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
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. Let's bring it back
Speaker 2: to the United States and turn to the US consumer
Speaker 2: Retail sales due at a thirty Eastern time. The report,
Speaker 2: coming after a disappointing new mitched consumer sentiment survey, dropped
Speaker 2: going into the weekend. Airlines are leading the way as
Speaker 2: corporate start a lower guidance, Delta American and Southwest slashing
Speaker 2: their outlooks citing weaker than expected demand. Stephen Trent of
Speaker 2: City still op domestic common sector, writing the main risk
Speaker 2: seems to be top down, when and how do we
Speaker 2: get cloud see on the government's plans on tariff, trade
Speaker 2: and foreign relations. Steven joined US now for more. Stephen Goomring,
Speaker 2: good to see you same, thank you for having me.
Speaker 2: I think we've got to start with the downgrades to
Speaker 2: the outlook for the first quarter that came from some
Speaker 2: of the airlines, and it was kicked off by Delta
Speaker 2: just last week at Bastin used the tea word, the
Speaker 2: tea words a scary word on this program. Transitory transitory.
Speaker 2: Just how transitory? Might this be?
Speaker 3: Great question, and I think it's too early to say.
Speaker 3: So you did have a lot of noise in one queue, certainly,
Speaker 3: as you guys said, the airlines really disliked this uncertainty.
Speaker 3: So when are we going to get clarity on tariffs,
Speaker 3: on dodge cuts and what does all of this mean
Speaker 3: for demand? I think that's too early to say during
Speaker 3: the quarter at least so far. As well, you did,
Speaker 3: unfortunately have several high profile aviation accidents, all but one
Speaker 3: of them were fatal. That is also something that you
Speaker 3: can ignore in these short term moves. But I think, overall,
Speaker 3: what confidence do we have six months? So now? I
Speaker 3: think it way too early to tell, and the underlying
Speaker 3: fundamentals still look positive.
Speaker 4: So let's go check ourselves, because before we get carried
Speaker 4: away with too much negativity, not that I would ever
Speaker 4: be accused of that. I am wondering if it really
Speaker 4: was all that bad what some of these airline executives
Speaker 4: are projecting.
Speaker 3: Yeah, so look, I think if you look to your point,
Speaker 3: nobody so far has changed their full air guide. I
Speaker 3: think they're also in a wait and see mode to
Speaker 3: some extent where things go. Are we going to wake
Speaker 3: up a month from now and we'll have a little
Speaker 3: bit more clarity after this April second bogie that mister
Speaker 3: Wessemmer mentioned. Are we going to wake up and have
Speaker 3: some wild headline about Greenland and nobody wants to travel?
Speaker 3: I think it's too early to say, and it's a
Speaker 3: little too hard to put meth on that today. But
Speaker 3: the underlying fundamentals still look positive, and I think the
Speaker 3: airlines telegraph that by not making any cut to the
Speaker 3: full year guides.
Speaker 4: There was a real question about how much of this
Speaker 4: was driven by consumer discretionary spending, people who might be
Speaker 4: worried about losing their job, versus companies really pulling back
Speaker 4: saying hunker down, study, you've got nothing to tell any
Speaker 4: of the clients.
Speaker 3: Yeah. Look, I think those are all potentially legitimate drivers
Speaker 3: I would add to that what's happened on the government level,
Speaker 3: which is not the largest piece of travel, but with
Speaker 3: doors kicking in less government employment, I would imagine they're
Speaker 3: also being stricter about who's allowed to go on business
Speaker 3: trips from these various agencies. So I think all of
Speaker 3: that stuff is relevant.
Speaker 1: They certainly are, I hear that anecdotally. But also we
Speaker 1: saw it with United, who is most vulnerable to that
Speaker 1: those government contracts, those government flights.
Speaker 3: Yeah, certainly United had not a massive number, but American
Speaker 3: United sort of talked about having a smallish percent of
Speaker 3: revenue associated with US government travels. So I don't remember
Speaker 3: exactly at the top of my head, but very low
Speaker 3: single digits I think in in the highest case.
Speaker 2: So not enough to pull roots.
Speaker 3: No, no, But you also have to also, uh consider
Speaker 3: some of these markets uh where the government serves, so Washington,
Speaker 3: Reagan of course, where we just had one of those
Speaker 3: awful accidents. Uh. You know, the FAA has had actually
Speaker 3: added a little bit of flights uh into that carrictor recently.
Speaker 3: So you have a difference in terms of how much
Speaker 3: flow you get from some of these uh government employees,
Speaker 3: and uh, what kind of economics you get on them. So, uh,
Speaker 3: they were small numbers, but I think the question is
Speaker 3: at when the dust clears in all of this, how
Speaker 3: big are they gonna be? We we don't really know yet.
Speaker 1: You also mentioned fuel prices in your note. A lot
Speaker 1: of banks are now cutting their forecast to BRND. How
Speaker 1: much is that going to be very helpful right now
Speaker 1: for the airlines?
Speaker 3: Yeah, so I think, uh, lower fuel prices are helpful,
Speaker 3: and fuel sort of a funny thing. You know. Fuel
Speaker 3: prices that are too high are bad news. Fuel prices
Speaker 3: that are too low also bad news. You know. The
Speaker 3: latter signals a recession, for example. But where we are
Speaker 3: today with you know, WTI and kind of the high
Speaker 3: sixties or thereabouts, it's at a level where it's not
Speaker 3: really doing any damage or it's not dangerously cheap per se.
Speaker 3: And it did come down from levels where we're going
Speaker 3: to see lower unit revenue at least short term. So
Speaker 3: it's actually good to have a little bit of tailwind
Speaker 3: from fuel today, you know. But I guess if fuel
Speaker 3: start and crude started to fall wildly, that wouldn't be
Speaker 3: the best signal in the world.
Speaker 2: So I think a couple of things we're still talking
Speaker 2: about one. Did the weakness in February spill over to March?
Speaker 2: And within the weakness is the premium segment. The international
Speaker 2: long call is still holding up.
Speaker 3: Yeah, so what we see so far international long hall
Speaker 3: is still strong. You have a dearth of new equipment
Speaker 3: per capita in that space. On the wide body side,
Speaker 3: you really only have three excuse me now with the
Speaker 3: alask have four US carolines and how many any wide
Speaker 3: bodies really? And loyalty and co branded card the same
Speaker 3: domestic spin the main place. So far that's been a
Speaker 3: little bit soft. And you know, the indications so far
Speaker 3: as are is that that should at least continue somewhat
Speaker 3: in the March. But you know, truly to say, what's
Speaker 3: gonna happen on the month.
Speaker 2: And let's finish on domestic what happens when you start
Speaker 2: changing for bags? What happens?
Speaker 3: Yeah? It depends who you are.
Speaker 2: What if you're Southwest?
Speaker 3: Yeah, well, so I think on one level, if you're
Speaker 3: a carrier that's for decades been dealing with a passenger
Speaker 3: flow that is elastic in terms of demand, it's a
Speaker 3: give and take, No, so I think what you're gonna
Speaker 3: pick up and check bags. You're also going to run
Speaker 3: some risk of sending some passion passenger flow away to
Speaker 3: somebody else, and that also makes you arguably less distinct
Speaker 3: against basic economy of one of the big three. You're
Speaker 3: now offering something similar to them, and they have a
Speaker 3: massive network versus you.
Speaker 2: If yourself question why did they do it? What's the
Speaker 2: logic behind it?
Speaker 3: So I think for the discount airlines there has to
Speaker 3: be some kind of change. Strategically speaking, I think these
Speaker 3: post pandemic structural challenges, the way consumers purchase tickets and
Speaker 3: decide to travel, all of that's changed. We no longer
Speaker 3: have enough air traffic control capacity per capita to allow
Speaker 3: these discount carriers to just lay a bunch of capacity
Speaker 3: and maintain really high blockout ugalization. They need to do
Speaker 3: something on the unit revenue side. So is this going
Speaker 3: to be the fix? I don't know.
Speaker 2: Just quickly topic right now for the sector?
Speaker 3: What is it of the US airlines? United's my favorite one,
Speaker 3: and then American Airlines in DOTTA.
Speaker 2: All three then all three of the big players.
Speaker 3: We're fans of the network guys. They have everything they
Speaker 3: need to win. We just need the consumer to have
Speaker 3: a little bit more calmera water.
Speaker 2: We'll get another read on the US consumer at a
Speaker 2: thirty Eastern Times. Stephen Trent, good to see you, as always,
Speaker 2: Stephen Trent there of City, Lofi Carui of GOLDM and
Speaker 2: Sachs looking for wider credit spreads. Writing since the first
Speaker 2: tariff headlines broke, our message has been simple, ad hedges,
Speaker 2: embrace for some rebuilding risk. Premia Lafia joins us now
Speaker 2: for more, Lofi, good morning, it's good to see you.
Speaker 3: Warning.
Speaker 2: I want to go back several months. I want to
Speaker 2: go back to the note you put out the end
Speaker 2: of twenty four going into twenty five, where you highlighted
Speaker 2: just how severe the valuation constraints were coming up into
Speaker 2: the new year. How much of a role do you
Speaker 2: think that's played in some of the shay count we've
Speaker 2: seen so far.
Speaker 5: A little bit, obviously, when valuations are expensive, you don't
Speaker 5: have a lot of room to stomach these big, big shocks.
Speaker 5: But back then, actually our message was that yes, the
Speaker 5: market is expensive, ad hedges, add downside protection and then
Speaker 5: wait for any signs that things that are shifting, either
Speaker 5: fundamentally or from a technical standpoint. What we've learned the
Speaker 5: last three to four weeks is that things are actually
Speaker 5: shifting fundamentally, but the trade off between growth and inflation
Speaker 5: is in our of you at least heading into a
Speaker 5: direction that is unfriendly to risk assets, and so you
Speaker 5: have to realign yourself with that and you have to
Speaker 5: push spreads a little wider.
Speaker 4: Things are changing fundamentally when it comes to sentiment, when
Speaker 4: it comes to maybe to demand that we're hearing from
Speaker 4: airlines as we were just talking about. Has it really
Speaker 4: shifted though, with the credit worthiness of these companies that
Speaker 4: have walked in borrowing costs for a long time and
Speaker 4: still seem to have healthier balances than they have historically.
Speaker 2: It depends where you look.
Speaker 5: If you're talking high quality, ig rated companies, probably not.
Speaker 5: I mean, you know, if you implement terrorists at the
Speaker 5: end of the day, it's probably worth a couple of
Speaker 5: points of declining of declines and earnings that will shift
Speaker 5: your credit metrics a little bit, but not too much.
Speaker 5: Where this will make a difference, in my view, is
Speaker 5: in the very low end of the high end market,
Speaker 5: where we ended the year with tight spreads in hopes
Speaker 5: that actually the economics of refinancing for some of these
Speaker 5: over leveraged capital structures have gotten better. Now, I think
Speaker 5: what you'll see is spreads moving wider and that economics
Speaker 5: of refinancing getting a little bit more challenging.
Speaker 2: Again, we just.
Speaker 4: Saw a week of the biggest widening and credit spreads
Speaker 4: going back to last summer's volatility, and I just wonder,
Speaker 4: is this a repricing of risk to your point about
Speaker 4: valuation late last year, or is this the start of
Speaker 4: something more significant where people shift maybe to places like
Speaker 4: say Europe and European credit over the United States.
Speaker 5: This feels a little different to me relative to late
Speaker 5: July early August, where we were actually pounding the table
Speaker 5: to buy the dip back.
Speaker 4: Then.
Speaker 5: This feels a little different because you need time to
Speaker 5: process what is effectively a meaningful dose of uncertainty that's
Speaker 5: been injected in the economy. The starting level for spreads
Speaker 5: is also very tight, and so it's not like you
Speaker 5: were being paid actually for this type of shocks. Europe
Speaker 5: has already a performed Actually, Europe has had a phenomenal
Speaker 5: start to the year, both in credit and inequities. I
Speaker 5: guess I would describe European credit and as basically being
Speaker 5: in the same situation as US credit, you know, three
Speaker 5: months ago, back to that valuation conundrums. So I think
Speaker 5: it's going to be very hard for Europe to continue
Speaker 5: to tighten in absolute terms. In relative terms, I think
Speaker 5: europeill i perform the US.
Speaker 4: There's this question at a time when the US is
Speaker 4: potentially entering into a difficult patch of whether credit still
Speaker 4: has the canary in the coal mine aspect that it
Speaker 4: used to, Whether it's still kind of can forecast the
Speaker 4: sense of disruption in the fundamental economy that it had
Speaker 4: the reputation of doing ten twenty years ago. Has that
Speaker 4: signaling mechanism been broken?
Speaker 5: Yeah, I think that rept comes entirely from the playbook
Speaker 5: of the global financial crisis. I don't think things will
Speaker 5: play out that way this time around. And so what
Speaker 5: we've seen now is literally credit moving locksteps with its
Speaker 5: sort of empirical or beta relationship to the equity market.
Speaker 5: And so people complain all the time, Well, actually credit
Speaker 5: has not moved. That's actually quite that's not true. You know,
Speaker 5: we've actually repriced in terms of the change in spreads.
Speaker 5: If you look at the change in ig that would
Speaker 5: be implied by it eight and a half nine percent
Speaker 5: moving in the SMP. It's exactly what you've gotten the
Speaker 5: last four weeks. And so it looks like credit is
Speaker 5: resilient only because the starting level is so tight, But
Speaker 5: if you look at the change in spreads, it's been commonsorate.
Speaker 5: I would say with the move inequities.
Speaker 1: When John was talking about your note, you talked about
Speaker 1: the first headline from Donald Trump when it came to tariffs.
Speaker 1: Why now? Trump has talked about this from the very beginning,
Speaker 1: and we knew this was one piece of his broader plan.
Speaker 6: Why now?
Speaker 5: Great question. I think what we've learned is that the
Speaker 5: administration has greater tolerance for a move lower in the
Speaker 5: market and even a full slow down in the economy.
Speaker 5: To me, that's been the most critical piece of information
Speaker 5: that we've learned. And then valuation has remained very tight.
Speaker 5: The two other things I would add is that you know,
Speaker 5: and this is a big difference between today and twenty eighteen.
Speaker 5: In eighteen, rates were very low. They're not today. Actually,
Speaker 5: you get paid four percent four in a quarter to
Speaker 5: invest in cash, and so you have a very valuable
Speaker 5: degree of freedom. Duration has rallied to from a peak
Speaker 5: of four and three quarters roughly to four and a quarter,
Speaker 5: but can rally more if you have an even bigger slowdown.
Speaker 5: And so to me, the urgency to buy the dip
Speaker 5: today is just not there.
Speaker 2: I think we all remember December twenty eighteen when the
Speaker 2: credit market totally throws up. I think that month for
Speaker 2: high yield we got zero issuance in December twenty eighteen.
Speaker 2: Is there anything like that happening right now? Anything that
Speaker 2: we're concern the Federal Reserve coming against this two diimetic
Speaker 2: standing tomorrow.
Speaker 5: I think they'll most likely be in wait and see
Speaker 5: or on the sidelines, will learn, you know, in terms
Speaker 5: of what they do with the their own projections how
Speaker 5: much they'll push inflation up and then how much they'll
Speaker 5: push growth down. But at the moment, like us, my
Speaker 5: guess is that they're processing this flow of information and
Speaker 5: trying to assess what they will do.
Speaker 7: Now.
Speaker 5: The market is pricing in I think two cuts for
Speaker 5: this year. That seems quite reasonable to me. You're pricing
Speaker 5: in two cuts not because you think we're going to
Speaker 5: make progress and inflation, but you're pricing in two cuts
Speaker 5: because you think the Fed will probably adopt some kind
Speaker 5: of an insurance cuts type of framework exactly like they did.
Speaker 5: Actually in twenty eighteen.
Speaker 2: It's the primary market still open for DALs. We saw
Speaker 2: some headlines in the last week or so.
Speaker 5: You know, risk aversion has gone up, and so the
Speaker 5: market is open one hundred percent, but new issue concessions
Speaker 5: have gone up, and so you know, issuers have to
Speaker 5: pay a little bit more relative to the secondary to
Speaker 5: access the primary market. That's actually, in and of itself,
Speaker 5: it's a healthy thing because if you reduce supply, you
Speaker 5: kind of rebalance the market a little bit and you
Speaker 5: bring stability to the secondary market.
Speaker 4: What are you waiting to understand the depth of what
Speaker 4: kind of correction we could see or whether this is
Speaker 4: going to become something that you can opportunistically go into.
Speaker 5: So at the single name level, I would say you're
Speaker 5: already seeing some opportunities. I mean, certainly the primary market
Speaker 5: is one way to deploy capital and harvest a little
Speaker 5: bit of alpha. But what could change my view?
Speaker 2: Look two things.
Speaker 5: One, you get a valuation reset, so actually you from
Speaker 5: load a lot of damage, you price it in and
Speaker 5: you make spreads interesting. Then you revisit the conversation. The
Speaker 5: second thing, I think we need to remember that there's
Speaker 5: in the administration's policy agenda. There's a lot of things
Speaker 5: that are pro growth, and so if you recalibrate, actually
Speaker 5: that policy makes away from some of the stuff that
Speaker 5: is actually negative to growth into some of the things
Speaker 5: that are positive for growth. Tax cuts is a good example,
Speaker 5: and deregulation, et cetera. Then I think you have a
Speaker 5: different conversation and you would look at this market a
Speaker 5: bit differently.
Speaker 2: A sense that's still the strategic can care of a
Speaker 2: lot of the bolls out there that the overall policy
Speaker 2: makes is still pro ris pro growth. In six nine
Speaker 2: months time, things might look a little bit different. That's
Speaker 2: the hope. Anyway.
Speaker 4: The first half of the year is Biden data, and
Speaker 4: then when Trump data comes into play, you would tell that, yeah,
Speaker 4: then there's going to be a policy mixer. It's more
Speaker 4: supportive too. Things going better.
Speaker 2: Lofi's good to see you. Thanks for breaking this down.
Speaker 2: Sharp has always a clinic on credit from Loafi Karui
Speaker 2: there of Goldman Sachs, twenty seven percent of registered voters
Speaker 2: view the party positively in an NBC News poll. Unreal
Speaker 2: joining us now to build on some of these conversations.
Speaker 2: Henrota tres A Vada Partners, Henrietta welcome to the program. Overall,
Speaker 2: I would say on net the people that come on
Speaker 2: this program don't like tariffs. There is some pushbacks sometimes,
Speaker 2: but on the whole they don't like them. The market
Speaker 2: participants they do like tax cuts. Now we're trying to
Speaker 2: understand whether we'll get those corresponding tax cuts anytime soon.
Speaker 8: Well, if you listen to the White House, they're trying
Speaker 8: to build the one thing that is happening here tariffs
Speaker 8: as tax cuts. You know, when Peter Navarro and other
Speaker 8: economic advisors in the White House come out and say
Speaker 8: that tariffs are tax cuts, that's obviously you know, either
Speaker 8: you're lying to yourself or you're lying to me.
Speaker 7: But it's not correct. And that's the problem.
Speaker 8: That we run into because the same is true on
Speaker 8: the tax cut side. As your previous guest was discussing
Speaker 8: the bill that they're trying to pass, you know by
Speaker 8: Memorial Day whenever it passes, that don't care.
Speaker 7: They're extending the status quo.
Speaker 8: So there are no tax cuts even built into the
Speaker 8: four point six trillion dollar tax bill that they need
Speaker 8: to pass this year.
Speaker 7: So there are tariffs and there are not tax cuts.
Speaker 8: And when you sell tariffs as tax cuts, you create
Speaker 8: a pretty material disconnect between the consumer who is confused
Speaker 8: now about what there should should be expecting, which is swye.
Speaker 8: You pull back at the big box retailers and people
Speaker 8: delaying big purchases, which.
Speaker 7: Is what's leading to that soft data that's so problematic.
Speaker 1: Right now, Henrietta, what happened to the Caroenen stick approach
Speaker 1: when it came to tariffs in corporate tax rates? I thought,
Speaker 1: if you produced in the United States, potentially you could
Speaker 1: get a fifteen percent corporate tax rate. Where did that
Speaker 1: conversation go on Capitol Hill?
Speaker 8: That conversation is nowhere right now on Capitol Hill. Each
Speaker 8: percentage point reduction in the corporate tax rate costs a
Speaker 8: hundred and fifty billion dollars. So, as I mentioned, we're
Speaker 8: already at four point six trillion just for the status quo.
Speaker 8: We got to fix the salt cap even just to
Speaker 8: raise it up to twenty k for couples filing jointly.
Speaker 7: We have to extend the child tax credit.
Speaker 8: The President wants to do things like eliminate taxes on tips,
Speaker 8: which is itself one hundred and seventy five billion dollars.
Speaker 8: We do not have the money for a fifteen percent
Speaker 8: corporate tax rate, And even if.
Speaker 7: You did, I'd like to.
Speaker 8: Relay that the Republican Conference and members up there do
Speaker 8: not support additional tax cuts.
Speaker 7: For the business community.
Speaker 8: They view the twenty seventeen tax build downfall. The one
Speaker 8: piece that was really unpopular is that the corporate rate
Speaker 8: tech cuts were permanent, and all the individuals in the
Speaker 8: United States are now subject to the tax increase at
Speaker 8: the end of this year because of the twenty seventeen bills.
Speaker 8: So there's not a lot of appetite for tax cuts
Speaker 8: at the corporate level.
Speaker 1: So, Henrietta, what kind of extras can we get? Do
Speaker 1: we get no tax on tips, no tax on social security?
Speaker 1: What could Trump put on this to make it more
Speaker 1: than just an extension of TCJA.
Speaker 7: That's a great question. The no taxes on SOLFI security
Speaker 7: is physically not possible.
Speaker 8: They're not permitted to address social security in any capacity
Speaker 8: using reconciliation instructions.
Speaker 7: So that's entirely off the table.
Speaker 8: And just so we're clear, the cost of doing that
Speaker 8: would be one point eight trillion dollars. So if it
Speaker 8: was not physically impossible, it's definitely monetarily impossible. The no
Speaker 8: taxes on tips piece doesn't have a tremendous amount of
Speaker 8: support because there's not been enough education or discussion of
Speaker 8: how to rain that in so that you don't avoid
Speaker 8: a CEO saying the million dollars that I made last
Speaker 8: year is actually just a tip and evading taxes, So
Speaker 8: they don't have this the logistics.
Speaker 7: Worked out for that.
Speaker 8: And then in addition, that's not a universal tax cut
Speaker 8: for all individuals. It's only a tax cut if you
Speaker 8: get tips, which not everybody does, so it's disproportionately impactful
Speaker 8: to different states. That was a big sell in Nevada,
Speaker 8: but Nevada does not have Republican senator, so it's going
Speaker 8: to be really difficult to get that over the finish line.
Speaker 8: There's not a lot in there that can be described
Speaker 8: even charitably as stimula. There are a couple of business
Speaker 8: related provisions that expired in twenty twenty two that we
Speaker 8: could provide a short term extension of, but that's really it.
Speaker 2: Henrod destroys as Ida put as Henritta, thank you for
Speaker 2: the update. Appreciate it. To extend the conversation, it's a
Speaker 2: run back now, welcome to the program, sir. You've noted
Speaker 2: the soft data the anxiety over employment specifically, I just
Speaker 2: want your thoughts initially on retail sales. Do those two
Speaker 2: things stack up.
Speaker 3: Well?
Speaker 9: I mean, the retail sales data was basically an online story.
Speaker 9: I mean last month, a lot of the weakness that
Speaker 9: people didn't foresee was a function of online retail. And
Speaker 9: this month, a lot of the strength that people see
Speaker 9: was a function of online retail. So that kind of
Speaker 9: just slung around. If you take that out, you know,
Speaker 9: the underlying story is still weaker, you know. I think
Speaker 9: it's interesting that food services and drinking places, you know,
Speaker 9: basically restaurants are down, you know, three months in a row,
Speaker 9: and you know, or down sorry, over the last three months,
Speaker 9: and pretty meaningfully over that period. I mean, that's sort
Speaker 9: of a bread and butter type of discretionary purchase. If
Speaker 9: you're not feeling good, you're not going to go out
Speaker 9: to eat. And that's exactly what's been happening.
Speaker 4: Neil, You've been clear about how this weakening tread has
Speaker 4: been in place for quite a while, that really since
Speaker 4: late last year you could start to see it in
Speaker 4: the data, and this is part of the economic cycle
Speaker 4: as much as anything else, if not more. I am
Speaker 4: wondering if you're surprised by the pace of some of
Speaker 4: the deterioration, especially in light of the pressure that increasingly
Speaker 4: is being put on the FED not to cut rates
Speaker 4: because of inflation expectations.
Speaker 9: Well, I don't think there's a smoking gun yet in
Speaker 9: the hard data. I mean, I want to be clear
Speaker 9: about that. You know, there's no sign of collapse. There's
Speaker 9: no real discontinuity in the hard data. I mean, that's
Speaker 9: a classic green span sort of tell for trying to
Speaker 9: figure out when you know, if we're in a recession
Speaker 9: or going into one.
Speaker 6: But you clearly see weakness in.
Speaker 9: You know, soft measures of economic activity, and you know,
Speaker 9: obviously there's been a fairly rapid speed in terms of
Speaker 9: the weakness in in consumer sentiment as.
Speaker 6: An example, the March Empire data. Sort of the same thing.
Speaker 9: Obviously, if you're doing tariffs, I mean, that's going to
Speaker 9: weigh on the good sector, you know, disproportionately, and you're
Speaker 9: seeing that, but you've yet to see that really translate
Speaker 9: into into hard measures of activity.
Speaker 6: And I think at some level.
Speaker 9: Lisa, I mean, the fact that the economy, i mean,
Speaker 9: residential investment has been quite sluggish, you know, you know,
Speaker 9: a lot of the cyclical areas. You know, manufacturing has
Speaker 9: been quite sluggish. So if these cyclical areas have been
Speaker 9: relatively soft to begin with, it mitigates some of the downside,
Speaker 9: because if you're sort of bouncing along the bottom, it's
Speaker 9: hard to go further down into the basement.
Speaker 4: One thing that you've laid out, Neil, and I thought
Speaker 4: it was really profound, especially in your conversation with Paul
Speaker 4: Krugman over the weekend, was the degree to which some
Speaker 4: people are underestimating the amount of state and local funding
Speaker 4: that's being cut right now, and how some of the
Speaker 4: federal cuts might look really small on kind of a
Speaker 4: national spending level, but when you start to get those
Speaker 4: cuts at state and local levels, that's where it's going
Speaker 4: to bite more significantly.
Speaker 2: I'm wondering how quickly are.
Speaker 4: We starting to see some of those cuts filter into
Speaker 4: some of the economic data that we're getting out, like spending,
Speaker 4: like consumer confidence.
Speaker 9: Well, I think the area to watch is really stay
Speaker 9: in local government employment. I mean, that had been a
Speaker 9: steady tail wind for jobs growth over the last you know,
Speaker 9: year or so, and that's you know, shifting into a
Speaker 9: much lower lower gear. And you know, I remember stay
Speaker 9: in local governments. We're adding, you know, thirty basis points
Speaker 9: to GDP growth, and that's probably poised to go to zero,
Speaker 9: maybe and slightly negative this year. You know, that's what
Speaker 9: we're seeing in the upcoming fiscal year. You know, states
Speaker 9: have exhausted their pandemic relief money, and you know that's
Speaker 9: that's already started to weigh on sort of public sector
Speaker 9: construction spending. I think employment's going to be the next
Speaker 9: leg of that, you know, when.
Speaker 1: It comes to this administration and their pain tolerance. Over
Speaker 1: the weekend, Treasure Secretary Scott best In, someone I know
Speaker 1: you know well, said, over the long term, if we
Speaker 1: have good tax policy, deregulation, energy security, then the markets.
Speaker 2: Will do great.
Speaker 1: But in the short term, right now, the only policy
Speaker 1: we keep getting out of this administration is tariffs. What's
Speaker 1: their threshold for how painful they're willing to take what
Speaker 1: we're seeing in the financial markets and consumer sentiment, Well.
Speaker 9: I don't know the level of the the put I mean,
Speaker 9: I just know that it's lower than where we are now.
Speaker 9: I mean, look, I do think it's more about what
Speaker 9: they're doing, not the uncertainty around what they're doing.
Speaker 6: That's that's driving the markets.
Speaker 9: But you know, did I keep you know, you and
Speaker 9: I have talked about this and people not know what
Speaker 9: they signed up for. I think what we're seeing is
Speaker 9: when Trump won, everyone knew that it was some combination
Speaker 9: of tax cuts, deregulation, and tariffs, but they bet on
Speaker 9: it in that order, which is why you saw expectations
Speaker 9: for growth at least in the first and second quarter
Speaker 9: go up after the election.
Speaker 6: But obviously we see what the order is in.
Speaker 9: Any day that they're not talking about tax cuts and
Speaker 9: deregulation is a day they're talking about tariffs, and the
Speaker 9: signaling of that means that they're pursuing a lot of
Speaker 9: growth unfriendly initiatives.
Speaker 1: First, Neil, why do you think there was this consensus
Speaker 1: around the sequencing, because it's very clear, if you understand Washington,
Speaker 1: that the only lever Donald Trump could pull on his
Speaker 1: own when he got into office was unilaterally tariffs.
Speaker 9: Well, yeah, I mean, I'm I don't know, Henry, maybe
Speaker 9: you should you should get into the private sector forecasting business,
Speaker 9: because I think that was a great call. But but look,
Speaker 9: I mean not only that, I mean any leg was
Speaker 9: going to be a very very tall left as well
Speaker 9: as you know, because the Congress was so thinly divided.
Speaker 9: I mean, I think at some level, because it's going
Speaker 9: to take them longer to get some of this tax
Speaker 9: stuff through the finish line. You know, that's probably why
Speaker 9: they're one reason why they are front loading the terriff agenda.
Speaker 2: Neil, I haven't watched it yet, but people want to know.
Speaker 2: Is Kruman Dat's are going to become a regular thing?
Speaker 2: Do we get a second series?
Speaker 9: You'd have to ask Paul, but it was it was
Speaker 9: quite the honor to be on with him.
Speaker 2: Neil appreciate the input. As always, Sir Neil's of Run
Speaker 2: mag This is the Bloomberg Sevenants podcast, bringing you the
Speaker 2: best in markets, economics, angier politics. You can watch the
Speaker 2: show live on Bloomberg TV weekday mornings from six am
Speaker 2: to nine am Eastern. Subscribe to the podcast on Apple,
Speaker 2: Spotify or anywhere else you listen, and as always, on
Speaker 2: the Bloomberg Terminal and the Bloomberg Business app.