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: Terminal and the Bloomberg Business App. Harry Cavasina of RBC writing,
Speaker 2: we are lowering our year end twenty five price targets
Speaker 2: of fifty five to fifty from sixty two hundred, essentially
Speaker 2: making our old bare case our new base case. Lurie
Speaker 2: joined us now for more, and Laurier have to say
Speaker 2: that old bear case, which is the new base case,
Speaker 2: is sounding like the bullcase based on the moose we've
Speaker 2: seen over the past few days. How you're reflecting on
Speaker 2: things over the weekend.
Speaker 3: It's a great question, and I was actually talking to
Speaker 3: my energy trader, and the days are all bleeding together
Speaker 3: at this point. I think it was on Friday, and
Speaker 3: you know, we sort of discussed how we went from
Speaker 3: stagflation in terms of people's thinking to recession in about
Speaker 3: two seconds. And I've never seen anything like it where
Speaker 3: you've just seen the mentality shift so much so quickly.
Speaker 3: But I will caution you that is what happens in
Speaker 3: growth spheres, and that is what we are Smack Dad
Speaker 3: in the middle of the seventeen point four percent draw
Speaker 3: down that we saw as of Friday was exactly in
Speaker 3: line with the average drawdown that we saw in twenty ten,
Speaker 3: twenty eleven, twenty fifteen, sixteen, and twenty eighteen.
Speaker 1: Of course, that twenty eighteen.
Speaker 3: Went all the way down twenty percent, which would take
Speaker 3: us around forty nine hundred on the S ANDP. This
Speaker 3: time around, I think just a touch under. And so
Speaker 3: this is what it feels like. You know, we have
Speaker 3: this tiers of fear framework we've talked about to help
Speaker 3: us navigate. We're in tier two. Tier one is the
Speaker 3: garden variety pullback. Tier two is the growth fhere. Tier
Speaker 3: three is recession. And so we have increasingly been talking
Speaker 3: to people, if we break through that twenty percent number,
Speaker 3: what does recession look like? If you look at the
Speaker 3: average and the media and draw down it's about twenty
Speaker 3: seven and thirty two percent. It's taken out of forty
Speaker 3: two hundred and forty five hundred on the S and P.
Speaker 1: We could do that. It's not unreasonable to be thinking.
Speaker 2: About that, Laurie. We know how to price growth scarce.
Speaker 2: We're okay at that. We're fairly decent at knowing what
Speaker 2: a recession might look like, though we haven't seen many
Speaker 2: over the last twenty years. That's a shock to the cycle.
Speaker 2: The issue that we've been trying to get our hands
Speaker 2: around is how to price a shock to the system
Speaker 2: because of these are the new rules of the game.
Speaker 2: This is a change we haven't seen for decades, Lourie,
Speaker 2: How different is that?
Speaker 1: So I think it's a great question. John.
Speaker 3: And as I've been, you know, talking to investors over
Speaker 3: the past month, and we've been talking, we were talking
Speaker 3: about how.
Speaker 1: That tier two fear was rising. One of the thoughts
Speaker 1: that occurred to.
Speaker 3: Me, and I didn't like to say this out loud
Speaker 3: all that often, but it had felt a bit to
Speaker 3: me like this was January of twenty twenty, where there
Speaker 3: was something coming that we didn't quite know what it was.
Speaker 3: I will give you one bit of you know, comfort
Speaker 3: from that twenty twenty period, which was that that ended
Speaker 3: up being a garden variety recession in the thirties and
Speaker 3: terms of the drawdown from peak. And I know it
Speaker 3: doesn't make us all feel happy for me to say
Speaker 3: that out loud right now, but it does give me
Speaker 3: a little bit of comfort. If you really want to
Speaker 3: talk about big crises, we don't have a big sample
Speaker 3: size on those. You know, We've got things like the
Speaker 3: tech bubble, We've got things like the GFC. You basically
Speaker 3: see the market lose hap its value. I'm not saying
Speaker 3: that's what's going to happen, but as we sort of explore,
Speaker 3: you know, the depths that we could go, that is
Speaker 3: the one outside of recession that you want to look at.
Speaker 4: You said, Laurie in your recent note that full recession
Speaker 4: pricing could be a drawdown of some twenty seven to
Speaker 4: thirty two percent based on historical standards, which would take
Speaker 4: the index down to forty two hundred to forty five hundred.
Speaker 4: What would you have to see to start entertaining the
Speaker 4: idea of that being a base case?
Speaker 3: So look, I think the street and we talked about
Speaker 3: this in our target note. We changed our target on
Speaker 3: Friday morning. It was clear to us on Thursday that that,
Speaker 3: you know, things were not going to hold in that
Speaker 3: garden variety territory. But the reality is that the street
Speaker 3: right now is really doing a lot of hard work
Speaker 3: modeling out what the economic impacts are.
Speaker 1: And so we've got the impacts.
Speaker 3: From the tariffs, but then we've also got secondary impacts, right,
Speaker 3: We've got impacts from all the uncertainty we've just had.
Speaker 1: We've got secondary impacts. Even if the.
Speaker 3: Tariffs get dialed down, there's still secondary impacts from the
Speaker 3: uncertainty that will be there going forward. This is a
Speaker 3: very very tough thing for the economics community to model.
Speaker 3: They're working through it now, and I will remind you, Lisa,
Speaker 3: a week ago, we were also all sitting here saying
Speaker 3: we've seen all this deterioration and the soft data, what
Speaker 3: about the hard data. We still haven't really seen any
Speaker 3: hard data yet for the recent impacts of all that uncertainty.
Speaker 3: So we need that baseline to come out in this
Speaker 3: hard data to really understand what the damage is going
Speaker 3: to be.
Speaker 4: At the same time that we're talking in these sort
Speaker 4: of catastrophic terms. I want to go back to the
Speaker 4: call that you actually made, which is gains on the
Speaker 4: S and F through the end of this year. What
Speaker 4: gives you hope or confidence that actually there is going
Speaker 4: to be some sort of rally.
Speaker 5: What is the relief valve.
Speaker 4: That you think Stymy's what this is as you frame
Speaker 4: a growth scare.
Speaker 3: So, look, there are two things that you can look at.
Speaker 3: One of them I buy into the other that I don't.
Speaker 3: I think that the thing that you know, and we've
Speaker 3: seen strategists you know, start to take their numbers down,
Speaker 3: A lot have not, and I think one of the
Speaker 3: reasons why a lot have not is because there is
Speaker 3: an understanding if you've been in this business long enough,
Speaker 3: that as fast as you go down, you can rally
Speaker 3: just as fast on the other side once something happens,
Speaker 3: once there's some sort of policy intervention, once there's some
Speaker 3: sort of change, And so I think that's keeping people,
Speaker 3: you know, somewhat. I don't want to use the word complacent,
Speaker 3: because that's not what it is. It's a legitimate thing
Speaker 3: to worry about. But I do think the trigger in
Speaker 3: terms of the fundamentals for that is this idea that
Speaker 3: we get back to tax, that we get back to deregulation,
Speaker 3: that somehow this storm passes and we get to the
Speaker 3: promised lands of those business friendly things.
Speaker 1: I'm not so excited about that.
Speaker 3: But I will tell you the thing in my modeling, Lisa,
Speaker 3: that sort of keeps me sympathetic to that kind of
Speaker 3: V shaped type move, or at least on guard for
Speaker 3: it a little bit, is the idea that if you
Speaker 3: look at aaii netbulls, they are a very very good
Speaker 3: contrarian indicator.
Speaker 1: If you're looking on a forward, say nine.
Speaker 3: Month basis or twelve month basis, and we are down
Speaker 3: more than two standard deviations below the long term average.
Speaker 3: We have been there since the end of February. In
Speaker 3: terms of how lousy people have felt. That is similar
Speaker 3: to what we saw in twenty twenty two. It's similar
Speaker 3: to what we saw in the GFC. It's similar to
Speaker 3: also what we saw in the ninety ninety one recession.
Speaker 3: If you go back to the fall of twenty twenty two,
Speaker 3: there was despair running around the street. We had something
Speaker 3: weird happen with that inflation spike. It wasn't quite a recession.
Speaker 3: It ended up being a great buying opportunity that nobody
Speaker 3: could even entertain in terms of kind of writing the
Speaker 3: sentences out on paper. But that indicator, that just sort
Speaker 3: of contrarian impulse, I think is something a lot of
Speaker 3: people in the strategy community have in their minds.
Speaker 2: Laurie Helpers navigated the earning still to come. So on Friday,
Speaker 2: we were going into the hard daya looking for payrolls.
Speaker 2: Payrolls came and went. No one's talking about it, no
Speaker 2: one's mentioned it for the whole of this morning. For
Speaker 2: the Holy Yesterday, when we did special programming, the payrolls
Speaker 2: number didn't even come up.
Speaker 6: We moved on quickly. This week it's about earnings.
Speaker 2: Are we going to have the same behavior towards earnings
Speaker 2: this week when we hear from down to rail lines
Speaker 2: on Wednesday? From the banks on Friday? What would you
Speaker 2: use earnings this week for come they offer any guidance?
Speaker 3: So, John, I don't think that the earnings this week
Speaker 3: we're going to offer much guidance beyond the banks themselves.
Speaker 3: You know, I think the airlines always give us some
Speaker 3: interesting clues, particularly in regards to consumer behaviors. Of course
Speaker 3: we want to pay attention to that, but you know,
Speaker 3: to be honest, the banks are not at the center
Speaker 3: of this storm. You know, we might hear some things
Speaker 3: in terms of trading volume and whatnot, but we knew,
Speaker 3: you know, back in early March at our financial conference,
Speaker 3: that the banks were in pretty good shape. They were
Speaker 3: cognizant of what was going on, and they felt like
Speaker 3: they could manage through. So do we see any deviation
Speaker 3: from that message. That'll be one thing to look at.
Speaker 3: But really, John, what we care about is week two,
Speaker 3: Week three, week four, We two, we get more industrials.
Speaker 3: They're really more at the center of this storm. We
Speaker 3: need to hear what they're saying in terms of how
Speaker 3: they manage their supply chains and pricing. You're not even
Speaker 3: going to get consumer companies till the end of this
Speaker 3: reporting season. You might have a few sprinkled out throughout,
Speaker 3: but this can be a long slog.
Speaker 1: There's a lot of hard work to be done.
Speaker 3: Companies have done a lousy job of giving the sell side,
Speaker 3: analyst community guidance on how to think about tariffs because
Speaker 3: that denialism you talked about, John, the companies have been
Speaker 3: guilty of this as well, and it's really frozen a
Speaker 3: lot of the people who cover stocks on the street,
Speaker 3: because when they don't understand what the sensitivities are, they
Speaker 3: can't model it.
Speaker 1: And I will tell you I read a lot of transcripts.
Speaker 3: Companies have not wanted to talk about anything until it
Speaker 3: comes to reality, and we're just now having that reality.
Speaker 1: Hit them in the face.
Speaker 2: Laurie, you don't have to answer this question if you
Speaker 2: don't want to. I don't want to put you in
Speaker 2: a tricky spot. But do you think that could be
Speaker 2: because these management teams didn't want to get on the
Speaker 2: wrong side of the administration? Do you think that was
Speaker 2: something that was driving that decision not to share their
Speaker 2: thoughts on tariffs? And do you think that'll change in
Speaker 2: the coming weeks.
Speaker 1: You know, it's hard for me to speculate on what
Speaker 1: that is. I do worry about John.
Speaker 3: About financial markets, and you know, I'm an old political
Speaker 3: science major. I study political political theory, and so I'm
Speaker 3: a big believer in the free marketplace of ideas, and
Speaker 3: I do think we have to have a free market
Speaker 3: place of ideas on the street for financial.
Speaker 1: Markets to work well. But I think, to be honest,
Speaker 1: they have.
Speaker 3: Really just not wanted to talk about things until they
Speaker 3: knew exactly what they had to talk about if we
Speaker 3: sort of look forward. You know, I think the conversation
Speaker 3: is going to get started. But I will tell you
Speaker 3: one of my analysts last week told me his companies
Speaker 3: they're not going to be able to figure out this
Speaker 3: in one quarter. It's going to take a couple quarters.
Speaker 3: And that was not a comforting thought to me.
Speaker 2: Lurie, I appreciate your time as oas thanks for jumping
Speaker 2: on for us Lari canvasin event a VAMPI.
Speaker 7: Sat excited to say I'm joined by Ed Mills this
Speaker 7: morning of Raymond James, and thank you so.
Speaker 5: Much for joining.
Speaker 7: A big question we have going into this week is
Speaker 7: is this a negotiating tactic. This reports in Japan the
Speaker 7: Prime Minister will get on the phone with the president
Speaker 7: this morning DC time, or are these the new rules
Speaker 7: of engagement.
Speaker 8: I think it's a bit of both, and I think
Speaker 8: that they need more revenue to go to the tax cuts.
Speaker 8: I do think that this is a big part of
Speaker 8: trying to change policy and Marie, but I think that
Speaker 8: the problem for the President is that a lot of
Speaker 8: world leaders are not quite sure that they can negotiate
Speaker 8: with him. They look at the meeting between Trudeau Zelenski.
Speaker 8: They don't want to be embarrassed. They also don't know
Speaker 8: what the president actually wants. He says he doesn't want
Speaker 8: a trade deficit, but there's some of these countries that
Speaker 8: will never be able to be at par you look
Speaker 8: at Vietnam in particular. I think one of the saving
Speaker 8: graces potentially is that the only thing that is still
Speaker 8: not subject to tariffs are USMCA compliant goods. That was
Speaker 8: a deal that he struck in his first term. Is
Speaker 8: he trying to send the signal that if I negotiate
Speaker 8: a deal that I am willing to stick with it.
Speaker 8: The more USMCA goods are excluded, the more he can
Speaker 8: lean into that argument.
Speaker 7: The trade deals take years to hammer out. Is the
Speaker 7: damage going to be done?
Speaker 8: That's the question for markets, And when I talked to
Speaker 8: folks at Raymond James is that they are concerned that
Speaker 8: what they thought they understood about President Trump is not
Speaker 8: what they're getting. That there is a big concern that
Speaker 8: the equity markets are no longer a barometer of his success.
Speaker 8: That they are concerned that he is going to be
Speaker 8: pushing for a change to the world global order that
Speaker 8: has existed since the end of World War II, and
Speaker 8: that they are concerned that he might go too far
Speaker 8: because his advisors are telling them in his first term
Speaker 8: he didn't go fast enough and that he wasn't able
Speaker 8: to do the change in the four years that he
Speaker 8: was president, and that there is a desire to go stronger,
Speaker 8: hold the course and try to push for additional change
Speaker 8: that we were not pricing into this market.
Speaker 1: Will there be.
Speaker 7: Legal or congressional challenges to the tariff plans.
Speaker 8: I think that there's going to be both. I think
Speaker 8: with Congress. Congress has the ability under the National Emergencies
Speaker 8: Act to undo this emergency. However, it requires a veto
Speaker 8: proof majority. We saw the Senate pass a resolution on
Speaker 8: the Canada tariffs last week that was only fifty one
Speaker 8: to forty eight. It was a majority, but not veto proof.
Speaker 8: If he's not cutting deals, the tensions will grow when
Speaker 8: you look to the courts. He used emergency powers JEPA.
Speaker 6: Yeah, AIPA.
Speaker 8: Back in nineteen seventy one, Richard Nixon did the same thing,
Speaker 8: used emergency powers to put a worldwide global tariff as
Speaker 8: we came off the gold standard. There was a strong
Speaker 8: argument there about an unbalanced of payments. Then in nineteen
Speaker 8: seventy four, Congress passed a trade Act that said, if
Speaker 8: there is an uneven balance of payments, the president's authority
Speaker 8: is to use what's known as Section one twenty two,
Speaker 8: where you can put a tariff on for one hundred
Speaker 8: and fifty days up to fifteen percent one to five.
Speaker 8: This is not what the president did here. So did
Speaker 8: the president violate the congressional intent? Did the president use
Speaker 8: emergency authority when there isn't the subcontext for an emergency authority?
Speaker 1: The problem for me.
Speaker 8: Is that the courts, almost exclusively never say that the
Speaker 8: president's emergency action was not legitimate, and that the beef
Speaker 8: might be with Congress that the Congress has to make
Speaker 8: their action under the National Emergencies Act to turn off
Speaker 8: the emergency.
Speaker 7: Saying in Congress, some good news for the administration was
Speaker 7: the fact that the Senate passed this budget is going
Speaker 7: to go to the House this week. When do you
Speaker 7: think we will see extension of tax cuts?
Speaker 8: So I'm always looking for a crisis or deadline in
Speaker 8: DC before we act. You look at Republicans and they're
Speaker 8: trying to do this with the debt limit. So to me,
Speaker 8: that goes right up to the August recess, so probably.
Speaker 6: The June July time period.
Speaker 8: And when you look at that bill, what passed in
Speaker 8: the Senate was at least five trillion dollars worth of
Speaker 8: tax cuts over the next decade, a three hundred billion
Speaker 8: dollar increase in defense, in immigration spending. That would be
Speaker 8: the single largest bill in the history of the United States.
Speaker 8: And a lot of people look at this and say,
Speaker 8: all right, well, this is not going to be stimulative
Speaker 8: because it's a continuation of current policy. But when you
Speaker 8: add in the changes to no tax on tips, overtime
Speaker 8: social security, extension of salt, extension of the child tax credit,
Speaker 8: in the business tax credits, I can come up with
Speaker 8: a reasonable argument that over the next year or two
Speaker 8: that's somewhere between five hundred billion in a trillion dollars
Speaker 8: of additional stimulus. That's where the market is going to say,
Speaker 8: that's the bull case from here, especially if we start
Speaker 8: getting some of these trade deals struck.
Speaker 1: Ed wills, Thank you so much from Raymond.
Speaker 2: Jeans Justin Wolfers of the University of Michigan writing, these
Speaker 2: tariffs are going to hurt a lot. They're going to
Speaker 2: reshape your life in much more fundamental ways, and pleased
Speaker 2: to say that Justin has given us some time this
Speaker 2: morning just thin good morning to you, sir. Let's just
Speaker 2: breath some life into that quote. When you say this
Speaker 2: is going to change people's lives in fundamental ways, what
Speaker 2: do you.
Speaker 9: Mean Next time you walk through the supermarket, just pick
Speaker 9: up that box of cookies or their pastor or that avocado,
Speaker 9: and just look on the side for where it's made.
Speaker 9: Even when it says whether it's made in America, think
Speaker 9: about whether or ingredients came from and very quickly you'll
Speaker 9: discover that every part of our lives is profoundly integrated
Speaker 9: with the global economy. And what we now have is
Speaker 9: on average twenty percent tax on every interaction we have
Speaker 9: with the rest of the world. So we're going to
Speaker 9: have to shift what we buy, we shift how much
Speaker 9: we can afford, and you know, the rest of the
Speaker 9: world's off doing business with each other. This is a
Speaker 9: shock very much on Americans.
Speaker 1: Justin.
Speaker 4: You said, small tariffs create small problems, and big tariffs
Speaker 4: create huge ones. How much of this is just simply
Speaker 4: price increases. How much is this a real crimping in
Speaker 4: the economy, and how much is this actual supply chain disruptions?
Speaker 4: It kin to what we saw during the pandemic.
Speaker 9: Yeah, so Lisa, this one of a few networks so
Speaker 9: I can actually come on and talk about it this way.
Speaker 9: There's something I hope your viewers remember from when they
Speaker 9: took introductory economics, which is that the cost of a
Speaker 9: tariff rises in the square of the tariff. So you know,
Speaker 9: when we move from one percent to two percent tariffs,
Speaker 9: which is basically what we did under the first Trump administration,
Speaker 9: it's just not a big deal. You know, if our
Speaker 9: two percent tariff can lead you to switch off buying something,
Speaker 9: you probably didn't want it that much anyway. But now
Speaker 9: we're moving all the way up to twenty percent tariffs.
Speaker 9: And so by my calculation, that means that the second
Speaker 9: set of the tariffs in the second Trump administration will
Speaker 9: literally be fifty times more painful. To put it in
Speaker 9: simpler language. In the first Trump administration, if things became
Speaker 9: a little bit more expensive, you know, you could sort
Speaker 9: of soldier on and a percentage point here, and then
Speaker 9: you're not really going to notice here. Every time you
Speaker 9: go to purchase something, every part of your supply chain,
Speaker 9: every store you visit, you want to ask yourself a
Speaker 9: question before you walk in hey to these prices make sense?
Speaker 9: Can I afford to keep doing this? Ought to be
Speaker 9: looking at a substitute even if it's a substitute I
Speaker 9: don't like as much. And that's the sense in which
Speaker 9: this is really fundamentally going to change every part of
Speaker 9: our lives.
Speaker 4: Which raises the question of what the bigger risk is
Speaker 4: right now? Is it stay fleation or is it recession?
Speaker 4: And people have been asking this question initially is stay
Speaker 4: fleation was the main case? If this really does suppress demand,
Speaker 4: at what point are we just talking out a recession?
Speaker 1: Listen.
Speaker 9: I think one of the hard things to do right
Speaker 9: now is to interpret the news that we're getting. So
Speaker 9: realize that stocks have fallen twelve thirteen percent over the
Speaker 9: past a few trading days, but realize they'd already priced
Speaker 9: in their best guess at what the Trump tariffs would
Speaker 9: look like, and even right now they're pricing in a
Speaker 9: very large probability that Trump backs off. So if you
Speaker 9: took all of that out, that suggests that markets believe
Speaker 9: that the cost of these tariffs are much much larger
Speaker 9: than the ten than the twelve or thirteen percent that
Speaker 9: markets have subtracted as a result so if they got
Speaker 9: clarity that Trump were going to stick with this, it
Speaker 9: would be even more calamitous. Look, you raise a really
Speaker 9: important question, which is it's a very very asymmetric set
Speaker 9: of risks. And so here's the thing Trump doesn't understand,
Speaker 9: which is he remembers from when he was young that
Speaker 9: there were very not very large, there were large trading
Speaker 9: barriers within a number of countries. That's simply not true.
Speaker 9: We had decades and decades of aid liberalization and it's
Speaker 9: no longer true. So look, heads we win, we can
Speaker 9: get a country like Vietnam to get rid of its tariffs,
Speaker 9: but realize the gain there is Vietnam is going to
Speaker 9: reduce its tariffreate from one point one percent to zero.
Speaker 9: Tales we lose. We're facing thirty four percent tariffs on
Speaker 9: trying to export stuff from China. So this is a
Speaker 9: game where there's not much to win, but there's a
Speaker 9: whole heck of a lot to lose.
Speaker 2: Justin can we sit on the sources of inflation and
Speaker 2: the potential for further price increases when you look across
Speaker 2: the economy of various industries, and you mentioned food production
Speaker 2: repeatedly through this conversation, are there certain industries where demand
Speaker 2: will be high but capacity will continue to be low
Speaker 2: and constrained here domestically in the United States that you
Speaker 2: would worry about in the coming months.
Speaker 9: Man, I'm just going to tell you, I'm not very
Speaker 9: good getting down to the sector bisector staff. So you've
Speaker 9: got all sorts of really smart analysts, and so I
Speaker 9: reckon you oud oppose it to them.
Speaker 2: I'm sure I'll ask them that question and they would
Speaker 2: probably point to what you've pointed to food production, and
Speaker 2: that could be the issue going forward from here. That
Speaker 2: raises the question about consumer price tolerance justin and maybe
Speaker 2: you can speak to that. This is going to be
Speaker 2: the interesting interplay for us as we watch financial markets
Speaker 2: and how corporations respond in the coming days, the interplay
Speaker 2: between margins whether they'll absorb some of this or whether
Speaker 2: they'll pass it on consumer price tolerance. Are we in
Speaker 2: a different phase of the economic cycle compared to where
Speaker 2: we were several years ago, when consumers could absorb some
Speaker 2: of the higher costs.
Speaker 9: Made were in a very different place. So, first of all,
Speaker 9: during the last downturn, we had enormous amounts of government
Speaker 9: support coming and more to the point, we had you know,
Speaker 9: through twenty twenty one, a government that, whether you like
Speaker 9: it or not, appeared to be competent on its face,
Speaker 9: we had no surge in economic uncertainty. Look, one of
Speaker 9: the things that's really unnerved to all of us over
Speaker 9: the past few days is not just the tariffs. It's
Speaker 9: the clown show that's come with it. It's tariff's on penguins,
Speaker 9: it's setting tariffs proportional to the bilateral trade deficit, which
Speaker 9: Noah on Earth will tell you it's defensible. And then
Speaker 9: it's sending out the entire cabinet to the Sunday shows,
Speaker 9: where each one of them, on a different network gave
Speaker 9: a different rationale for what's going on, basically leaving us
Speaker 9: all with the conclusion that the global economy is being
Speaker 9: held hostage by the whims of just one man, which
Speaker 9: is not usually how we like democracies or economies to work.
Speaker 2: Justin, I appreciate your time, sir, as always, and your
Speaker 2: honor's response as always, Justin Wolferstan at the University of Michigan.
Speaker 2: Macan Draper Barkley's writing this coinflation will likely rise markedly
Speaker 2: over the coming months as taris are implemented, labor report
Speaker 2: needs to weaken materially for the fat to cut as
Speaker 2: much as it's currently priced then by the market. Maganjoin's
Speaker 2: is now for more. Megan, gim morning, get to see you,
Speaker 2: Good morning, to see you. What changed the chairman pal
Speaker 2: over the last week.
Speaker 10: Oh, I mean things have become much cloudier. I think
Speaker 10: it's a much more complicated hand that he's been delt.
Speaker 10: And frankly, we've downgraded our growth forecast I think in
Speaker 10: good company across the street over the course of the
Speaker 10: last forty eight hours. So calling for two periods of
Speaker 10: negative growth in the second half of this year, or
Speaker 10: calling for unemployment to tick back up to four point
Speaker 10: six by year end. But the bigger problem for the
Speaker 10: Fed is that we're calling for an increase in inflation.
Speaker 5: So it's up four percent on.
Speaker 10: The course EPI number by your end, three seven on
Speaker 10: core PCE. But to your point earlier, you know, it's
Speaker 10: not really about where inflation is today. I think for Powell,
Speaker 10: he's looking out where is inflation a year from now
Speaker 10: or two years from now, and looking his legacy as a.
Speaker 5: Piece of that.
Speaker 6: You're running deck capital markets.
Speaker 2: How well supplied does this market been in the lead
Speaker 2: up to this and what kind of issuance are you
Speaker 2: expecting in the next few months.
Speaker 10: Now, Yeah, you know, this is an a liquidity event
Speaker 10: and I think that's the net positive. So if we
Speaker 10: look at investment grade markets, is really becoming a safe
Speaker 10: harbor for issuers and investors. We started out the year
Speaker 10: with a record amount of supply, an all time record.
Speaker 10: Why is that it's front loading. It's not a nominal
Speaker 10: increase in funding needs, but it was a defensive posturing
Speaker 10: I think heading into expectations that this year would be
Speaker 10: choppy to navigate, and so you think about you know,
Speaker 10: the issuers we're talking to as on the road the
Speaker 10: last week, talking to CFOs and treasures, they're very defensively
Speaker 10: positioned heading into this, which netnet is a positive. You know,
Speaker 10: they have extended their maturity profiles. You're watching EBITDAH margins
Speaker 10: that are upwards of thirty percent still in it's far
Speaker 10: above two thousand and four highs, and you know, at
Speaker 10: the end of the day, they're appealing to investors who
Speaker 10: are flushed with liquidity.
Speaker 5: So you talk to the buy side.
Speaker 10: You know, the silver lining, the bright spot, and the
Speaker 10: noise we saw in the last forty eight hours. Is
Speaker 10: that investors continue to have cash to spend. Why there's
Speaker 10: four hundred billion of coupon and come back coming back
Speaker 10: into investor's hands this year, they've got record COVID debt maturing.
Speaker 10: That's all cash coming back into investors pockets. And so
Speaker 10: we saw actually net buying over the course of Friday session,
Speaker 10: as bad as it felt in their places, you know,
Speaker 10: two and a half billion of net buying.
Speaker 5: It's pretty astonishing.
Speaker 4: Well, we've also seen deals pulled. People have been companies
Speaker 4: have been planning to issue certain deals and have decided
Speaker 4: maybe they ought to wait till another time because this
Speaker 4: might not be the best week in the world. Does
Speaker 4: that concern you or is this just a timing for
Speaker 4: the best price kind of issue? And if they needed
Speaker 4: to and wanted to, they probably could just a small
Speaker 4: haircut to what they would like.
Speaker 3: Yeah.
Speaker 10: I mean in investment grade, we haven't had deals pulled,
Speaker 10: but they've been postponed. So we're evaluating entry points. And
Speaker 10: it's really three camps I think emerging as I talked
Speaker 10: to issuers. The first are yield centric investors, and so
Speaker 10: you look at these moves and underlying treasury yields.
Speaker 5: It's more than offset spread widening.
Speaker 10: We've seen an investment grade, so you know, in mid January,
Speaker 10: you know, four seventy eight on the tenure note. You know,
Speaker 10: four percent or sub four percent feels like a reasonably
Speaker 10: good entry point, even if you need to pay higher
Speaker 10: new issue concessions to appeal to some of that liquidity.
Speaker 5: Then you got spread focused borrowers.
Speaker 10: I think there it's a bit more defensive shelter in place,
Speaker 10: if you will. But in talking to what are largely
Speaker 10: bank buyers in that subset of issuers, many of them
Speaker 10: are already forty to sixty percent through their funding needs
Speaker 10: for the year.
Speaker 5: There's no real urgency here. We're not seeing any signs
Speaker 5: of panic.
Speaker 10: And then there are others that are just flush with
Speaker 10: cash and I think maybe disappointed that business investment is slowing,
Speaker 10: but all in all, I think well positioned and willing
Speaker 10: to write out the storm.
Speaker 4: There's a larger question here. You said that there's plenty
Speaker 4: of cash in the investor base is looking for good investments.
Speaker 4: A lot of the investor base used to be overseas,
Speaker 4: Japan in particular, and there's a real question, and John
Speaker 4: was alluding to it, earlier. Will some international buyers withdraw
Speaker 4: their interest from the US markets on the heels of
Speaker 4: a whole host of different policies as well as currency differentials.
Speaker 4: Are you seeing any signs of that.
Speaker 10: It's a great point, and I think it's something we
Speaker 10: need to continue to closely monitor. So retaliation may not
Speaker 10: be just as it relates to tariffs, may actually be
Speaker 10: as it relates to investment in US assets.
Speaker 5: And the largest growth of.
Speaker 10: Underpinning to demand an investment grade credit has come from
Speaker 10: overseas investors. It's twenty to twenty five percent of the market,
Speaker 10: so not insubstantial. On the new issue side, it's probably
Speaker 10: fifteen percent of the order books that we'll be seeing.
Speaker 10: It's about forty percent of that is Europe, about twenty
Speaker 10: five percent of that it's Asia, and then you've got
Speaker 10: ten percent or so from Canada. The mitigans to that
Speaker 10: money moving away from investment grade credit are really two
Speaker 10: or threefold. One is they already own twenty to twenty
Speaker 10: five percent. So are you really working against your own
Speaker 10: book by pairing back or not showing up to not
Speaker 10: showing up to the new issues that emerge here. On
Speaker 10: the other hand, it's one of the few places you
Speaker 10: can source duration, and it's also the most liquid market
Speaker 10: around the globe, so eight and a half trillion of assets,
Speaker 10: it would be difficult, I think, to move back to
Speaker 10: their whole markets. We did see one or two instances
Speaker 10: of smaller size real money pension investors on principle stepping
Speaker 10: back from the market last week, but it's a small
Speaker 10: fraction and net net six and a half of net
Speaker 10: buying over the course of the week says it was
Speaker 10: dropping the bucket in terms of those who paired back.
Speaker 5: But certainly something we need to keep an eye on.
Speaker 2: Race is the question where asked you go my gape
Speaker 2: and it was just on just pig me on the
Speaker 2: Bloomberg terminal said trades only a fraction of US GDP
Speaker 2: compared to other countries. The larger revisions may come outside
Speaker 2: the US, and it may be more of a global
Speaker 2: recession story than a US one.
Speaker 6: That's something we have to think about. I think.
Speaker 2: Over the last two months or so, we just talked
Speaker 2: about trade, looked at the market move. The market was
Speaker 2: basically the bias for everyone to frame their own view
Speaker 2: on what was happening at the moment. Equities were under
Speaker 2: performing in America outperforming in Europe. Everyone talked about the
Speaker 2: pain in the United States over the past week or so.
Speaker 2: We've only just started to talk about the pain abroad
Speaker 2: in Europe, stocks down hard, Japan, in China.
Speaker 6: That's a new phase of this story.
Speaker 4: This was what people thought would happen, like late last year,
Speaker 4: where they were looking at a potential terror regime, the
Speaker 4: US sneezes and the rest of the world catches it
Speaker 4: called that was upended partly because people a didn't believe
Speaker 4: that these tariffs would go on, and B we're so
Speaker 4: excited about the idea that Germany was going to spend
Speaker 4: money that it seemed like the whole world could be
Speaker 4: a brighter place with fiscal stimulus. On some level, there
Speaker 4: is this issue of whether this is the right sizing
Speaker 4: and the unwind of some of that capital shift that
Speaker 4: we saw.
Speaker 5: Earlier this year.
Speaker 2: Megan, this was a clinic. It's great to cant show
Speaker 2: with you. Thanks for your time, Thank you very much,
Speaker 2: making great for their of Barclays. This is the Bloomberg
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