WEBVTT - We Just Saw Europe's Biggest Week in Decades 0:00:00.360 --> 0:00:02.400 Hey, Odd Loots listeners, We're coming to DC. 0:00:02.840 --> 0:00:04.840 We're finally doing it, Joe. It's going to be our 0:00:04.840 --> 0:00:09.200 first live show in Washington, DC, our nation's capital. It's 0:00:09.240 --> 0:00:12.440 also finally going to be the time where we actually 0:00:12.520 --> 0:00:13.640 talk about the Jones Act. 0:00:13.880 --> 0:00:17.119 Listen talk about doing the Jones Act episode of Odd 0:00:17.200 --> 0:00:19.880 Lots for a long time, and it's become this recurring 0:00:19.920 --> 0:00:21.880 joke that we've never done on But we're going to 0:00:21.920 --> 0:00:24.599 do it in grand style because we're going to be 0:00:24.600 --> 0:00:27.200 doing it live in DC and it's actually going to 0:00:27.240 --> 0:00:27.840 be a debate. 0:00:28.240 --> 0:00:32.760 Yeah. So we have Sarah Fuentes from the Transportation Institute. 0:00:32.920 --> 0:00:34.600 She's going to be taking the pro side, and we 0:00:34.760 --> 0:00:38.120 also have Colin graybou of the Cato Institute. He'll be 0:00:38.200 --> 0:00:41.839 taking the against side. It's going to be really interesting 0:00:41.920 --> 0:00:43.880 to see how all of that shakes out. 0:00:43.960 --> 0:00:46.519 In addition to that, we're going to be speaking with 0:00:46.720 --> 0:00:50.080 Blair Levin, who was around during the telecom bubble, and 0:00:50.400 --> 0:00:53.440 we have Andrew Ferguson, the new head of the FTC, 0:00:53.560 --> 0:00:55.320 the one who's replaced Lina Kong. We're going to be 0:00:55.320 --> 0:00:57.920 talking about mergers and acquisitions and all that stuff. So 0:00:58.240 --> 0:00:59.320 it should be a really fun night. 0:00:59.520 --> 0:01:02.120 If you want to come and join us for that evening, 0:01:02.240 --> 0:01:05.120 it's going to be on March twelfth at the Miracle Theater. 0:01:05.440 --> 0:01:08.399 Go to Bloomberg dot com forward slash odd Lots and 0:01:08.440 --> 0:01:10.839 you can find the link to purchase tickets. We hope 0:01:10.840 --> 0:01:11.440 to see you there. 0:01:14.120 --> 0:01:29.319 Bloomberg Audio Studios, Podcasts, radio News. 0:01:29.640 --> 0:01:32.759 Hello and welcome to another episode of the Odd Lots podcast. 0:01:32.920 --> 0:01:35.920 I'm Tracy Alloway and I'm Joe wysent Thal. Joe, do 0:01:36.000 --> 0:01:38.319 me a favor and pull up a chart of the 0:01:38.480 --> 0:01:39.720 ten year German Bund. 0:01:39.920 --> 0:01:46.000 Oh yeah, okay, let's see German generic ten year bond. 0:01:46.480 --> 0:01:48.600 You don't know the ticker, you haven't memorized. 0:01:48.840 --> 0:01:51.320 Oh, but we have the beautiful auto of it. Wow, 0:01:51.360 --> 0:01:54.360 that is a chart. So you know, back in the 0:01:54.360 --> 0:01:57.120 beginning of December, the yield was about two percent. It's 0:01:57.160 --> 0:01:59.880 been climbing. It was about two point four percent at 0:02:00.080 --> 0:02:03.000 end of February, and in the last two days it's 0:02:03.080 --> 0:02:06.680 rocketed up. It's close to two point nine percent. And 0:02:07.040 --> 0:02:10.000 I saw a headline yesterday. We're recording this March sixth. 0:02:10.120 --> 0:02:13.000 Yesterday's move was the largest one day move since basically 0:02:13.000 --> 0:02:15.200 around the time the Berlin will. 0:02:14.919 --> 0:02:18.480 Yeah, it's a line that goes straight up. Yes, it's 0:02:18.520 --> 0:02:21.560 a pretty big move. As you mentioned, the euro is 0:02:21.600 --> 0:02:26.200 also up against the dollar. European defense stocks have been soaring. 0:02:26.280 --> 0:02:29.560 There are lots of lines going straight up charts out 0:02:29.600 --> 0:02:31.080 there relating to Europe. 0:02:31.200 --> 0:02:35.080 European financials doing really well too. It's like, you know, 0:02:35.200 --> 0:02:38.160 everyone was so down on everything Europe and then Trump 0:02:38.280 --> 0:02:41.600 was expected to make those lines go down further and 0:02:41.639 --> 0:02:42.760 they've just been rocketing up. 0:02:43.120 --> 0:02:45.880 Yeah. And the argument that seems to be happening here 0:02:46.120 --> 0:02:49.720 is the idea that the possibility of tariffs from the 0:02:49.760 --> 0:02:53.680 Trump administration and the loss of the US security umbrella, yeah, 0:02:53.760 --> 0:02:57.120 are so bad for Europe that they could turn out 0:02:57.160 --> 0:02:58.880 to be good in the sense that Europe has to 0:02:58.919 --> 0:03:02.239 spend lots of money to interact them. Maybe they integrate 0:03:02.320 --> 0:03:05.560 some more and maybe that'll boost growth. And if you 0:03:05.560 --> 0:03:08.280 think about all the military equipment that they'll need to buy, 0:03:08.680 --> 0:03:13.280 or maybe the possibility that long suffering German carmakers are 0:03:13.320 --> 0:03:16.200 going to pivot into defense or something like that, it 0:03:16.320 --> 0:03:17.080 kind of makes sense. 0:03:17.280 --> 0:03:19.200 Well, I'm gonna say what I'm about to say. You 0:03:19.320 --> 0:03:20.760 just pull up a chart of the decks. 0:03:21.160 --> 0:03:23.800 Oh yeah, it's pretty another line going straight up. 0:03:24.080 --> 0:03:28.000 You know, there's two elements here. I mean, I joked 0:03:28.080 --> 0:03:31.639 yesterday that the history of finance Twitter is essentially fifteen 0:03:31.720 --> 0:03:35.119 years of waiting for Germany to pull out the fiscal bazooka, 0:03:35.400 --> 0:03:39.760 to sort of pull back from its obsession with balanced budgets. 0:03:40.120 --> 0:03:44.320 The Schwartz, the schwartznul. Did I say that, Okay, Schwartznul, 0:03:44.520 --> 0:03:47.520 Schwartz snul. Yeah. So there's two things though. There's one, 0:03:47.800 --> 0:03:51.640 there's the realization that perhaps more money should be spent, 0:03:52.160 --> 0:03:54.600 and then two there can you get the political stars 0:03:54.600 --> 0:03:58.240 to align to act on that realization. And one thing 0:03:58.360 --> 0:04:00.480 people seem to be thinking is and this is a 0:04:00.560 --> 0:04:04.560 very complicated problem for all kinds of structure architectural reasons 0:04:04.600 --> 0:04:07.960 within the EU or the Eurozone. And there seems to 0:04:08.000 --> 0:04:11.160 be a belief and more than a belief that the 0:04:11.320 --> 0:04:13.800 sort of actions of the Trump administration over the last 0:04:13.800 --> 0:04:18.039 several weeks may be solving both of these problems at once. 0:04:18.000 --> 0:04:19.960 Right in the sense that maybe you need a common 0:04:20.080 --> 0:04:23.320 enemy to galvanize some action. And I will just say 0:04:23.960 --> 0:04:27.320 specifically what we've seen this week. So we saw talk 0:04:27.560 --> 0:04:31.719 of a five hundred billion euro infrastructure fund. We saw 0:04:32.040 --> 0:04:35.920 Germany saying that defense above one percent of GDP could 0:04:36.000 --> 0:04:38.880 be exempt from the debt break. This is the famous 0:04:39.040 --> 0:04:43.280 schulden Blenza. And they also said German states can now 0:04:43.320 --> 0:04:46.200 borrow up to zero point three five percent of GDP, 0:04:46.400 --> 0:04:50.240 that is up from zero. So change there. And so 0:04:50.520 --> 0:04:52.520 I guess in conclusion, there is a lot going on 0:04:52.600 --> 0:04:55.400 in Europe and we should definitely talk about it. And 0:04:55.640 --> 0:04:57.800 I do, in fact have the perfect guest for you. 0:04:57.960 --> 0:04:59.760 It's someone who I used to talk to you all 0:04:59.760 --> 0:05:02.880 the time time about European developments, specifically when we had 0:05:02.960 --> 0:05:05.840 the euro crisis back in sort of twenty eleven to 0:05:05.880 --> 0:05:09.279 twenty thirteen. We're going to be speaking with George Sarah Valos. 0:05:09.520 --> 0:05:12.520 Here's the head of FX research at Deutsche Bank. George, 0:05:12.560 --> 0:05:14.080 thank you so much for coming on the show. 0:05:14.520 --> 0:05:16.360 Thank you very much for having me. It's a great pleasure. 0:05:17.360 --> 0:05:20.480 All right. So I've seen a few people call this 0:05:20.680 --> 0:05:23.720 a watershed moment. I've seen people call it whatever it 0:05:23.760 --> 0:05:28.120 takes two point zero. Barclays is calling it whatever it costs. 0:05:28.839 --> 0:05:32.400 Ralph Preuser over at Bank of America is calling it 0:05:32.440 --> 0:05:35.000 a paradigm shift in the sense that Europe is no 0:05:35.120 --> 0:05:38.640 longer funding the US fiscal expansion. Instead, it's funding its 0:05:38.640 --> 0:05:42.600 own and you yourself have called it history in the making. 0:05:43.400 --> 0:05:47.440 Walk us through how significant this is and why sure. 0:05:47.440 --> 0:05:51.239 I would tend to agree with all of these characterizations. 0:05:51.600 --> 0:05:53.760 I would say it's not just the size, and I 0:05:53.800 --> 0:05:57.160 can help walk through the size and provide some context, 0:05:57.360 --> 0:06:01.160 but also the speed that is remarkable. You have to remember, 0:06:01.440 --> 0:06:04.000 just a few weeks ago we're having the German election. 0:06:04.560 --> 0:06:07.960 The centrist parties lost the two thirds majorities, and the 0:06:08.080 --> 0:06:11.240 centrist parties as well, especially the leading centrist part of 0:06:11.279 --> 0:06:15.520 the CDU, was not campaigning on any sort of fiscal 0:06:15.560 --> 0:06:18.760 expansion compared to what we're seeing now. So I'd say 0:06:18.760 --> 0:06:21.840 it's both the size and the speed that's taken markets 0:06:21.839 --> 0:06:24.880 by surprise. But just to go back to the size, 0:06:25.400 --> 0:06:28.839 and you went through the changes infrastructure, we think will 0:06:28.880 --> 0:06:32.480 be at least one a bit more than one percent 0:06:32.520 --> 0:06:35.880 of GDP a year the state level, easing the reform 0:06:35.920 --> 0:06:38.320 to the debt break that's another point three to five. 0:06:38.960 --> 0:06:43.680 There's gaps that are being freed up on defense because 0:06:43.720 --> 0:06:47.159 now anything above one percent of GDP can be excluded, 0:06:47.200 --> 0:06:50.359 but Germany's already spending one and a half, so you 0:06:50.440 --> 0:06:53.880 have a half a percentage gap that's released immediately, and 0:06:53.920 --> 0:06:56.440 then any extra defense you want to do on top, 0:06:56.720 --> 0:07:00.120 and we think Germany would potentially target between three to 0:07:00.160 --> 0:07:03.840 three and a half percent of GDP defense spending. If 0:07:03.880 --> 0:07:06.919 you add all of these things up, we're talking about 0:07:06.960 --> 0:07:11.640 a swing in the deficit of somewhere between three to 0:07:11.720 --> 0:07:15.800 three and a half percent. Now, to contextualize that, the 0:07:15.880 --> 0:07:19.520 current German deficit is two and a half So if 0:07:19.560 --> 0:07:22.840 you add that on top, we're somewhere between five and 0:07:22.920 --> 0:07:27.440 a half and six percent fiscal deficit. Now that is 0:07:27.800 --> 0:07:28.679 extremely high. 0:07:29.440 --> 0:07:33.000 It's approaching US levels, and we know how wide the 0:07:33.120 --> 0:07:34.280 US deficit is. 0:07:34.680 --> 0:07:36.920 Oh, we know how the US feels about its deficit 0:07:37.000 --> 0:07:37.360 as well. 0:07:38.680 --> 0:07:43.320 Exactly, and critically, I would say this is not a 0:07:43.440 --> 0:07:47.200 one off in the sense that the COVID support was 0:07:47.240 --> 0:07:51.120 a one off. We are talking about a sustained increase 0:07:51.200 --> 0:07:55.240 in deficits of this order for multiple years, at least 0:07:55.280 --> 0:07:58.640 three four five. But for context, the Infrastructure Fund is 0:07:58.680 --> 0:08:02.440 a ten year fund. The closest proxy I think is 0:08:02.520 --> 0:08:06.600 German reunification. But even if you go back then and 0:08:06.640 --> 0:08:10.320 you look at the numbers, these are actually even bigger wow. 0:08:10.480 --> 0:08:14.080 So if you try and contextualize it, there were two 0:08:14.080 --> 0:08:18.280 big rounds of fiscal easing during the German reunification. The 0:08:18.320 --> 0:08:21.000 first one was nineteen ninety and that was a de 0:08:21.080 --> 0:08:25.840 facto helicopter drop of money into Eastern Germany. That was 0:08:25.840 --> 0:08:28.240 when the Eastern deutsch Mark and the Western dotsche Mark 0:08:28.280 --> 0:08:31.880 were equated one for one. It was effectively a fiscal 0:08:31.880 --> 0:08:35.080 transfer to Eastern Germany. We calculate that to be eight 0:08:35.120 --> 0:08:38.120 percent of GDP. So that was nineteen ninety and then 0:08:38.120 --> 0:08:40.840 in nineteen ninety five you had another fiscal expansion, a 0:08:40.880 --> 0:08:45.200 one off fiscal expansion of roughly another eight percent. Now 0:08:45.240 --> 0:08:51.199 we're talking here six percent deficits, but for many more years. 0:08:51.360 --> 0:08:54.200 So if you add up the numbers, arguably this is 0:08:54.280 --> 0:08:56.439 even bigger than German reunification. 0:08:57.720 --> 0:09:00.920 You put out a note on March four, and it's 0:09:01.000 --> 0:09:04.400 filled with, you know, dramatic language. You say it's hard 0:09:04.440 --> 0:09:07.760 to overestimate the scale of change taking place in global 0:09:07.800 --> 0:09:12.120 economic and geopolitical relations. You say that this is the 0:09:12.120 --> 0:09:16.120 biggest shift in trade relations since the collapse of Bretton Woods. 0:09:16.920 --> 0:09:19.520 And I think it's very interesting that you mentioned, even 0:09:19.640 --> 0:09:22.800 just a few weeks ago, when Germany was having its 0:09:23.080 --> 0:09:27.679 national election. There wasn't much talk about this. What specifically 0:09:28.440 --> 0:09:34.560 from the Trump administration, whether it's on trade or defense, 0:09:34.880 --> 0:09:37.760 has caused such a dramatic about phase. 0:09:38.520 --> 0:09:41.280 So I would say it's been building, it's been building 0:09:41.960 --> 0:09:45.400 for months, it's been building for weeks. But the watershed 0:09:45.440 --> 0:09:49.400 moment was really the Munich Security Conference. And we are 0:09:49.440 --> 0:09:52.080 Dutch back, we're based in Germany. We get the vibe 0:09:52.080 --> 0:09:57.120 so to speak. Yeah, but the political vibes domestically in 0:09:57.200 --> 0:10:01.920 Germany dramatically shifted after the Munich Security Conference, the speech 0:10:02.080 --> 0:10:04.920 that was given by the Vice president, the broader body 0:10:05.000 --> 0:10:08.160 language around that, I'd be relocked in to say that 0:10:08.200 --> 0:10:11.120 was the single thing that caused everything. But most certainly 0:10:11.320 --> 0:10:14.760 it was a trigger for a change in mindset. And 0:10:15.040 --> 0:10:17.720 this change in mindset we identified as soon as the 0:10:17.760 --> 0:10:20.880 election was over in terms of the negotiations beginning. It 0:10:21.240 --> 0:10:26.080 culminated this week with the announcements. Say the announcements, even 0:10:26.400 --> 0:10:28.960 we were expecting something, but even for us it was 0:10:28.960 --> 0:10:30.839 at the very top end of expectations. 0:10:31.400 --> 0:10:35.160 Can you talk about the corporate vibes, maybe our companies 0:10:35.160 --> 0:10:40.160 are management getting excited about extra fiscal stimulus or are 0:10:40.160 --> 0:10:44.280 they still very nervous about both the security situation and 0:10:44.400 --> 0:10:46.160 the potential incoming tariffs. 0:10:46.800 --> 0:10:51.440 So the geopolitical backdrop has been a challenge. Trade uncertainty 0:10:51.960 --> 0:10:54.880 is clearly huge, and we saw it with the ECB 0:10:55.040 --> 0:10:58.600 meeting earlier today. But what I would say is this 0:10:58.640 --> 0:11:01.080 has been present in the back around now for months, 0:11:01.960 --> 0:11:05.360 and you can see in policy uncertainty, in disease in 0:11:05.480 --> 0:11:09.000 Germany and in broader Europe, which have been very high 0:11:09.160 --> 0:11:11.880 for a long time over the last couple of quarters. 0:11:12.440 --> 0:11:16.440 So in a sense, what is really genuinely new over 0:11:16.480 --> 0:11:20.160 the last few weeks is this positive shock, and I 0:11:20.200 --> 0:11:23.720 think what is most interesting is to give you an example, 0:11:23.920 --> 0:11:27.280 we had a large investor round table just last week 0:11:27.280 --> 0:11:30.400 in Germany. This is after the negotiations had begun, and 0:11:30.480 --> 0:11:33.600 around that roundtable we had a large number of real 0:11:33.640 --> 0:11:38.079 money investors domestically based in Germany allocating their money to 0:11:38.360 --> 0:11:42.679 European fixed income. And while everyone expected announcements around defense, 0:11:43.880 --> 0:11:48.719 no one really expected anything big on infrastructure. No one 0:11:48.760 --> 0:11:51.400 expected the reform of the debt break up front. So 0:11:51.440 --> 0:11:55.439 I would say this is just a biggert surprise internationally, 0:11:56.240 --> 0:11:59.880 as it is domestically, at least from the investor fe 0:12:00.000 --> 0:12:02.240 feedback and the corporate feedback I've experienced. 0:12:02.559 --> 0:12:05.640 We've seen this big spike in the euro over the 0:12:05.720 --> 0:12:09.000 last couple of days, but you know, it's still fairly low, 0:12:09.120 --> 0:12:11.360 and it's not even back to where it was in 0:12:11.400 --> 0:12:14.960 the beginning of December. It's actually it's still below pre 0:12:15.000 --> 0:12:20.760 election levels. Could this dramatically change the trajectory over the 0:12:20.760 --> 0:12:23.719 coming months and years of the exchange rate? 0:12:26.040 --> 0:12:27.960 So I think to answer that question, you have to 0:12:27.960 --> 0:12:30.400 look at both sides of the Atlantic. So you have 0:12:30.520 --> 0:12:34.000 to question what is going on with the US administration, 0:12:34.600 --> 0:12:38.840 what's happening in Europe. A very good starting point is 0:12:38.880 --> 0:12:42.040 to think about relative neutral rates or what's known as 0:12:42.080 --> 0:12:45.920 relative are star now in kind of high frequency, short 0:12:46.000 --> 0:12:48.480 term On a short term basis, of course, these things 0:12:48.520 --> 0:12:50.079 are very hard to estimate, but if you take a 0:12:50.120 --> 0:12:53.920 step back, relative neutral has been a pretty good guide 0:12:54.320 --> 0:12:57.600 in the broader dollar trends over the last few decades. Now, 0:12:57.640 --> 0:13:01.040 what's interesting is, and I use this re unification analogy, 0:13:01.280 --> 0:13:05.880 if you go back to them, that period saw the 0:13:06.000 --> 0:13:10.280 relative our star between Europe and the US go from 0:13:10.440 --> 0:13:15.360 around minus two hundred during the mid nineteen eighties to 0:13:15.640 --> 0:13:20.080 zero in the early nineteen nineties. This was a period 0:13:20.160 --> 0:13:24.439 where the European neutral rate was rising. As Eastern Germany 0:13:24.600 --> 0:13:27.200 was being unified with Western Germany, you had the big 0:13:27.240 --> 0:13:31.880 increase in fiscal expenditure. So to answer your question, if 0:13:32.040 --> 0:13:35.880 this big infrastructure shift defense shift goes ahead, if it's 0:13:36.000 --> 0:13:41.400 able to push trend growth higher, productivity higher, by extension 0:13:41.480 --> 0:13:45.600 ECB rates higher, I think it certainly has potential to 0:13:45.679 --> 0:13:49.880 be materially positive for the Europe. Now how positive also 0:13:49.920 --> 0:13:52.000 depends on what's going on on the other side of 0:13:52.000 --> 0:13:55.240 the Atlantic and what are the policies pursued there. So 0:13:55.640 --> 0:13:59.520 maybe that's something to discuss in our conversation. But I 0:13:59.559 --> 0:14:02.559 would say how much trend growth is being affected and 0:14:02.640 --> 0:14:05.200 the ECBs is at the core of how much it's 0:14:05.200 --> 0:14:20.360 going to affect the Europe. 0:14:22.000 --> 0:14:24.400 Okay, I'm going to take debate and ask the really 0:14:24.440 --> 0:14:28.720 simple question, which is what happens to a country's currency 0:14:29.000 --> 0:14:32.680 when they enact tariffs so the US, and the reason 0:14:32.720 --> 0:14:35.440 I ask it is because people seem to have different opinions. 0:14:35.480 --> 0:14:37.880 On the one hand, some people think it slows down 0:14:38.000 --> 0:14:41.640 growth and therefore currency will come down. Other people think 0:14:41.760 --> 0:14:44.640 maybe it'll speed it up. Currency goes up real rates 0:14:44.680 --> 0:14:47.560 go up, et cetera. Where do you sit in that debate? 0:14:48.320 --> 0:14:51.000 So it's it sounds like a very simple question, but 0:14:51.040 --> 0:14:52.920 I think as we've seen, it ends up being an 0:14:52.960 --> 0:14:58.000 extremely complicated one. I would say it depends on two things. 0:14:59.200 --> 0:15:03.400 How the tariff's being enacted and to whom are the 0:15:03.440 --> 0:15:06.800 tariffs being enacted. Now, if you're talking about a situation 0:15:07.120 --> 0:15:11.200 of bilateral tariffs, so for example, under the first Trump administration, 0:15:11.640 --> 0:15:15.640 where it's just against China, the US clearly has an advantage. 0:15:15.680 --> 0:15:20.640 It's running a trade deficits, so extension, if it applies 0:15:20.680 --> 0:15:23.120 a tariff, that tariff is going to be more damaging 0:15:23.440 --> 0:15:25.680 to the country it's running a deficit with, because it's 0:15:25.840 --> 0:15:30.080 just a larger portion of that good of that country's goods. Now, 0:15:30.200 --> 0:15:33.800 I think when we're thinking about Trump policy under the 0:15:33.800 --> 0:15:38.200 second administration, we're applying the same logic. The US has 0:15:38.400 --> 0:15:40.840 a trade deficit with the rest of the world. But 0:15:40.920 --> 0:15:43.920 there are two key differences, and this has also taken 0:15:43.960 --> 0:15:46.200 me by surprise compared to the start of the year. 0:15:46.960 --> 0:15:49.960 The first one is how tariff policy is being applied. 0:15:50.720 --> 0:15:53.400 And I think the danger it's presenting to the US 0:15:53.480 --> 0:15:58.120 economy is it's being done in a very haphazard, inconsistent way, 0:15:58.960 --> 0:16:03.320 where the and businesses are struggling to understand both the 0:16:03.360 --> 0:16:06.560 path and the endpoint. And I mentioned that because if 0:16:06.560 --> 0:16:10.360 you look at the key transmission channel of tariffs into 0:16:10.400 --> 0:16:14.840 the economy, it's uncertainty. That was certainly the case during 0:16:14.840 --> 0:16:18.240 the first administration. Certainly the case now and the pattern 0:16:18.280 --> 0:16:23.360 we're seeing ever since January is US uncertainty is now 0:16:23.400 --> 0:16:25.960 going up faster than it is in the rest of 0:16:25.960 --> 0:16:28.240 the world. Now, partly that's because the rest of the 0:16:28.240 --> 0:16:30.600 world's already been worried about tarifs for a long time, 0:16:31.120 --> 0:16:33.240 but I think it's also the way the policy is 0:16:33.240 --> 0:16:36.600 being executed that there is very little clarity and there 0:16:36.640 --> 0:16:39.760 is a constant back and forth. I'd say that's the first. 0:16:40.040 --> 0:16:42.560 Yeah, I'm just gonna say, even since we've been talking 0:16:42.760 --> 0:16:47.520 on this, Trump likely to defer tariffs on goods and 0:16:47.560 --> 0:16:51.680 services under us MCA. I guess by a month. It's unclear. 0:16:52.360 --> 0:16:55.160 And this is from Howard Lutnex speaking on CNBC. So 0:16:55.480 --> 0:16:58.240 there are changes of foot even to the sort of 0:16:58.280 --> 0:17:02.560 North American trade relationship. It's changing by the day. The 0:17:02.600 --> 0:17:04.280 exact nature of this anyway, keep going. 0:17:05.800 --> 0:17:08.840 I think that's exactly it. It's the constant back and 0:17:08.880 --> 0:17:10.840 forth which at the end of the day makes it 0:17:10.880 --> 0:17:14.040 extremely difficult to plan. And remember, the starting point of 0:17:14.080 --> 0:17:16.520 expectation was a very positive one that this would be 0:17:16.680 --> 0:17:20.240 a very business friendly administration. So I'd say that's one part. 0:17:20.720 --> 0:17:24.399 The second part relates to who you are tariffing, and 0:17:24.600 --> 0:17:29.119 if you are tariffing a country where the bilateral trade 0:17:29.119 --> 0:17:34.240 relationship is extremely strong, is less imbalanced, is more codependent, 0:17:34.760 --> 0:17:39.399 and here I'm referencing Mexico, but even more importantly Canada. 0:17:39.560 --> 0:17:42.480 If you're tariffing such a country, the economic impact is 0:17:42.520 --> 0:17:45.320 going to be much bigger than if you're applying the 0:17:45.320 --> 0:17:48.919 same thing to Europe or China. Effectively, I think of 0:17:49.880 --> 0:17:52.520 the economy in the US as part of a broader 0:17:52.560 --> 0:17:56.040 North American economy. You have integrated supply chains that have 0:17:56.119 --> 0:18:01.640 been building for decades, and therefore a tariff policy which 0:18:01.760 --> 0:18:06.399 essentially unwinds that and unwinds an international agreement which you've signed, 0:18:06.840 --> 0:18:09.360 I think is much more damaging than if we were 0:18:09.400 --> 0:18:12.800 thinking about the same for Europe and China. So it's 0:18:12.840 --> 0:18:17.639 taken me by surprise that the whole policy started with 0:18:17.760 --> 0:18:20.720 Canada and is taking place in such a haphazard way, 0:18:20.720 --> 0:18:22.960 and I think that's at the core of why the 0:18:23.040 --> 0:18:24.680 dollar is not strengthened. 0:18:40.880 --> 0:18:42.840 So one of the things that I mentioned in the 0:18:42.880 --> 0:18:45.440 beginning is that in order to get to a point 0:18:45.480 --> 0:18:49.359 where Europe really pivots or reforms or in some way 0:18:49.520 --> 0:18:52.720 or it does something big, you really need two things 0:18:52.760 --> 0:18:55.399 to happen, which is, you need the recognition that it 0:18:55.440 --> 0:18:58.600 should be done, and then you need the political stars 0:18:58.760 --> 0:19:02.159 to align. And that's very trick within the Eurozone for 0:19:02.280 --> 0:19:07.800 various reasons, you know, setting aside German physical expansion, capital markets, 0:19:07.800 --> 0:19:12.320 deepening capital markets, integration, other things like that, progress on 0:19:12.560 --> 0:19:15.640 areas like that has been really slow, etc. 0:19:16.040 --> 0:19:16.199 You know. 0:19:16.240 --> 0:19:19.159 One of the things that we've seen, very interestingly enough, 0:19:19.280 --> 0:19:22.320 is that Donald Trump breathed new life into the Liberal 0:19:22.320 --> 0:19:26.760 Party in Canada. They were basically left for dead about 0:19:26.760 --> 0:19:30.600 a month ago, the party of Trudeau, who's not in 0:19:30.600 --> 0:19:33.119 the running to be the next prime minister. And now 0:19:33.200 --> 0:19:36.080 suddenly their poles are surging. Like when you look at 0:19:36.119 --> 0:19:40.320 the European political landscape, do the sort of center right 0:19:40.520 --> 0:19:44.960 or center liberal parties do they seem to have new 0:19:45.080 --> 0:19:47.280 signs of life in this environment. 0:19:47.600 --> 0:19:49.920 I think it's too early to tell because a lot 0:19:50.000 --> 0:19:52.840 of the major interventions in Europe have only happened over 0:19:52.880 --> 0:19:55.520 the last few weeks in reference to the Munich Security 0:19:55.520 --> 0:19:59.679 Conference in particular. But what I would certainly agree with 0:19:59.720 --> 0:20:03.560 you is that the threatened withdrawal of the security guarantee 0:20:04.080 --> 0:20:06.560 is providing, if I could call it, a guiding star 0:20:06.640 --> 0:20:10.639 to Europe in terms of something everyone can coordinate around with, 0:20:10.840 --> 0:20:14.240 which is defense. And the one point to make is, 0:20:14.560 --> 0:20:17.600 of course, when you start Europe as a very low 0:20:18.000 --> 0:20:20.720 industrial defense base, it will need to build that out. 0:20:20.960 --> 0:20:24.280 But that's precisely the reason why that could serve as 0:20:24.320 --> 0:20:27.280 a new growth engine. And we have to think about 0:20:27.320 --> 0:20:31.400 broader spillovers of defense. For example, just over the last 0:20:31.400 --> 0:20:36.480 two days we've seen negotiations between Italy and Turkey to 0:20:36.560 --> 0:20:40.040 develop drone technology. We're seeing a potential shift away from 0:20:40.080 --> 0:20:44.800 Starlink to European satellite company for Ukraine and all these things. 0:20:45.320 --> 0:20:49.080 The initial trigger might be a military reason, but there's 0:20:49.119 --> 0:20:53.320 broader technological spillovers and growth spillovers. And the last point 0:20:53.400 --> 0:20:56.040 is we have to remember the starting point of Germany 0:20:56.119 --> 0:20:58.840 is solo. Germany has not grown for the last two 0:20:58.880 --> 0:21:03.199 or three years. Germany has engineering expertise, has access capacity. 0:21:03.600 --> 0:21:09.280 The economy is actually fairly well placed to benefit from 0:21:09.560 --> 0:21:13.520 using defense as a new industrial strategy, so to speak. 0:21:14.000 --> 0:21:17.679 Germany is a third of Europe, so if Germany's moving, 0:21:18.520 --> 0:21:20.960 even if no one else is moving, it can be 0:21:21.040 --> 0:21:24.080 quite material, especially given that Germany has been the drag 0:21:24.119 --> 0:21:24.840 in the first place. 0:21:25.359 --> 0:21:28.920 And Tracy, you know something that George mentioned defense as 0:21:28.960 --> 0:21:31.800 a potential true engine of growth with spillovers. I mean, 0:21:31.840 --> 0:21:34.399 this is the story, right that we've been talking about 0:21:34.400 --> 0:21:38.480 in American industrial policy history. It really is always defense, 0:21:38.480 --> 0:21:42.399 and then defense gave us eventually the iPhone. But this 0:21:42.480 --> 0:21:45.080 is really always seems to be how it happens. In 0:21:45.119 --> 0:21:47.560 anxiety about existential security, I. 0:21:47.600 --> 0:21:50.359 Look forward to the German iPhone. Okay, I'm going to 0:21:50.400 --> 0:21:53.560 ask a sort of bigger question, just going back to 0:21:54.000 --> 0:21:57.359 the scope and the significance of all of this, I 0:21:57.400 --> 0:22:01.720 have to ask what happens to US treasuries here and 0:22:01.760 --> 0:22:05.000 the US dollar in the sense that you know, I 0:22:05.080 --> 0:22:07.480 mentioned earlier that one way of looking at this is 0:22:07.480 --> 0:22:11.480 that Europe is no longer funding the US fiscal expansion. 0:22:11.560 --> 0:22:15.000 Instead they're funding their own. Germany has in fact been 0:22:15.080 --> 0:22:18.280 a really important buyer of US treasuries in recent years, 0:22:18.680 --> 0:22:21.840 and Europe's also a big buyer of US corporate bonds, 0:22:21.880 --> 0:22:25.200 and you know, US treasury purchases kind of go hand 0:22:25.320 --> 0:22:29.359 in hand with the dollars special status in the financial 0:22:29.359 --> 0:22:35.240 system as the reserve currency. Does this change that equation? Perhaps? 0:22:35.359 --> 0:22:38.720 Is the dollar at risk of losing its special status? 0:22:39.320 --> 0:22:42.000 Well? I think you raise a very important question, and 0:22:42.800 --> 0:22:45.600 there's different ways of looking at it, but my starting 0:22:45.600 --> 0:22:49.440 point would be that you're absolutely correct in Europe being 0:22:49.440 --> 0:22:52.520 the marginal buyer of treasuries. There's been a lot of 0:22:52.560 --> 0:22:56.080 discussion recently around the Mara Lago Accord and the role 0:22:56.119 --> 0:22:59.840 of reserve managers central banks of not being buyers of 0:23:00.400 --> 0:23:03.440 debt for the last ten years. In fact, the share 0:23:03.480 --> 0:23:07.359 of reserves has been declining in terms of global GDP, 0:23:07.960 --> 0:23:11.560 So the marginal buyer has been the private sector. It's 0:23:11.600 --> 0:23:15.600 been primarily Europeans, potentially Japanese as you alluded to. Does 0:23:15.640 --> 0:23:18.560 that create a problem for the US, I would say 0:23:18.600 --> 0:23:20.919 depends on what's going on with the US policy stance. 0:23:21.640 --> 0:23:25.119 If the idea is the US fiscal stance is shrinking 0:23:25.160 --> 0:23:28.360 at the same time because the US is consolidating, it's 0:23:28.400 --> 0:23:32.320 going to be okay if the US is sticking with 0:23:32.400 --> 0:23:37.000 these deficits of six seven percent, and I think critically 0:23:37.320 --> 0:23:40.320 when we're thinking about the funding of the so called 0:23:40.359 --> 0:23:43.639 twin deficit, it's not just about the magnitude, but it's 0:23:43.680 --> 0:23:47.240 about the context. Is the US outperforming in terms of growth? 0:23:47.840 --> 0:23:51.399