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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Wall Street this morning. Julian and Emmanuel have evercore writing
Speaker 2: the President's speech last night, celebrated American values, intensified the
Speaker 2: Parlisan divide in Washington, and maintained the uncertainty around the
Speaker 2: situation with Iran. Julian joins us now for more. Julian, good,
Speaker 2: Mornic Coome morning. I read your recent note. Despite valuations,
Speaker 2: despite geopolitical anxiety, despite the political anxiety, despite a series
Speaker 2: of blow ups, the index has been really, really resilient.
Speaker 2: What does that tell you?
Speaker 3: It tells us that you know the backdrop, the macro
Speaker 3: backdrop in a year where we're getting better earnings growth,
Speaker 3: it's likely going to be double digits when all is
Speaker 3: said and done in twenty twenty six. Long term yields
Speaker 3: staying very very you know sedate, particularly when you think
Speaker 3: about the rest of the world stimulus and the potential
Speaker 3: for rate cuts. It says that sucks. Likely going higher,
Speaker 3: definitely passed.
Speaker 4: The state of the union is in Vidia. The big
Speaker 4: event of this week. I mean, how big of a
Speaker 4: signific of a market moving event is just going to be.
Speaker 3: It's very big. I mean, what's fascinating to us is,
Speaker 3: you know, we're comfortable with being contrarians, and when we
Speaker 3: came into twenty twenty six, we felt that, you know,
Speaker 3: being overweight the AI centric names and themes was really
Speaker 3: in consensus, and that changed very quickly. The mood around
Speaker 3: technology remains very guarded, the positioning remains very frankly, and
Speaker 3: a lot of that has to do with the build
Speaker 3: up around Iran and so you know, look, we know
Speaker 3: that the report today will be good. They will beat
Speaker 3: on the metrics. It's just a question of how the
Speaker 3: shares will respond, and frankly, the market is poised for
Speaker 3: likely a good share price response.
Speaker 4: So I'm wonder if what's good for in video is
Speaker 4: bad for everything else. We've seen this rotation through the
Speaker 4: rest of the economy at a time when there's a
Speaker 4: lot of anxiety about the labor market, where you're seeing
Speaker 4: those pressures. We got home depot yesterday, we got lows
Speaker 4: this morning, raising the specter of uncertainty really pressuring consumers.
Speaker 4: At what point is in Nvidia a counter indicator to
Speaker 4: the economic cycle and could their earnings reverse some of
Speaker 4: the broadening out that we've seen.
Speaker 3: Look and again, think about the backdrop that we've had
Speaker 3: the leading sectors this year, energy industrials, the deep cyclicals,
Speaker 3: but also consumer staples. In terms of the action and
Speaker 3: the interpretation of earnings, all is well, except you know,
Speaker 3: you've had these occasional blow ups. But in our mind,
Speaker 3: if anything in Nvidia is likely to and remember, the
Speaker 3: public hasn't really soured on technology because the labor market,
Speaker 3: as difficult as it is to actually fathom with all
Speaker 3: the policy changes of the last year, is still relatively strong,
Speaker 3: and that bodes well really across the S and P.
Speaker 5: Five hundred.
Speaker 1: You mentioned Iran the Present spent a lot of time
Speaker 1: last night talking about this. Do you think that this
Speaker 1: is going to be potentially an next catalyst for the market.
Speaker 3: There's no question about it. And what's interesting is is,
Speaker 3: you know sometimes there is an eye roll when we
Speaker 3: talk about options, but actually the options market is telling
Speaker 3: you right now that investors are very edged for a
Speaker 3: more challenging outcome in Iran. You look at the prediction markets,
Speaker 3: the market, they think something is going to happen. While
Speaker 3: I got news for you. The skew the price of
Speaker 3: downside puts versus upside calls in the triple ques is
Speaker 3: as wide as it was during the trough of the
Speaker 3: April tariff tantrum and so very contrariant. And the same
Speaker 3: thing in terms of bullishness in the oil market, as
Speaker 3: bullish as it was when oil was one hundred and
Speaker 3: twenty dollars a barrel when Russia invaded Ukraine initially.
Speaker 1: So the market is screaming military intervention, not diplomatic offramp.
Speaker 6: That's right.
Speaker 3: And so for us, the surprise, I mean our base cases,
Speaker 3: we think there will be some either off ramp or
Speaker 3: limited military engagement. Because think about it, we heard it
Speaker 3: last night, we hear it all the time. If the
Speaker 3: oil price spikes further, you are losing the war on
Speaker 3: the affordability issue, and that means you're going to lose
Speaker 3: the midterms. So that's really, you know, a least desired outcome.
Speaker 2: They give news so far as the rights have banked
Speaker 2: that we've got ten year bond yods back down to
Speaker 2: four percent. What's the signal an equity gund like you
Speaker 2: takes from the move that we've seen in fixed income.
Speaker 3: Well, it's this dual edge, you know, thought that the
Speaker 3: you know, the violence under the surface. You've had crashes
Speaker 3: in software, you've had crashes in silver, you've had crashes
Speaker 3: in all to investment managers that the message from all
Speaker 3: of this is that the credit market is disturbed and
Speaker 3: maybe we're having a growth scare. But frankly, if you
Speaker 3: look at the broad credit market, it still behaves very nicely,
Speaker 3: even though there's pockets of distress.
Speaker 2: Jenny, Let's talk about the consumer and how that's been
Speaker 2: priced in the equity market. We've got discretionary down by
Speaker 2: close to four percent for the year so far, state
Speaker 2: was up fifteen Ist an economic story in there or
Speaker 2: is that all AI?
Speaker 3: It is very largely AI, frankly, and if you think
Speaker 3: about it, so when we did our foundational work on AI,
Speaker 3: we really digested what the job impact would be across sectors.
Speaker 3: And actually, when thinking about it, right, the least impacted
Speaker 3: sectors metals and mining, agriculture, consumer staples, all the sectors
Speaker 3: that have ripped year to day. The most impacted sectors financials, software,
Speaker 3: the legal profession, all of the places where you've seen
Speaker 3: tape bombs on and off. And so you know, to us,
Speaker 3: this is also typical behavior that you get in the
Speaker 3: first quarter of the new year, that kind of rotation.
Speaker 3: But there isn't really in our mind a broader.
Speaker 2: Message financials and the banks, where a consensus overweight into
Speaker 2: the new year has not changed for the year ahead.
Speaker 3: For you, we've had it and inline rating. Look that
Speaker 3: they have been expensive, they remain expensive. And obviously, again
Speaker 3: you know, while we don't see anything systemic, this is
Speaker 3: an environment where we're shooting first and asking questions later.
Speaker 3: We'd rather not be in areas where there's going to
Speaker 3: be more shooting.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: President Trump defending his economic record in a marathon State
Speaker 2: of the Union. According to a recent poll from IPSOS,
Speaker 2: americans are split on who can better handle the cost
Speaker 2: of living crisis, including thirty three percent who say they
Speaker 2: trust neither Trump nor congressional Democrats joining us now to
Speaker 2: discuss his anam post of the Peterson Institute Adam a
Speaker 2: one welcome bank to the program. As always a affordability
Speaker 2: issue set to get worse and no better in the
Speaker 2: year ahead.
Speaker 5: I think they are John, thanks for having me back,
Speaker 5: and I feel the first time in my life, I
Speaker 5: feel a little bit of sympathy for Donald Trump because
Speaker 5: it's just not that much he can do on affordability.
Speaker 5: He would have to try to intervene directly into particular
Speaker 5: market that matter, like housing or food, which he's not
Speaker 5: averse to doing, but even the Congress is not willing
Speaker 5: to do, and it's not clear those would be more
Speaker 5: than for show. And I think there remains a headwind,
Speaker 5: excuse me, a tailwind to prices because the labor market's
Speaker 5: a lot stronger than people think, because the FED is
Speaker 5: not as tight as people think because of the tariffs,
Speaker 5: and in the background, the migration issue is starting to hit.
Speaker 5: The other point, though, is as Lisa and Anne, Marie
Speaker 5: and everybody said, he didn't make any major budget proposals.
Speaker 5: He didn't make any major policy proposals of any kind,
Speaker 5: and so against my prior forecast that there was going
Speaker 5: to be a handout, Maybe inflation will be a little
Speaker 5: lower than I feared, because he's not going to blow
Speaker 5: out the budget quite as much.
Speaker 1: But Adam, couldn't he do something when it comes to affordability,
Speaker 1: when it comes to terror, specifically, just let the Supreme
Speaker 1: Court's ruling stand and don't now have new deals of
Speaker 1: ten or fifteen percent with one twenty two's.
Speaker 5: I didn't mention that because it's something he's clearly not
Speaker 5: willing to do. He could take down tariffs unilaterally, and
Speaker 5: just since basically every ally we trade with, including Canada,
Speaker 5: including Europe, including Japan, including Korea, has lower tariffs on
Speaker 5: US now than we have on them. And as Governor
Speaker 5: Svan Burger pointed out, none of the things he claimed
Speaker 5: about manufacturing or jobs or trade deficits were true. Some
Speaker 5: of the things he said were true, but those weren't.
Speaker 5: And so yeah, he could reduce prices, but even that
Speaker 5: wouldn't That'd be a great idea, and it'd be good
Speaker 5: for the country and good for the average working American,
Speaker 5: but it wouldn't necessarily translate into price drops. So as
Speaker 5: all of you have been saying, a decline in the
Speaker 5: rate of inflation isn't the same as seeing prices for
Speaker 5: things people spend on declining. You need real income growth
Speaker 5: for that, Adam.
Speaker 4: The one thing that struck me as a potential market
Speaker 4: moving influence was his discussion of tariffs as reshaping the
Speaker 4: way we pay income taxes. In other words, no income
Speaker 4: taxes and increased tariffs to account for the bulk of
Speaker 4: all income for the nation. He went on to say,
Speaker 4: as time goes by, I believe the tariffs paid for
Speaker 4: by foreign countries will, like in the past, talking about
Speaker 4: the late seventeen hundreds, eighteen hundreds substantially replaced the modern
Speaker 4: day system of income tax Is there anything that you
Speaker 4: take from that that could be codified. Do you see
Speaker 4: that as a feasible path forward.
Speaker 5: It's not feasible, Lisa, I mean, it's just wrong when
Speaker 5: the US government was surrounding on taxes, just like some
Speaker 5: subsa Aeran, African and Central American countries today have tariffs.
Speaker 5: That's a big part of their tax It's because they
Speaker 5: can't collect taxes in a more efficient way. All they've
Speaker 5: got our troops at the border. And because the society
Speaker 5: and the economies are not very well developed, a tariff
Speaker 5: system doesn't work. It also isn't paid for by the
Speaker 5: foreign countries. No matter how many times the president says that,
Speaker 5: no matter how many times his people try to attack research,
Speaker 5: it's universally recognized. It's just right there in the data. Now,
Speaker 5: how much of that's the consumer versus companies is a question.
Speaker 5: How much that becomes inflation is a question, but there's
Speaker 5: absolutely no question it is the American purchasers of the
Speaker 5: inputs and of the products who pay the terriffs. But finally,
Speaker 5: even with the Supreme Court ruling, tariff revenues are going
Speaker 5: to go down because if tariffs stay up, then people
Speaker 5: change behavior. They start buying more American products, or they
Speaker 5: start forgoing foreign products, or they start substituting in ways
Speaker 5: that are not good, or over time, you bring some
Speaker 5: stuff home even though it's less competitive, and so what
Speaker 5: happens is you end up spending less on foreign goods. Now,
Speaker 5: that's not a good thing, but from a revenue point
Speaker 5: of view, it's definitely not a good thing, because then
Speaker 5: if you're spending less on foreign goods, there's less terriffs,
Speaker 5: and so my view is we're already well passed peak
Speaker 5: tear for revenues, even if the President were to let
Speaker 5: them laves.
Speaker 2: And I'm just to final question, just to go back
Speaker 2: to the summer of twenty twenty four, you warned ahead
Speaker 2: of that election, given the policies that we're being proposed,
Speaker 2: that this Federal Reserve might have to prepare the market
Speaker 2: and the country for higher interest rates. They can't interest
Speaker 2: rates subsequently in the year ahead, Adam, Given where things
Speaker 2: stand and your revision to your outlook on inflation, where
Speaker 2: are you now on Fed policy?
Speaker 5: John? Thanks for asking. If it turns out that the
Speaker 5: President doesn't put in a budget request for bailouts and
Speaker 5: handouts to people and out of the midterm elections, I'll
Speaker 5: be surprised. But then I have to reduce my happily
Speaker 5: my inflation forecast from four percent to three point five
Speaker 5: or less on CPI at the end of the year.
Speaker 5: But I also think that the Fed, as a large
Speaker 5: number of FMC members have indicated over the last several weeks,
Speaker 5: the FED is not going forward with an easing bias.
Speaker 5: They should not be going forward with an easing bias.
Speaker 5: The labor market is much stronger than people think. The
Speaker 5: pain is real for people, but that's different from us
Speaker 5: saying that there's a cyclical weakness in the labor market.
Speaker 5: You have to separate those two things. And in that situation,
Speaker 5: and as your guests and manual mentioned, credit markets are
Speaker 5: holding up pretty darn well and a Reming credit remains
Speaker 5: pretty available. So I don't think the Fed's going to
Speaker 5: be cutting as many times this year, even before we
Speaker 5: get into the independence politics, as markets currently project.
Speaker 2: Stay with us. Maulblinberg Savandan's coming up offter this by
Speaker 2: some facts in that state of the Union, President Trump
Speaker 2: remaining defile, that is, tarifagenda will continue despite the Supreme
Speaker 2: Court's ruling.
Speaker 7: They're a little more complex, but they're actually probably better.
Speaker 7: Congressional action will not be necessary.
Speaker 5: It's already time tested.
Speaker 7: And approved, and as time goes by, I believe the
Speaker 7: tariffs paid for by foreign countries will, like in the past,
Speaker 7: substantially replaced the modern day system of income tax.
Speaker 2: Formacenia White House trying to devise a county on show
Speaker 2: rights in the follow and it may not be a
Speaker 2: straight cuts and pace, but I expect at least some
Speaker 2: tariffs to increase the fifteen percent in the coming days.
Speaker 2: Canny On Johness, Nawim Walk Kenny and welcome to the program.
Speaker 2: Help us understand where we are. It was ten, then
Speaker 2: I of the weekend it was fifteen, and then we
Speaker 2: came into the weaken it's ten. What is it and
Speaker 2: what's it goin to be?
Speaker 6: Well, right now it's a hurry up and wait.
Speaker 8: So it's technically a ten percent tariff that went into
Speaker 8: effect at twelve oh one am yesterday, but I do
Speaker 8: understand from the administration that they are still looking to
Speaker 8: implement the President's fifteen percent tariff increase. Part of the
Speaker 8: challenge is that Section one twenty two. It's a really
Speaker 8: wonky statute. It's never been used. It does allow you
Speaker 8: to carve some countries out, it allows you to carve
Speaker 8: out some goods.
Speaker 6: It's not really clear that it.
Speaker 8: Allows you to differentiate between countries in terms of the
Speaker 8: overall tariff rate. So once you get to fifteen, you're
Speaker 8: actually increasing tariffs above some of these agreed trade agreements,
Speaker 8: and you're also putting tariffs on countries like Australia, the
Speaker 8: UK and a lot of Western hem countries, so it's
Speaker 8: a little more complicated to work out legally.
Speaker 6: I think that's part of the delay.
Speaker 8: But I'm still expecting that fifteen percent tariff increase.
Speaker 1: So if the rate is higher than what this administration
Speaker 1: has agreed to with some trading partners, and they want
Speaker 1: trading partners to abide, but those agreements, are we going
Speaker 1: to get carve outs.
Speaker 8: So I've actually talked to some of our trading partners
Speaker 8: about this, and you know, some of them are a
Speaker 8: little concerned that they're going to end up with a
Speaker 8: teriff rate that's above the agreed rate, and they're talking
Speaker 8: to the administration about that. So I think the administration
Speaker 8: is going to look for some flexibilities in terms of
Speaker 8: whatever proclamation comes out next, but you know they're going
Speaker 8: to have to do so within legal constraints. They just
Speaker 8: had IEPA tariff struck down, They're going to be really
Speaker 8: conscious of not wanting to have these ones enjoying struck
Speaker 8: down to.
Speaker 1: Well, are one twenty twos legal? They have never been
Speaker 1: used either in the past.
Speaker 8: Well, certainly a law on the books, and if you
Speaker 8: look at the CIIT decision that initially struck down the tariffs,
Speaker 8: one of the bases was because the core thought that
Speaker 8: the president should have used one twenty two in the
Speaker 8: first place. So there's certainly scope to use Section one
Speaker 8: twenty two. It's just really a matter of how you
Speaker 8: implement it. And I think that's really what the administrations
Speaker 8: wanting to make sure they're doing, to make sure that
Speaker 8: these tariffs don't get struck down again.
Speaker 4: There was at tension yesterday, Kelly, in between this focus
Speaker 4: and affordability and this focus on tariffs and trying to
Speaker 4: explain how tariffs are actually structurally going to be better
Speaker 4: longer term because it could potentially reduce income taxes and
Speaker 4: other aspects that consumers pay. I just wonder how capped,
Speaker 4: how it hampered the president is from increasing either the
Speaker 4: one twenty twos to fifteen percent or implementing some of
Speaker 4: the others based on the affordability aspects of his agenda.
Speaker 6: Yeah, I think it's a great question.
Speaker 8: I mean, really, what's going on here is the administration
Speaker 8: looks at the data, they look at the tariffs, and
Speaker 8: they say that, look, we haven't seen significant price increases
Speaker 8: on the backs of some of these, in some cases
Speaker 8: really high tariff rates.
Speaker 6: We haven't seen some of the.
Speaker 8: Economic catastrophes that everyone predicted would happen if the administration
Speaker 8: put in a universal baseline tariff. And so this idea
Speaker 8: that tariffs are leading to this affordability crisis doesn't really register,
Speaker 8: but it does register in the minds of voters. And
Speaker 8: you have a situation in which voters are linking tariff
Speaker 8: increases to price increases and to the fact that they're
Speaker 8: having trouble affording grocery store, energy prices and a lot
Speaker 8: of things that voters will vote on in terms of
Speaker 8: how they're feeling about the economy. And so the administration
Speaker 8: has some work to do in terms of trying to
Speaker 8: message this to the American people going into the midterms,
Speaker 8: but I don't see the administration significantly pivoting. You heard
Speaker 8: the President doubling down last night that tariffs were a
Speaker 8: core part of his economic policy. We might see some
Speaker 8: tea on the margins, but I don't expect a full
Speaker 8: scale reversal of any of this policy.
Speaker 4: There's also a question of what the IEPA ruling by
Speaker 4: the Supreme Court does to international agreements, so with some
Speaker 4: of our trade partners, given that certainly the European Union
Speaker 4: has already pushed back We're going to be speaking with
Speaker 4: Ambassador Jamison Greer, the trade representative for the United States,
Speaker 4: later this morning. I'm just wondering what you're wondering about,
Speaker 4: what your biggest questions are for him.
Speaker 8: Yeah, and certainly seeing the EU hit pause on its
Speaker 8: consideration of that implementing legislation was predictable. I think the
Speaker 8: EU in some cases has been looking for a reason
Speaker 8: to kind of walk away from this deal for some time.
Speaker 6: The US implemented back in August.
Speaker 8: The EU hasn't cut a single tariff line since that
Speaker 8: turn Bary agreement. So this isn't a surprise, but I
Speaker 8: do expect that to escalate. I think in terms of
Speaker 8: what to ask Ambassador Greer, I'm curious about when we'll
Speaker 8: see some of these Section three oh one investigations, what
Speaker 8: the TERRAFF structure might look like, whether it's going to
Speaker 8: cover all trading partners or just some trading partners.
Speaker 6: Really trying to.
Speaker 8: Get a sense of what the next five to six
Speaker 8: months look like. This companies are trying to navigate this
Speaker 8: new tariff landscape.
Speaker 2: Let's talk about the next two months. So A Marie
Speaker 2: mentioned that matig in China between the President and the
Speaker 2: Chinese leader KellyAnn, do you sense that he's lost some
Speaker 2: leverage here, given how constrained he might be now at
Speaker 2: home and the point that over the last year that
Speaker 2: China has run a record trade surplus even with these tariffs.
Speaker 8: Yeah, I think it's a good question as well, especially
Speaker 8: going into the President Trump President She visit.
Speaker 6: But I guess my big takeaway is long term, the.
Speaker 8: United States already has teriff leverage over China. They're doing
Speaker 8: all of these three oh one investigations to get more
Speaker 8: terrorf authority over other countries, but we have that existing
Speaker 8: three oh one.
Speaker 6: We also have an ongoing three.
Speaker 8: Oh one investigation into China's compliance with the Phase one deal,
Speaker 8: and there's a host of other levers the United States has,
Speaker 8: from financial tools to export controls and other mechanisms really
Speaker 8: get leverage over China. Going into some of these discussions,
Speaker 8: I think my base case for an outcome is pretty
Speaker 8: low to begin with. I think the administration is really
Speaker 8: looking to just keep a stable relationship between President Trump
Speaker 8: and President She and the trade arrangement that they negotiated
Speaker 8: in Busan, not expecting any massive deliverables there.
Speaker 6: So I think it's a pretty steady state.
Speaker 8: With China remarkably, But it is a good question as
Speaker 8: to what some of this means in terms of the
Speaker 8: President's negotiations with other trading partners, where it's not as
Speaker 8: clear what teriff authority he has to threaten some of
Speaker 8: these big foreign policy related.
Speaker 2: Tariff kumming and we have tariffs on them, But do
Speaker 2: we have influence since we still have influence, I.
Speaker 8: Do, but I do think the next few days are
Speaker 8: a bit rocky until we do get some more certainty
Speaker 8: over what the president's tariff agenda is going to look like,
Speaker 8: the authorities that he's going to use. I think the
Speaker 8: relationships with most of our trading partners will be stabilized.
Speaker 8: You know, when it comes to the US China relationship,
Speaker 8: there's a lot of soft power at play, and I think.
Speaker 6: That's what you're alluding to.
Speaker 8: And certainly having a core decision which goes against one
Speaker 8: of the President's key policies isn't the best thing going
Speaker 8: into this meeting, But at the same time, I don't
Speaker 8: think it's devastating, and I think there's a really long
Speaker 8: time between now and March thirtieth when the President goes
Speaker 8: in terms of actions that can be taken, that's a
Speaker 8: lifetime in terms of the trade agenda and the negotiating agenda,
Speaker 8: so we'll see what happens in the next couple of weeks.
Speaker 2: This is the Bloomberg Survendics podcast, bringing you the best
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