course, you know, it
Speaker 3: depends on what the President decides. The President will negotiate
Speaker 3: the deals that he thinks are best for America, best
Speaker 3: for Americans, and you know, I can't get ahead of
Speaker 3: him on those issues.
Speaker 6: We also talked about how partners can invest in and
Speaker 6: install factories in America or trading partners. Could China do that?
Speaker 4: Uh?
Speaker 3: You know, I think I think they could, but you know,
Speaker 3: it remains to be seen whether they be willing to.
Speaker 3: I think China's policy has been to try and you know,
Speaker 3: sort of steal all the all the manufacturing market share
Speaker 3: for themselves, not only for the United States, but for
Speaker 3: many of our trading partners as well. And you know,
Speaker 3: it seems to me unlikely that China would be willing
Speaker 3: to make that concession upfront. However, you know I would
Speaker 3: welcome it.
Speaker 6: So China said yesterday they will withdraw the Trump said yesterday,
Speaker 6: excuse me that if China does not withdraw the retaliatory tariffs,
Speaker 6: the US will oppose an additional fifty percent less than
Speaker 6: twenty four hours starting tomorrow. Do you expect those additional
Speaker 6: fifty percent tarishs to come into play?
Speaker 3: I think that depends on the Chinese. And you know,
Speaker 3: my advice to them would be that they have a
Speaker 3: lot more to lose than America does. That America holds
Speaker 3: a leverage and everybody knows that, and therefore they should
Speaker 3: seek a detant and they should offer concessions which would
Speaker 3: persuade the presidents to relent.
Speaker 1: Uncertainty might be a good negotiating tactic, but it's really
Speaker 1: bad for business. That's been the message from a lot
Speaker 1: of corporate executives. And what you're seeing certainly in markets.
Speaker 1: Are you worried that US companies are going to stop
Speaker 1: investing that that could style me some of the progress
Speaker 1: that you're hoping to engineer.
Speaker 3: Yeah, the President has been very clear that you know
Speaker 3: that that that what he's engaging in is is a
Speaker 3: long term improvement in the economic welfare of the United
Speaker 3: States and a long term improvement in putting American workers
Speaker 3: on fair ground viasa of either the rest of the world.
Speaker 3: Some temporary uncertainty will come along with the transition and
Speaker 3: with the imposition of those policies. That that's that's without
Speaker 3: a question. However, I think it's important to understand that
Speaker 3: uncertainty doesn't really cause recessions. You know, I don't think
Speaker 3: that there's been a recession that was caused by people wondering,
Speaker 3: you know, what's you know, what's going to happen tomorrow.
Speaker 3: Uncertainty can delay decisions, for sure, as you're saying, you know,
Speaker 3: there could be some some transfer of investment decisions, some
Speaker 3: transfer of hiring decisions.
Speaker 4: From one month to another.
Speaker 3: That's absolutely possible, but there's limits to that because eventually
Speaker 3: a firm is going to decide, hey, I really need
Speaker 3: to add this capacity, or hey, I really need to
Speaker 3: make a decision about what's going on, and at some
Speaker 3: point waiting becomes not worth it. So is there a
Speaker 3: chance that the uncertainty causes you know, sort of distortions
Speaker 3: in the in the month to month or quarter to
Speaker 3: quarter macroeconomic data that make one quarter look weaker and
Speaker 3: another quarter look stronger. Absolutely, that's likely, right, If it's
Speaker 3: not only possible, it's quite likely. But companies can delay
Speaker 3: decisions forever. Eventually they got to pull the trigger and
Speaker 3: they got to invest based on their evaluation of the
Speaker 3: most likely policy landscape in the future. And the President
Speaker 3: has been very clear about what that policy is.
Speaker 1: In fairness, so a lot of people, in particular Wall
Speaker 1: Street economists have come out and so that actually uncertainty
Speaker 1: can cause a recession, and we have heard that from
Speaker 1: a number of different Wall Street firms for a number
Speaker 1: of different companies, and frankly, the Small Business consumer survey
Speaker 1: came out this morning and so the steepest plunge that
Speaker 1: we've seen going back years. There is a question here
Speaker 1: about yes, they have to ultimately make decisions, but when
Speaker 1: do they start laying people off?
Speaker 7: At what point are you worried.
Speaker 1: About execution risk at a time where some of the
Speaker 1: structural changes take a lot longer than some of these
Speaker 1: policies are taking to implement.
Speaker 3: Yeah, well, look, there isn't really any material sign of
Speaker 3: layoffs in the macroeconomic data, So that's not something that
Speaker 3: I'm that's not something that I'm seeing right now at all.
Speaker 3: And I I would say is again to remind people
Speaker 3: that there are three legs to the stool.
Speaker 4: One is trade renegotiation.
Speaker 3: The other two are deregulation and tax reform, and those
Speaker 3: are still in the pipeline. We're waiting on Congress to
Speaker 3: extend the President's historic tax cuts from twenty seventeen will
Speaker 3: which will sort of preserve low marginal rates in American
Speaker 3: workers and firms. But on top of that, you know,
Speaker 3: what we experienced in Liberation Day was a roughly thirteen
Speaker 3: percentage point rise in the effective terror freight on all imports.
Speaker 3: And that's going to create enormous amounts of revenue, hundreds
Speaker 3: of billions of dollars of revenue that can be used
Speaker 3: to provide additional tax relief for Americans. And the President
Speaker 3: has been pretty clear laying out certain forms of the
Speaker 3: tax relief, and I think that their scope to go
Speaker 3: even further than that, I would you know, I personally
Speaker 3: would like to. However, you know, it depends on what
Speaker 3: Congress works out and negotiates with the President on that.
Speaker 3: You know, I don't always get you know, I'm not
Speaker 3: the president, right the president is the one who will
Speaker 3: decide in collaboration with Congress. But I think that using
Speaker 3: that revenue for additional tax relief would be a fantastic outcome.
Speaker 3: I think that regulation is underway, and the combination of
Speaker 3: making America more competitive via tariffs with making it easier
Speaker 3: to build and invest in higher here is a is
Speaker 3: a fantastic outcome. And when you look ahead to the future,
Speaker 3: when you look ahead to the future, there's going to
Speaker 3: be in America that's the best place in the world
Speaker 3: to do business because the tariffs make a competitive, regulation
Speaker 3: deregulation makes it easy, and tax reform makes it efficient.
Speaker 3: And tax reform keeps more money in people's pockets, makes
Speaker 3: it easier hire, easier to invest, and those are all
Speaker 3: great things, and the markets will look forward to that
Speaker 3: if it should be forward looking, Yeah.
Speaker 6: You're talking about the entire policy proposal. Markets are forward looking.
Speaker 6: They're already pricing in just that the extension of TCGA.
Speaker 6: What more can be done on the tax side. Do
Speaker 6: you think we will get no tax on tip, no
Speaker 6: tax on Social Security?
Speaker 3: Yeah, I think we'll. I think we'll see I think
Speaker 3: we'll see that. And you know, I can't get ahead
Speaker 3: of Congress. I can't get ahead of the president. But
Speaker 3: the President's been clear and calling for those things, and
Speaker 3: I'm optimistic that we'll get them. And I'm also optimistic
Speaker 3: if it we'll get some form of further tax relief.
Speaker 3: Beyond that, what format takes, you know, will be up
Speaker 3: to Congress and the President. But I think that I
Speaker 3: think that it would be a fantastic outcome for American
Speaker 3: workers if we took money raised by tariffs levied from
Speaker 3: foreigners and use that to lower taxes on Americans. That
Speaker 3: would create a more efficient, dynamic, competitive economy.
Speaker 4: That would that would transition into the present's new Golden.
Speaker 2: Age, Steven, how can it be both? How can it
Speaker 2: be both a source of revenue to provide tax relief
Speaker 2: and an option for negotiations.
Speaker 4: Well, tariffs raise revenue, and then I've got that revenue.
Speaker 5: Yeah, yeah, sure, but you said you can negotiate this.
Speaker 3: Oh oh, because the negotiation Okay, so yes, so I.
Speaker 4: Understand what you're saying. So so, presumably if the negotiations.
Speaker 3: Lead to materially better trade terms for American firms, then
Speaker 3: you create a booming economy because there's much more demand
Speaker 3: for our exports.
Speaker 2: And then we tie the tax relief back, well, then
Speaker 2: you don't have this additional revenue to pay for that
Speaker 2: tax relief.
Speaker 3: But nevertheless, Congress and the President are determined to extend
Speaker 3: the original tax the original tax cuts, and provide the
Speaker 3: additional relief at the president I've spoken about. So it's
Speaker 3: a question how much further beyond that can you go.
Speaker 5: We'll keep struggling to make sense of it.
Speaker 2: We appreciate you how This morning, Steven Maron there the
Speaker 2: White House Council of Economic Advisor's share. We begin this
Speaker 2: sound with stocks pushing KaiA as markets look for signs
Speaker 2: of policy clarity. Julian and Manuel of ever Core cutting
Speaker 2: his year end price target on the S and P
Speaker 2: to fifty six hundred from sixty eight. Right in the following,
Speaker 2: prolonged uncertainty has raised asset volatility, damage confidence, and increase
Speaker 2: the odds. Soft data eventually infects the hard causing stagflation
Speaker 2: or outright recession.
Speaker 5: Julian joins us.
Speaker 2: Now for more, Julian, good Mornic, Why so bullish even
Speaker 2: with the price target cut based on what we're seeing
Speaker 2: over the last few days.
Speaker 5: Where does the bullishness come from?
Speaker 8: The bullishes comes from an expectation that if we look
Speaker 8: at the last couple of weeks, we have arrived at
Speaker 8: the point of maximum uncertainty.
Speaker 9: Okay.
Speaker 8: And it's like, whether you think about it in terms
Speaker 8: of market volatility, uncertainty measures, you know, frankly, tariff rates,
Speaker 8: which is the crux of where the uncertainty is from.
Speaker 8: All these things really aren't sustainable in the long term
Speaker 8: because what ends up happening is you get the recession scenario.
Speaker 8: And I think as an investor, you have to believe
Speaker 8: a couple of things here. You really have to believe
Speaker 8: that uncertainty is arriving at peak, and you have to
Speaker 8: believe in and we do that Washington has no desire
Speaker 8: to precipitate a recession because frankly, precipitating a recession has
Speaker 8: a lot of other knock on unintended consequences.
Speaker 5: None of us can get into the mind at the president.
Speaker 2: I've got no idea what he's thinking this morning, going
Speaker 2: ahead to the tarish that will kick in overnight. Can
Speaker 2: we touch on valuations? What's the forward multiple on the
Speaker 2: S and P right now?
Speaker 9: It's well over.
Speaker 8: Twenty still beak to maximum and certainty it does not, okay,
Speaker 8: but we have maintained this for two years now and
Speaker 8: it's certainly worked reasonably well over.
Speaker 9: The last two years.
Speaker 8: Is that valuation alone doesn't end a market cycle, okay.
Speaker 8: What ends a market cycle is an oncoming recession, an
Speaker 8: uncooperative FED, or bond yields moving higher. And if we
Speaker 8: think about the last couple of weeks, look, there have
Speaker 8: been two significant wins here. Number One, oil prices are
Speaker 8: a lot lower than I think any one of us
Speaker 8: would have expected, given the fact that Russia and Ukraine
Speaker 8: is still in escalation mode and the Middle East is
Speaker 8: still in escalation mode for the most part.
Speaker 9: And bond yields things.
Speaker 2: And I was just thinking tick FED showing no woodingness
Speaker 2: to step in yesterday, bond yields will higher.
Speaker 5: What's the circuit brank?
Speaker 8: So you have to differentiate between a FED FED willing
Speaker 8: to step in and a FED who's going to say inflation,
Speaker 8: which now in our view is in the mid threes
Speaker 8: for twenty twenty five. I don't think he's going to
Speaker 8: remove the word transitory because and our research shows that
Speaker 8: essentially the real threat is less inflation. It's the one
Speaker 8: time hit from wherever we go. And our operating view
Speaker 8: is that tariffs will actually settle in around fifteen to
Speaker 8: sixteen percent on a global weighted basis, call it by
Speaker 8: the end of the third quarter. That's how investors can
Speaker 8: live with it going forward, but that the real threat
Speaker 8: is the new tariff regime slowing growth perhaps even more,
Speaker 8: is it.
Speaker 1: Overly complacent to view this as just business as usual
Speaker 1: to not really consider a structural change that, frankly is
Speaker 1: the goal of this administration that could potentially reorder trade
Speaker 1: and potentially cause a decoupling between the US and China.
Speaker 8: Oh again, in eighty days, you're trying to remake a
Speaker 8: global trading system that took eighty years to build. So
Speaker 8: to call it business as usual, you would be someone
Speaker 8: who perhaps didn't take defensive measures to his or her portfolio.
Speaker 9: In the last number of weeks.
Speaker 8: And the question is is are we going to get
Speaker 8: And I think Secretary Bessant was right and proper in
Speaker 8: making the point that there needs to be more singing
Speaker 8: from the same hymn sheet and an openness to cut deals.
Speaker 1: One of the big concerns yesterday was what happened in
Speaker 1: the bond market, and we were talking about it. A
Speaker 1: lot of people called me. They said, what are you
Speaker 1: hearing about this? People didn't have an understanding, but it
Speaker 1: spooked people. So the biggest sell off in thirty year
Speaker 1: bonds going back to the pandemic and why, I don't know,
Speaker 1: maybe because of disruption, maybe because of basis trades, maybe because.
Speaker 7: Of foreign selling.
Speaker 1: At what point point does that type of disruption fundamentally
Speaker 1: spook you and frankly your bullish call for gains by
Speaker 1: the end of the year.
Speaker 8: Well, actually, at this level, yields perfectly reasonable. And now
Speaker 8: again remember part of what we're saying is that asset
Speaker 8: price volatility all over the place is much larger. So
Speaker 8: if we're ranging between three ninety and four thirty or
Speaker 8: four forty or so in the ten year yield, that's okay,
Speaker 8: we deal with live with the volatility. But you know,
Speaker 8: on balance, that is a rate for you know, forward
Speaker 8: discounting of share price multiples that we can live with.
Speaker 8: It's you know, the question is what was behind yesterday's selling.
Speaker 8: We don't buy into the fact that it was international
Speaker 8: investors dumping bonds.
Speaker 9: We buy into the fact.
Speaker 8: That logically, if you think about it, given the moves
Speaker 8: that we've had in the last several weeks, it's asset allocation.
Speaker 1: But to me, the idea that one headline could drive
Speaker 1: two and a half trillion dollars of value destruction and
Speaker 1: creation over again just a blip.
Speaker 7: That's emerging market like trading.
Speaker 1: That is not the deepest, most liquid market in the country,
Speaker 1: in the world. That is not what we're used to,
Speaker 1: and that is not the reason why people go to
Speaker 1: the United States on a risk adjust a basis. That
Speaker 1: completely undermines the whole premise of the US market. Why
Speaker 1: does that not shake your confidence that there can be
Speaker 1: the same kind of dynamic going forward of some sort
Speaker 1: of American market exceptionalist.
Speaker 9: No, you're absolutely right about that, Lisa.
Speaker 8: And that drives home the point that we have to
Speaker 8: have I wouldn't necessarily call it off ramps. We have
Speaker 8: to understand what the path forward could look like to
Speaker 8: be able to deal with and make assumptions and make
Speaker 8: capital allocation decisions, whether you're an investor or a corporate,
Speaker 8: And that's why the emerging policy has to have a
Speaker 8: direction of travel to where we've maxed out on uncertainty,
Speaker 8: we've maxed out on potential tariffs, and we are going
Speaker 8: to get in the art of the deal mode. That's why, again,
Speaker 8: given this incredible volatility that we've seen in asset markets,
Speaker 8: which does undermine confidence, the month of April is as important.
Speaker 9: As it is to sort of subdue.
Speaker 8: The feeling in markets, and to the good we would say,
Speaker 8: if you look at it, the bearest sentiment is as
Speaker 8: intense as I've ever seen it, going back to the
Speaker 8: financial crisis in two thousand and eight. You look at
Speaker 8: the share of volumes the last two days off the charts,
Speaker 8: record share of volumes that tends to happen closer to
Speaker 8: trend changes than trend continuations. So you know, it's almost
Speaker 8: getting to a point where it's so negative that at
Speaker 8: least there's a ray of sunlight.
Speaker 6: You offered up a timeline the end of the third quarter,
Speaker 6: you think terrifies who come down anywhere between ten to
Speaker 6: sixteen percent. So basically for back to school what about
Speaker 6: all the damage that could be done between different administration
Speaker 6: officials singing from different hymn sheets between now and the
Speaker 6: end of September.
Speaker 9: Well, that's the critical issue.
Speaker 8: And again that's why I think, you know, Treasury Secretary
Speaker 8: Vesant is trying to get people to sort of come
Speaker 8: together on this, and to the extent that it does
Speaker 8: or it doesn't, it really will be reflected in asset prices.
Speaker 8: But you know, the shock that we've had to the
Speaker 8: system over the last month and in particular the last
Speaker 8: week and a half is such that you're in the
Speaker 8: zone where the sentiment data could materially infect the hard data.
Speaker 8: And to your point, you know, in home selling season,
Speaker 8: which we're in the peak of right now, and then
Speaker 8: back to school, et cetera, you know, that's where the
Speaker 8: economic risk lies.
Speaker 2: Allow me things held Eric Shaska yesterday at the Economic
Speaker 2: Club in New York that the CEOs that he speaks
Speaker 2: to think we're already in a recession. I just wonder
Speaker 2: what we're hear from the CEOs on Wall straight on
Speaker 2: Friday when the onies come out.
Speaker 5: What do you think the're gonna sund us?
Speaker 8: I would think that Jamie Dimon will will warn the
Speaker 8: way he has about her policy implementation and uncertainty. And look,
Speaker 8: this is going to be an earning season where you know,
Speaker 8: it's sort of similar to the unemployment report on Friday.
Speaker 8: It doesn't matter what the numbers are, It absolutely doesn't matter.
Speaker 8: What matters is the level of expressed you know, uncertainty,
Speaker 8: and you know, will companies pull their guidance and I'm
Speaker 8: sure there are a few that will.
Speaker 2: Yeah, Jian, it's going to see it. Thank you, sir,
Speaker 2: thanks for dropping by Gilian A man. Well, they're a
Speaker 2: Bellico Skotta Montgomery, Countick of Barclay's writing. Dollar negativity is
Speaker 2: now consensus and our sentiment index is a maximum parish territory. Historically,
Speaker 2: this has been a fairly reliable reversal sign Skyla, Johnnapamore,
Speaker 2: Skyla historically. I just wonder how different this time might be.
Speaker 10: Yeah, I mean it's interesting because I think the reaction
Speaker 10: to tariffs was unexpected for the dollar.
Speaker 7: All Lsequell.
Speaker 10: We know that US tariff should boost the dollar, but
Speaker 10: I do think there's a logical explanation here in that
Speaker 10: you know, our import substitution model shows that dollar strengths
Speaker 10: does occur on US tariffs but it also shows dollar
Speaker 10: weakness if all tariff countries responding kind, because in that
Speaker 10: situation a larger share of US exports would be tariff
Speaker 10: than say Europe, which only has new tariffs on exports
Speaker 10: to the US. So this tells us that within FX,
Speaker 10: we'll reliant on how the economies respond to US tariffs.
Speaker 10: The second point has to do with growth and confidence.
Speaker 10: I think there's this growing concern over US policy. From
Speaker 10: an economic perspective. Tariffs are not wrong if there's an
Speaker 10: existing distortion, but sweeping tariffs with very little nuance are
Speaker 10: clearly suboptimal and they raise recession ods. US growth was
Speaker 10: already slowing with confidence under pressure, and the one clear
Speaker 10: conclusion from Paris is that they are US growth negative.
Speaker 10: Whether they stay in place the board, are renegotiated in
Speaker 10: some places, are not. On the other side, that means
Speaker 10: if you know, there is also likely still some hope
Speaker 10: that there are deals, and we don't know where those
Speaker 10: deals would be yet. So I think that reflects of
Speaker 10: why you have this dollar downside. But I think it's
Speaker 10: very hard to maintain an environment of slowing global growth.
Speaker 2: Scarlet One thing we've discussed on this program repeatedly is
Speaker 2: not just the shock to the cycle, but the potential
Speaker 2: shock to the system. We'll catch up with Stephen Myron later,
Speaker 2: the Chair of the Council of Economic Advices to the
Speaker 2: White House in about an half from now. And one
Speaker 2: thing he said, particularly in the last twenty four hours
Speaker 2: is that the security umbrella that the United States is
Speaker 2: off of the world, together with the reserve assets that
Speaker 2: facilitate trade. He's making the point that that's distorted the
Speaker 2: US dollar. There seems to be a pushback against the system.
Speaker 2: And is that something that we can fully internalize now?
Speaker 2: I don't think so. But in coming weeks and months,
Speaker 2: coming years, how are you thinking about those changes?
Speaker 1: Yeah?
Speaker 10: I think because we have these great worries of a
Speaker 10: US policy, they have brought in question the role of
Speaker 10: the US and it's brought into question the role of
Speaker 10: the dollar in the global system. In this market narrative
Speaker 10: around a broad reallocation away from US assets and that
Speaker 10: in turn putting pressure on the dollar.
Speaker 7: We think it's too early.
Speaker 10: They didn't make that called minimum. I think for money
Speaker 10: to move to foreign markets, you need some kind of
Speaker 10: improved asset returns in these markets, which seems like a
Speaker 10: very high bar with global growth stelling. So, for example,
Speaker 10: in China, margins are mid to high single digits terris
Speaker 10: on the scale the US is imposing pretty much completely
Speaker 10: wipe that out. Even if you pass a significant portion
Speaker 10: of that onto the consumer for bonds, U s els
Speaker 10: are still relatively attractive, while there still isn't a large
Speaker 10: liquid alternative market. This is also not the first time
Speaker 10: that the market has falsely gotten excited about this narrative
Speaker 10: and it wasn't sustainable. You know, we've had more than
Speaker 10: a decade of policy that's very much favored the US,
Speaker 10: and it's very hard to undo that. So maybe just
Speaker 10: finish off by saying that, you know, even if it
Speaker 10: is the start of a massive rotation, that's something that
Speaker 10: will take a decade or more to play out, So
Speaker 10: there's still time to position for it, and you don't
Speaker 10: need to take on the early signal in case it's false.
Speaker 1: How do you get ahead of the idea that maybe
Speaker 1: China will allow the renminbeed to weaken disproportionately to offset
Speaker 1: some of the damage that we're seeing or potentially increase
Speaker 1: their export power.
Speaker 10: Yeah, I mean, I think that's kind of our base
Speaker 10: case in terms of China, one of the places that
Speaker 10: rhetor referent trade has been very clear. Tariffs have gone
Speaker 10: into place, They're very large in scale, and they've only
Speaker 10: escalated since Trump has been in office. Authorities in China
Speaker 10: have been artificially supporting the currency. So current terrif rates
Speaker 10: imply that dollar C and Y should be much much
Speaker 10: higher than current levels, and there is this view that
Speaker 10: they won't let the currency go because they're worried about
Speaker 10: capital flight, but capital flight will also leave if the
Speaker 10: growth out the deteriorates significantly, even if you keep the
Speaker 10: currency study. So when the economy deteriorates, they can either
Speaker 10: take the hit, moderate it via significant subsidies, or they
Speaker 10: can let the currency go. And they've been unwilling to
Speaker 10: do large scale stimulus or enough at least to really
Speaker 10: prompt the consumer to spend again.
Speaker 5: So we think it's more likely that.
Speaker 10: They do let the currency go in part to support
Speaker 10: their export market, and so we do like being long
Speaker 10: dollar C in one and our target on that is
Speaker 10: around seven fifty Skyler.
Speaker 1: There's this question about how Europe will respond, and we
Speaker 1: were talking about the haven SETUS of the US and
Speaker 1: just how fundamental it is to the overall system. In Europe,
Speaker 1: they are planning to do fiscal stimulus, there could potentially
Speaker 1: be other offsets regardless of whether there's a deal struck.
Speaker 1: How do you calculate the fiscal impulse into at what
Speaker 1: point the euro could potentially strengthen in a more material way.
Speaker 10: Yeah, So I think the euro in the last week
Speaker 10: or so it's benefited from the fact that it's the
Speaker 10: liquid alternatives to the dollar. It's more trading off of
Speaker 10: US enter negativity more than it's trading off of Europe's positives.
Speaker 10: And now there's this tug of war between tarras and
Speaker 10: the piscal response. And by that I mean we do
Speaker 10: expect you the European economy into recession. That's definitely what
Speaker 10: we've already seen urges scale fifth quantify that is, you
Speaker 10: can look at fiscal and around one percent of GDP
Speaker 10: and fiscal expansion is around thirty to thirty five basis points.
Speaker 7: On the long end.
Speaker 10: You can then take the beta between yields and effects
Speaker 10: to find what kind of policy response feeds into euro dollar.
Speaker 10: So for US, we're very much waiting on what the
Speaker 10: size of that stimulus is to have an idea of
Speaker 10: where we think your dollar fair value is, but you
Speaker 10: also need to consider there are other components, right and
Speaker 10: y weekends materially that will also put down a pressure
Speaker 10: on euro So you need quite a big fiscal stimulus.
Speaker 10: I think to offset the tariffs that we've seen with
Speaker 10: one measure, saying that you know, the fiscal that we
Speaker 10: got from Germany already adds around forty basis points to
Speaker 10: European growth, but a five percent takes away forty basis
Speaker 10: points and we're at twenty percent.
Speaker 2: Hie Kinley, We've got to leave it there. I appreciate
Speaker 2: your time. Scilla Montgomery counting there if Barclay's thank you.
Speaker 2: Nancy Lizarre of Pipers Sandler, seeing tarif related inflation as
Speaker 2: a one off and saying quote easy aggressively now would
Speaker 2: risk a sharp inflation reacceleration in twenty six. As of now,
Speaker 2: after the one off tariff inflation hits the economy in
Speaker 2: twenty five, inflation is likely to slow in twenty six.
Speaker 2: Nancy joined us now for more, Nancy, good morning, good morning.
Speaker 2: Are you suggesting they just wait then?
Speaker 7: I would prefer the Fed be more easier, very slowly,
Speaker 7: because again, what you don't want to do is repeat
Speaker 7: what we did in twenty twenty one, which was eased
Speaker 7: in a temporary shock and then create way too much
Speaker 7: liquidity and inflation indeed comes back. I didn't like the
Speaker 7: fact to use the word transitory. Again, not many people did.
Speaker 2: Yeah, JP Morgan Asset Management Bob michael on the program
Speaker 2: with us on Sunday evening, as we waited for equity
Speaker 2: futures to open on the S and P five hundred,
Speaker 2: he said, maybe this FED couldn't wait until the next meeting.
Speaker 2: The next meeting is the first week of May. Can
Speaker 2: they wait that long?
Speaker 10: Oh?
Speaker 7: I would say, again, this is not an interest rate problem.
Speaker 7: In fact, the lag effects of a FED easing cycle
Speaker 7: are still going to help the economy once uncertainty can
Speaker 7: come down and these price shocks convade. So the FED
Speaker 7: doesn't already ease, let's not forget that, and as we
Speaker 7: move into the back half of the year, they could
Speaker 7: actually already help to support growth. So yes, later rather
Speaker 7: than sooner would be healthier for the long run.
Speaker 1: Inslation Outlook, what's the historic analog to now where we
Speaker 1: can get some sense of how inflation has behaved with
Speaker 1: tariffs at a time where potentially you could also see
Speaker 1: some sort of demand shock.
Speaker 7: So you can go back to twenty eighteen where you
Speaker 7: had two industries in particular that had big tariffs on them,
Speaker 7: both washing machines and furniture, and you saw an increase
Speaker 7: in price immediately, and then you had a decline in
Speaker 7: unit sales immediately, and then over the next year you
Speaker 7: started to see prices actually declined because of that weakness
Speaker 7: and also the substitution effect. So again it takes it
Speaker 7: would be it'd be best for the Fed to be
Speaker 7: patient as we go through this price shock, see a
Speaker 7: dip in the economy, maybe one percent GDP growth. As
Speaker 7: we move into second and into the third quarter, and
Speaker 7: then by the back half fourth or into twenty twenty six,
Speaker 7: you can see an incremental improvement in the economy, and
Speaker 7: the Fed doesn't have to do much to get that.
Speaker 1: Some people would argue, including the likes of big Wall
Speaker 1: Street firms, and a number of Wall Street firms have
Speaker 1: predicted a base case now of recession, including JP Morgan.
Speaker 1: Why should the Fed look through that? Given what the
Speaker 1: surveys are showing, and given the fact that companies may
Speaker 1: come out and give some guidance other than Levi's, but
Speaker 1: may give some guidance.
Speaker 5: To that effect.
Speaker 7: Well, they may not look through it, they may incrementally ease,
Speaker 7: but again the Fed has already eased. Our models were
Speaker 7: actually pretty optimistic for twenty twenty five seeing any healing
Speaker 7: in the economy as we move through the year because
Speaker 7: of the easing cycle that we saw last year, lower
Speaker 7: bond yields that we have started to see now oil
Speaker 7: prices are down. There are basic supports for the economy.
Speaker 7: This is a one time price shock, and to ease
Speaker 7: too aggressively again risk creating this inflation next year.
Speaker 2: Let's talk about those risks of it not being a
Speaker 2: one time price shock. What are the sources of inflation
Speaker 2: that would concern you coming forward from here?
Speaker 7: Well, wage inflation, Actually, it has been very sticky over
Speaker 7: the past year. Even average early earnings have basically stopped
Speaker 7: slowing even prior to the current current current environment, which
Speaker 7: told us that inflation was again sticky in twenty twenty four.
Speaker 7: And I think the Fed should should heed that. And
Speaker 7: you've also seen it in some of the price measures
Speaker 7: again here in the first part of the year, where
Speaker 7: you've seen the ism price measures increase pretty much across
Speaker 7: the board within the regional FED measures, and.
Speaker 2: No Dust has made a similar point from Renmack about
Speaker 2: the risk of second round effects. It talks about the
Speaker 2: anxiety of the consumers right now, and you see it
Speaker 2: in the reports in the surface. They're anxious about high
Speaker 2: unemployment in the future. And if that's the case, the
Speaker 2: idea that they're going to go around to bid up
Speaker 2: their wages anytime soon is difficult to get your head around.
Speaker 1: Which is the reason why a lot of people aren't
Speaker 1: looking to that kind of inflation. Are you arguing that
Speaker 1: potentially a federate cut of even fifty basis points could
Speaker 1: engineer that confidence at a time where this stock isn't
Speaker 1: coming from elsewhere.
Speaker 7: No, I don't think a FED rate cut. I think
Speaker 7: the next major issue for the markets are going to
Speaker 7: be one what inflation does in say April in May,
Speaker 7: you're going to get a price shock, a big price
Speaker 7: increase from the teriffs that are being put in place.
Speaker 7: We think CPI could accelerate to around a five percent
Speaker 7: quarter to quarter annualized run rate, and that's going to
Speaker 7: take consumer spending down. And we're watching our daily consumer
Speaker 7: confidence survey. So no, we think the Fed can ease.
Speaker 7: They just can't ease aggressively, and they've already been in
Speaker 7: an easying cycle. They've pulled back on QT and so
Speaker 7: let's not get carried away, because there are longer term
Speaker 7: supports for the economy as we come out of this,
Speaker 7: which we hopefully is by the fourth quarter of this year.
Speaker 1: A couple of weeks ago, people were talking about the
Speaker 1: sequencing of the policies coming out of this administration, that
Speaker 1: the difficult stuff came first, the tariffs, some of the
Speaker 1: negative growth shocks, and then the pro growth shocks come
Speaker 1: later on with respect to tax cuts and deregulation other aspects.
Speaker 1: How much are people overlooking that as a potential catalyst
Speaker 1: for some growth and frankly, potentially even inflation, and discounting
Speaker 1: how much of an upward stimulus that could be on
Speaker 1: the economy.
Speaker 7: I think that is a very very significant point. I
Speaker 7: started in the summer of nineteen eighty one, and it
Speaker 7: was chaos in the summer of nineteen eighty one. Volker
Speaker 7: wasn't sure if he was going to be successful. Reagan
Speaker 7: did similarly, he was going to take some pain near term,
Speaker 7: allowing Volker to do what he wanted to do. He
Speaker 7: fired people. I'm not comparing Reagan to Trump. But I'm
Speaker 7: just suggesting it's not unusual for an administration to do that.
Speaker 7: And the longer term positives are positives to have on shoring,
Speaker 7: which I've been focused on for fifteen years, is an
Speaker 7: incredible positive. There are people who want to work in factories,
Speaker 7: clarity on the tax reform, deregulation, a smaller government. So
Speaker 7: there are some longer term positives if we can potentially
Speaker 7: negotiate some with these tariffs. I'm also for free trade.
Speaker 7: I'm also for fair trade, and if we come out
Speaker 7: of this current turmoil with some fairer trade, then yes,
Speaker 7: there are You can add that to the list of
Speaker 7: positives for twenty twenty five.
Speaker 5: And I see.
Speaker 2: I share that sentiment almost entirely. I'm pleased you said it.
Speaker 2: I think this has been a problem for a.
Speaker 5: Long long time. It goes back decades.
Speaker 2: I think this administration, led by this president, has done
Speaker 2: a tremendous job of articulating that problem. The President's done
Speaker 2: it going all the way back to the nineteen eighties.
Speaker 2: This is about whether this is the right policy executed
Speaker 2: in the right way to try and remedy this situation
Speaker 2: leads and I think they're two separate conversations. I think
Speaker 2: you've got to be able to acknowledge the former and
Speaker 2: then have a debate about the latter. And that's the
Speaker 2: struggle that a lot of people are seeming to have
Speaker 2: at the moment over the past week or so.
Speaker 1: I'm so glad that you framed it that way, because
Speaker 1: I think a lot of people do agree that there
Speaker 1: are some issues, some problems that are very correctly identified
Speaker 1: by the administration.
Speaker 7: It's execution risk.
Speaker 1: It's this question of the uncertainty itself that does have
Speaker 1: a prolonged period of time and how it is a
Speaker 1: key feature in the way that maybe these deals might
Speaker 1: be being negotiated or not, or maybe this is just
Speaker 1: simply simply policy.
Speaker 2: Joan, Nancy is going to see you, yes dropping bye,
Speaker 2: Thank you. Nancy's out there, of Pipers Sandler. This is
Speaker 2: the Bloomberg Sevenants podcast, bringing you the best in markets, economics,
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