WEBVTT - Why Are Stocks Hitting Records Amid US Uncertainty? 0:00:02.720 --> 0:00:10.799 Bloomberg Audio Studios, podcasts, radio news. People recognize there's an overvaluation, 0:00:11.000 --> 0:00:15.720 but at the same time, there's no catalyst for dealing 0:00:15.760 --> 0:00:16.000 with that. 0:00:25.760 --> 0:00:28.880 I'm Stephanie Flanders, head of Government and Economics at Bloomberg, 0:00:29.080 --> 0:00:31.479 and this is Trump Economics, the podcast that looks at 0:00:31.520 --> 0:00:34.800 the economic world of Donald Trump, how he's already shaped 0:00:34.800 --> 0:00:37.800 the global economy. What on earth is going to happen next? 0:00:42.320 --> 0:00:44.959 This week, we're doing something we don't normally do. We're 0:00:44.960 --> 0:00:48.479 talking about the stock market, the US stock market, because 0:00:48.840 --> 0:00:52.280 apparently a lot of people don't understand it. Let me explain, 0:00:52.800 --> 0:00:55.000 Like many of you, I had some holiday over the summer, 0:00:55.040 --> 0:00:58.960 and holiday inevitably means maybe having more conversations with normal 0:00:59.040 --> 0:01:01.280 human beings who don't spend their time checking the news 0:01:01.360 --> 0:01:04.080 or thinking about the state of the economy. The question 0:01:04.160 --> 0:01:07.600 I had more than any other from those normal human 0:01:07.640 --> 0:01:10.880 beings as we sat on the beach or wherever it was, was, 0:01:11.000 --> 0:01:13.679 if there's so much scary stuff happening in the US 0:01:13.720 --> 0:01:17.360 today and so much uncertainty hanging over pretty much every 0:01:17.400 --> 0:01:19.960 part of the economy, why on earth is the stock 0:01:20.040 --> 0:01:24.039 market so high? And it is a good question. The 0:01:24.080 --> 0:01:26.399 main US index s and P five hundred hit another 0:01:26.440 --> 0:01:28.640 all time high at the end of August. It's up 0:01:28.760 --> 0:01:32.600 around thirty percent since early April, when investors were very 0:01:32.600 --> 0:01:35.920 worried about all those tariffs, many of which are still 0:01:35.920 --> 0:01:39.080 in place. And that all time high in the market 0:01:39.280 --> 0:01:42.640 came just days after Donald Trump had put potentially the 0:01:42.800 --> 0:01:46.160 entire independence of the US central banking question by firing 0:01:46.200 --> 0:01:50.240 the Federal Reserve Governor Lisa Cook. So you might say 0:01:50.280 --> 0:01:52.080 it's the bomb market that needs to worry about all 0:01:52.120 --> 0:01:54.960 that about inflation and the Fed, not stocks, but the 0:01:55.040 --> 0:01:57.800 ten year bond yield, long term cost of borrowing for 0:01:57.840 --> 0:02:01.600 the US well, that actually fell after Lisa Cook was fired. 0:02:02.200 --> 0:02:04.280 So what gives I mean, we know the stock market 0:02:04.320 --> 0:02:07.160 isn't the US economy, but it is supposed to reflect 0:02:07.480 --> 0:02:10.760 reasonable expectations of US company's ability to make money in 0:02:10.800 --> 0:02:13.640 the future, and that depends on quite a lot of 0:02:13.639 --> 0:02:15.839 things that you might say President Trump had put into 0:02:15.919 --> 0:02:21.639 question the ability to trade, export and import freely, stable economy, 0:02:21.680 --> 0:02:25.120 predictable policy making. And there are quite a lot of 0:02:25.120 --> 0:02:27.359 people in the market worrying about these things. And they're 0:02:27.400 --> 0:02:31.280 also worried that the market has become way too dependent 0:02:31.320 --> 0:02:34.960 on a handful of companies, especially the ones associated with AI, 0:02:37.080 --> 0:02:41.320 but none of that has translated into a serious reversal 0:02:41.360 --> 0:02:45.120 in the market until now. Could this be the month 0:02:45.200 --> 0:02:48.520 that that changes. Well, we had a piece out earlier 0:02:48.560 --> 0:02:50.840 this week that did argue that the US stock market's 0:02:50.880 --> 0:02:55.000 fate comes down to the next fourteen trading sessions. So 0:02:55.080 --> 0:02:57.320 I thought we'd better have a quick word about what 0:02:57.360 --> 0:02:59.400 could happen in the next two weeks and what is 0:02:59.520 --> 0:03:03.480 underlying this basic confidence that we've seen in among investors 0:03:03.520 --> 0:03:06.720 in the last few months. And we don't offer investment 0:03:06.760 --> 0:03:09.200 advice on this show, thank goodness, but I did want 0:03:09.240 --> 0:03:12.160 to have an informed debate about it with two regulars 0:03:12.160 --> 0:03:14.840 who are in the DC studio talking to me now, 0:03:15.080 --> 0:03:18.200 Anna Wong, chief US economists for Bloomberg, and Ed Harrison, 0:03:18.320 --> 0:03:23.760 senior strategist for Bloomberg and author of the Everything Risk newsletter. Ed, Anna, 0:03:24.000 --> 0:03:25.120 fantastic to have you. 0:03:25.160 --> 0:03:27.480 Good to be here, Stephanie, good to be here. 0:03:34.120 --> 0:03:35.960 Thank you for sort of scrambling to do this show. 0:03:36.000 --> 0:03:37.680 Of course, as is always the way, we wanted to 0:03:37.680 --> 0:03:39.520 do something about the strength of the stock market and 0:03:39.520 --> 0:03:41.760 whether it might change. And as we're saying this on 0:03:41.840 --> 0:03:44.920 Tuesday the markets heading south. So we were either very 0:03:44.960 --> 0:03:49.080 precient or have once again sort of been counterindicators. But 0:03:49.120 --> 0:03:51.000 I mean ed that you may have had the same 0:03:51.040 --> 0:03:53.560 experience I had over the summer that ordinary sort of 0:03:53.560 --> 0:03:57.240 bystanders of the US economy just find it pretty curious 0:03:57.280 --> 0:03:58.760 that the stock market's been so strong. 0:03:59.680 --> 0:04:02.120 Yes, definitely. I would say that a lot of people 0:04:02.160 --> 0:04:05.360 I've spoken to are thinking there's a relative amount of 0:04:05.440 --> 0:04:10.400 chaos in terms of the economic order, and they're wondering, 0:04:10.440 --> 0:04:13.160 how is it possible that the market is up so much. 0:04:13.480 --> 0:04:15.720 I would start out the conversation by noting that the 0:04:15.800 --> 0:04:19.240 last Bank of America fund manager report had ninety one 0:04:19.320 --> 0:04:22.719 percent of fund manager saying that US equities were overvalued. 0:04:23.200 --> 0:04:27.320 So that's a lot that's pretty much everyone. And so 0:04:27.400 --> 0:04:29.440 what it says to you, were they say they should 0:04:29.440 --> 0:04:35.599 sell the exactly? I think that's the problem. The problem 0:04:35.680 --> 0:04:39.160 is is that Number One, when you look at the 0:04:39.200 --> 0:04:42.440 economic surprises in the last month or so, last two months, 0:04:42.600 --> 0:04:46.000 they've been to the upside. Number Two, the last earning season, 0:04:46.160 --> 0:04:48.440 particularly from those stocks that you were talking about, where 0:04:48.480 --> 0:04:51.880 the concentration was very good. All of those companies, even 0:04:52.000 --> 0:04:56.880 when there were some problems like data centers at Nvidia, 0:04:56.960 --> 0:05:01.719 also with Amazon and their AWS unit, they still overall 0:05:01.880 --> 0:05:06.120 had numbers that were stellar, better than the overall market 0:05:06.120 --> 0:05:10.400 in fact, and better than expectations, and so that's what's 0:05:10.520 --> 0:05:16.560 driving the market higher. It's very difficult to sell when 0:05:16.960 --> 0:05:20.039 the stocks that you would sell are actually beating expectations 0:05:20.080 --> 0:05:23.960 and the economy overall is doing better than expected. And 0:05:24.040 --> 0:05:28.240 so you have this dichotomy playing out where people recognize 0:05:28.320 --> 0:05:32.000 there's an overvaluation, but at the same time there's no 0:05:32.560 --> 0:05:34.839 catalyst for dealing with that. 0:05:35.600 --> 0:05:37.880 And actually, on the subject of catalysts, the piece I 0:05:38.000 --> 0:05:41.320 referenced about the next fourteen trading sessions, I mean we're 0:05:41.320 --> 0:05:45.120 straight after Labor Day now in the US early September, 0:05:45.800 --> 0:05:48.440 there's always a kind of back to school feeling also 0:05:48.760 --> 0:05:51.760 for the market, and as that piece pointed out, September 0:05:51.839 --> 0:05:55.159 is often a pretty choppy month for the market. In 0:05:55.320 --> 0:05:58.000 these kind of key bits of news we're going to 0:05:58.000 --> 0:05:59.720 get over the next couple of weeks, do you think 0:05:59.760 --> 0:06:02.719 they could be critical for the momentum of the market. 0:06:02.960 --> 0:06:05.240 Yeah, this is probably where and is going to come 0:06:05.279 --> 0:06:08.080 in at some point, because ultimately a lot of this 0:06:08.120 --> 0:06:10.159 has to do with the FED on some level. Two 0:06:10.160 --> 0:06:12.599 things that the market thinks in terms of this Fed's 0:06:12.680 --> 0:06:17.359 got the market's back, and overall, there's really no reason 0:06:17.640 --> 0:06:20.400 when the economy's going higher and the Fed's got our 0:06:20.520 --> 0:06:24.719 back to sell. What we found in particular with large 0:06:24.720 --> 0:06:28.160 investors is that they relate to the game when Donald 0:06:28.160 --> 0:06:32.080 Trump reversed his tariffs early on, small investors bought the 0:06:32.160 --> 0:06:35.840 dip and then people had to chase those returns and 0:06:35.880 --> 0:06:38.839 that's driven the market higher. And now we're getting to 0:06:38.839 --> 0:06:41.400 a point where the FED could potentially cut, and so 0:06:41.480 --> 0:06:43.919 the question is are they going to cut? When we 0:06:43.920 --> 0:06:46.960 talk about the next fourteen trading days, that's the terminal 0:06:47.080 --> 0:06:51.560 date in those days the Fed finally being able to cut, 0:06:51.880 --> 0:06:53.960 Will they cut, how much will they cut? Will there 0:06:54.000 --> 0:06:56.320 be the centers and so forth. I think that that's 0:06:56.400 --> 0:06:58.839 the critical test over the next three weeks. 0:07:00.000 --> 0:07:03.359 Will go through some of the individual data, but just 0:07:03.400 --> 0:07:06.440 sort of broadly, when Ed talks about, you know, he's 0:07:06.480 --> 0:07:09.760 coming from the market perspective. This is what people in 0:07:09.800 --> 0:07:12.120 the markets want to see in this sense of the 0:07:12.160 --> 0:07:15.560 FED having our back quote unquotes, do you think they're 0:07:15.600 --> 0:07:18.440 going to get what they need? Do you think this 0:07:18.520 --> 0:07:20.960 is going to be a reassuring couple of weeks for 0:07:21.720 --> 0:07:24.240 US dot market or something a bit more volatile. 0:07:24.840 --> 0:07:27.840 So we have two more key data point. 0:07:27.920 --> 0:07:31.480 One is the jobs report this Friday, and also a 0:07:31.480 --> 0:07:35.080 CPI report. The market thinks that the jobs report is 0:07:35.120 --> 0:07:38.640 all that matters, and CPI has this really high for 0:07:38.760 --> 0:07:43.400 it to shop September rate cut. So now this jobs report, well, 0:07:43.480 --> 0:07:46.560 there's barely any consensus. The range of forecasts out there 0:07:46.920 --> 0:07:52.640 goes from zero to one hundred thirty thousand, and I 0:07:52.680 --> 0:07:56.840 think even for unemployment right there's people thinking it's could 0:07:56.840 --> 0:07:59.200 be four point two, four point one, four part three. 0:08:00.040 --> 0:08:03.320 So I think that if the unemployment rate were to 0:08:03.680 --> 0:08:07.880 edge down surprisingly, I think that could well cost a 0:08:07.960 --> 0:08:12.160 market to price away a September rate cut back to 0:08:12.320 --> 0:08:15.080 right now, the probability of a rate cut in September 0:08:15.120 --> 0:08:18.600 is eighty nine percent according to a futures market. I mean, 0:08:18.720 --> 0:08:21.960 if the jobs report was surprisingly strong, we could see 0:08:22.440 --> 0:08:25.680 probability go go back down to sixty or fifty five 0:08:26.360 --> 0:08:29.720 or something vague, and then it will become a coin toss. 0:08:29.840 --> 0:08:32.200 And that's I think that's the type of stuff the 0:08:32.200 --> 0:08:34.640 stock market doesn't like, which is uncertainty. 0:08:35.000 --> 0:08:38.360 I don't know if ED will agree we'll. 0:08:38.240 --> 0:08:39.760 Go back to that, because it seems like there's been 0:08:39.760 --> 0:08:41.680 a lot of uncertain over the last few months that 0:08:41.679 --> 0:08:44.720 they've managed to struggle, but they are obviously very focused 0:08:44.720 --> 0:08:48.000 on these numbers. Just to touch on the inflation aspect, 0:08:48.160 --> 0:08:53.080 because one of the factors that had led traders to 0:08:53.400 --> 0:08:56.680 have a higher expectation of a rate cut from the 0:08:56.679 --> 0:09:00.840 Fed this month, along with the weaker labor market figures 0:09:00.840 --> 0:09:03.800 that we had, was also in the inflation numbers. So 0:09:03.880 --> 0:09:07.000 is there anything there that could change the way the 0:09:07.080 --> 0:09:09.560 Fed and then potentially the market is thinking. 0:09:10.240 --> 0:09:13.840 What I've heard from the markets is that CPI has 0:09:13.920 --> 0:09:17.600 to be really high, say zero point four point five, 0:09:18.440 --> 0:09:21.839 to be a game changer for a rate cut, and 0:09:22.120 --> 0:09:23.880 I think it would be. 0:09:24.040 --> 0:09:25.360 Just remind us what it is now. 0:09:25.840 --> 0:09:26.920 So in the. 0:09:26.800 --> 0:09:31.319 Past four months it has been fluctuating between point one 0:09:31.880 --> 0:09:35.160 two point three, and only in the last month had 0:09:35.320 --> 0:09:38.560 CPI it comes to point three, But previously. 0:09:38.120 --> 0:09:40.600 That's the increase in just the month, Yeah, just the month, 0:09:40.800 --> 0:09:44.680 So point four the annual rate is the annual rate 0:09:44.880 --> 0:09:47.880 is in the high two. I think I believe two 0:09:47.960 --> 0:09:51.400 point nine or close to three point zero, but a 0:09:51.600 --> 0:09:55.160 point four point five annual increase would be if you 0:09:55.240 --> 0:09:58.800 analyze that would be corresponding to four to five percent inflation. 0:09:58.920 --> 0:10:02.400 This is why point four five are super ugly readings. 0:10:02.720 --> 0:10:05.480 But you're not expecting that because you've looked at how 0:10:05.920 --> 0:10:10.920 the impact of tariffs, for example, on prices, and we've 0:10:10.960 --> 0:10:13.480 not been seeing those kind of numbers at least not yet. 0:10:13.600 --> 0:10:16.280 Is that right, well, Stephanie, our view on this is 0:10:16.400 --> 0:10:20.480 very dynamic in the sense that passed through on tariff 0:10:20.559 --> 0:10:21.400 is not static. 0:10:21.600 --> 0:10:23.720 Firms will only pass through if they can. 0:10:24.320 --> 0:10:28.000 And so this second quarter earning seasons, which I think 0:10:28.240 --> 0:10:33.000 market participants took us overall quite encouraging, was that there's 0:10:33.120 --> 0:10:37.240 not much evidence that firms profits are hit by these 0:10:37.320 --> 0:10:40.960 tariff which was the piece of puzzle for me because 0:10:41.360 --> 0:10:44.520 our view had been that, well, maybe tariffs won't translate 0:10:44.520 --> 0:10:48.040 into inflation so fast because firms will be eating it 0:10:48.200 --> 0:10:51.640 through profit compression. But so far we have not seen 0:10:51.760 --> 0:10:55.280 much tariff passed through in CPI, we have not seen 0:10:55.400 --> 0:11:00.079 much profit compression and firms. But we do know that 0:11:00.320 --> 0:11:03.839 US firms are taking the front of the tariff. So 0:11:04.360 --> 0:11:07.640 who in US is really taking the brunt of the tariff. 0:11:07.679 --> 0:11:09.920 It's like the doc that did Doc bark In like 0:11:10.040 --> 0:11:11.400 Sherlock's home tail. 0:11:12.080 --> 0:11:14.240 Okay, so is it possible that Donald Trump is right 0:11:14.280 --> 0:11:16.040 and it's those foreigners that are paying that. 0:11:16.280 --> 0:11:18.960 I don't think no. I think the evidence is still 0:11:19.040 --> 0:11:22.560 pretty firm on that, although I have been hearing some 0:11:22.760 --> 0:11:27.320 very esoteric explanations, which is that foreigners are not cutting 0:11:27.360 --> 0:11:31.000 the price they sold to the US importer. However, they're 0:11:31.080 --> 0:11:37.199 offering credits on exports services, which is why import indices 0:11:37.240 --> 0:11:40.480 will never capture any discounts. This is just a very 0:11:40.520 --> 0:11:44.280 offbeat explanation which I've heard from a few people now. 0:11:44.320 --> 0:11:47.280 So I think we need to examine that. Usually in 0:11:47.320 --> 0:11:50.600 the importer US also exports, so if they get some 0:11:50.679 --> 0:11:54.440 credit on the expert side, maybe that helps cushion something. 0:11:54.880 --> 0:11:56.800 I don't know, because at the end of the day, 0:11:57.040 --> 0:12:00.440 from a firm's perspective, it's about managing this cost increase 0:12:00.840 --> 0:12:04.280 imports tariff rise. You could cut labor costs, you know, 0:12:04.400 --> 0:12:07.319 increase your export prices, or you could do a range 0:12:07.360 --> 0:12:10.880 of things to manage that cost. And it could be that, 0:12:11.160 --> 0:12:14.000 but it also could be that actual tariffs was not 0:12:14.160 --> 0:12:17.480 as high as the statutory tariffs, and that's why the 0:12:17.559 --> 0:12:20.559 hit was also not as good. There are a few explanations. 0:12:20.880 --> 0:12:22.600 A lot of people have been looking into that gap, 0:12:22.679 --> 0:12:24.720 but that's also been showing up in the revenues. We're 0:12:24.720 --> 0:12:27.280 getting less revenues than you would expect. It's quite a 0:12:27.320 --> 0:12:30.360 lot of revenues coming into the treasury, but there's a 0:12:30.360 --> 0:12:32.440 bit of a gap there in terms of what the 0:12:32.520 --> 0:12:36.120 supposed tariff revenue's rates are and what the revenues are. 0:12:36.160 --> 0:12:37.920 So I think there's plenty of puzzles there. But ed 0:12:38.640 --> 0:12:42.959 going back to the Fed having the markets back, I mean, 0:12:43.000 --> 0:12:45.920 it always strikes me, and it happens a lot in 0:12:45.960 --> 0:12:48.680 these context. There's a bit of a dilemma because the 0:12:48.880 --> 0:12:51.880 market wants the lower interest rates, but not the thing 0:12:51.920 --> 0:12:55.160 that would trigger the lower interest rates. So the economy 0:12:55.240 --> 0:12:57.760 is doing well, then the stock market might feel better, 0:12:57.760 --> 0:12:59.680 but that also makes it less likely there's going to 0:12:59.679 --> 0:13:01.920 be a interest rates Is that a bit of an 0:13:01.960 --> 0:13:04.840 issue for the current state of expectations. 0:13:06.200 --> 0:13:09.760 It is, but given the range that Anna was talking about, 0:13:09.840 --> 0:13:12.840 that's sort of like the sweet spot. The goldilocks outcome 0:13:13.000 --> 0:13:15.840 zero to one hundred and thirty non farm payrolls. It 0:13:15.920 --> 0:13:18.400 says that the economy's weak enough to get the FED 0:13:18.440 --> 0:13:21.080 to cut, but not so weak that you actually are 0:13:21.120 --> 0:13:24.559 concerned about a recession. And I think when you think 0:13:24.600 --> 0:13:26.480 about the FED, and there's been a lot of talk 0:13:26.480 --> 0:13:29.840 about FED independence and whether you have low rate people 0:13:29.920 --> 0:13:33.040 or high rate people. Chris Waller, who's a FED governor, 0:13:33.400 --> 0:13:36.360 he actually has the zeitgeist of the FED right now 0:13:36.400 --> 0:13:40.560 in terms of anticipating that low number that we're talking 0:13:40.600 --> 0:13:44.000 about and the lack of a pass through of inflation 0:13:44.720 --> 0:13:47.160 enough to get the FED to cut, and I think 0:13:47.160 --> 0:13:49.600 that the rest of the FOMC sounds like they're moving 0:13:49.640 --> 0:13:52.719 in that direction. The market has eighty nine percent priced in, 0:13:52.800 --> 0:13:56.800 as Anna was saying, and largely there's no way that 0:13:56.840 --> 0:13:59.760 the FED is going to not cut when you have 0:13:59.840 --> 0:14:03.439 the kinds of numbers. The real question is do they 0:14:03.480 --> 0:14:06.880 cut afterwards? But I think that September is probably a 0:14:06.960 --> 0:14:10.200 done deal at this point unless you have something incredibly 0:14:10.240 --> 0:14:13.439 bad from the inflation number, as Anna was saying. And 0:14:13.520 --> 0:14:17.839 so the FED has the markets back largely through September 0:14:18.120 --> 0:14:21.200 and my view, but then afterwards that's the real question. 0:14:22.200 --> 0:14:25.080 You started by talking about how people are conscious of 0:14:25.120 --> 0:14:28.440 the overvaluation of the US market, and we've talked in 0:14:28.480 --> 0:14:31.720 the past about how even though the US stock market 0:14:31.800 --> 0:14:35.000 looked healthy in relative terms, many other markets have done 0:14:35.000 --> 0:14:38.240 better this year, and maybe the marginal investment dollar was 0:14:38.640 --> 0:14:41.040 more of it was going overseas now than had been 0:14:41.080 --> 0:14:44.840 in the past. But that fundamental question of can you 0:14:44.880 --> 0:14:47.680 afford to be so dependent on a handful of stocks. 0:14:47.680 --> 0:14:49.240 I can't remember the figure now, but I think the 0:14:49.280 --> 0:14:52.480 percentage that just in video alone, the producer of those 0:14:52.600 --> 0:14:56.720 very of the absolute cutting edge chips, that its share 0:14:56.760 --> 0:14:58.760 of the market is now I think higher than any 0:14:58.760 --> 0:15:03.000 companies has been. What can seriously change that? What's going 0:15:03.080 --> 0:15:06.480 to provide the reality check on that kind of concentration. 0:15:06.080 --> 0:15:10.600 Ed The reality check is missing earnings, and in its 0:15:10.680 --> 0:15:16.080 most dire form from an economic perspective, an incredible slowdown 0:15:16.120 --> 0:15:19.680 that causes firms to mis earnings repeatedly and by a 0:15:19.760 --> 0:15:23.320 large margin. So it's almost like people are holding their 0:15:23.360 --> 0:15:28.200 noses to buy at high valuations because there's nothing that 0:15:28.240 --> 0:15:30.320 they can do. Let's back up for a second. If 0:15:30.360 --> 0:15:32.880 you think about what happened in April after we had 0:15:32.920 --> 0:15:35.920 the tariffs. When the tariffs were announced, the levels were 0:15:35.920 --> 0:15:38.520 so high and the fear of a recession was so 0:15:38.640 --> 0:15:40.840 high that people sold on mass there was the whole 0:15:41.040 --> 0:15:45.280 Cell America trade. What that is representative of how quickly 0:15:45.400 --> 0:15:48.560 that almost recession for the SMP we were almost down 0:15:48.560 --> 0:15:53.640 twenty percent formed is indication that we have weak hands. 0:15:53.960 --> 0:15:56.400 That is, is that people are not real believers in 0:15:56.400 --> 0:15:58.920 the market. And given the fact that we've gone up 0:15:59.480 --> 0:16:03.400 this month since then, you would think that that same 0:16:03.480 --> 0:16:07.680 sentiment is even higher today. But at the same time, 0:16:08.640 --> 0:16:11.000 you're not going to be selling stocks that are actually 0:16:11.040 --> 0:16:13.680 beating expectations, and you're not going to do that in 0:16:14.120 --> 0:16:17.960 an economic environment that expectations are above. So I think 0:16:17.960 --> 0:16:20.360 that over the next couple of weeks, but I would 0:16:20.360 --> 0:16:22.360 say actually over the next six weeks, a number of 0:16:22.360 --> 0:16:25.280 things are coming together. One we have the FED. Two, 0:16:25.840 --> 0:16:30.480 we have expectations. That is the City surprise Index at 0:16:30.520 --> 0:16:34.120 a very high level, and that's a mean reverting index, 0:16:34.200 --> 0:16:38.840 meaning that the likelihood of continuing to beat economic forecast 0:16:39.000 --> 0:16:42.840 this much will go down. And then finally in October 0:16:42.840 --> 0:16:45.000 that's when we're going to start the next earning season. 0:16:45.320 --> 0:16:48.320 So those three things will come together and that will 0:16:48.320 --> 0:16:50.720 be very decisive in terms of whether or not this 0:16:50.760 --> 0:16:54.400 particular rally can hold. And I would mention by the way, 0:16:54.440 --> 0:16:56.840 as you said, Stephanie, the first day back, that we 0:16:56.920 --> 0:16:59.560 had a reality check. When people came back and desks 0:16:59.560 --> 0:17:03.240 were full, people saw not just stats but also. 0:17:03.120 --> 0:17:07.160 Bonds, possibly because they read this piece that said September 0:17:07.200 --> 0:17:09.600 was always terrible and the next forty trading sessions were 0:17:09.680 --> 0:17:12.200 going to be so important. I mean, Anna, if you're 0:17:12.200 --> 0:17:15.439 an economist, you will have been taught. Any economist, we 0:17:15.440 --> 0:17:19.359 were all taught that independence of central banks was very 0:17:19.359 --> 0:17:25.479 important for investors, for the stability of general confidence in 0:17:25.520 --> 0:17:27.840 the economy. It was one of the things that made 0:17:28.240 --> 0:17:31.640 the US an attractive market. And we've also always been 0:17:31.640 --> 0:17:35.280 told that stability of policy making was super important. And 0:17:35.359 --> 0:17:37.360 yet if you look at the last six months, you've 0:17:37.359 --> 0:17:41.640 had a definitely not stable policy making and a lot 0:17:41.680 --> 0:17:46.879 of volatility and outright questioning around the independence of the 0:17:46.920 --> 0:17:50.920 central bank. If everything just kind of continues as it has, 0:17:51.440 --> 0:17:53.679 do we have to kind of question that basic belief. 0:17:53.680 --> 0:17:56.199 Maybe the central bank independence is not as important as 0:17:56.240 --> 0:17:57.720 we thought, or is it just that it's not got 0:17:57.760 --> 0:17:58.520 to that point yet. 0:17:59.080 --> 0:18:03.000 I think it The mutant market reaction is about how 0:18:03.040 --> 0:18:07.000 the market interprets the series of events. So I think 0:18:07.040 --> 0:18:11.199 in our Washington DC bubble. We are all characterizing the 0:18:11.240 --> 0:18:16.640 events as jeopardizing the feed's independence, but I think many 0:18:16.680 --> 0:18:22.240 market participants are not thinking that this fundamentally jeopardized the 0:18:22.280 --> 0:18:23.280 FED independence. 0:18:23.720 --> 0:18:26.840 So I think FED independence. 0:18:26.520 --> 0:18:30.440 Is very important for the stability of the US economy, 0:18:30.480 --> 0:18:33.639 no question about it. So the market will have to 0:18:33.760 --> 0:18:37.359 come to the point where they see that it's jeopardized 0:18:37.400 --> 0:18:38.240 before they reacted. 0:18:38.280 --> 0:18:40.400 I don't think they're at that point yet, But. 0:18:40.400 --> 0:18:44.080 I guess one of the things that would perhaps stay 0:18:44.400 --> 0:18:49.280 the President's hand in pushing ahead more aggressively would be 0:18:49.320 --> 0:18:51.840 the sense that there was a market reaction, but he's 0:18:51.880 --> 0:18:53.960 not seen much evidence of that. I mean ed one 0:18:54.000 --> 0:18:56.640 tends to look to the bond market for a reaction 0:18:56.880 --> 0:19:01.359 to these kind of concerns, and certainly most economists I 0:19:01.400 --> 0:19:03.840 know are kind of expecting on balance inflation to be 0:19:03.840 --> 0:19:07.000 a bit higher after j. Powell leaves because of all 0:19:07.000 --> 0:19:09.359 the mood music that surrounded the appointment of the next 0:19:09.520 --> 0:19:12.119 head of the Central Bank. Is it surprising that the 0:19:12.119 --> 0:19:15.119 bomb market has also reacted so calmly to all this? 0:19:15.560 --> 0:19:17.840 I mentioned the ten year. I guess the thirty year 0:19:17.960 --> 0:19:20.679 moved up very slightly, but it doesn't seem like a 0:19:20.680 --> 0:19:21.160 big deal. 0:19:21.359 --> 0:19:25.920 All of this is relatively surprising. You can countenance the 0:19:25.960 --> 0:19:31.080 moves based upon the lack of a recession, the fact 0:19:31.080 --> 0:19:35.280 that we've had such a huge change in economic policy, 0:19:35.560 --> 0:19:39.160 but largely the beat goes on. I think that the 0:19:39.200 --> 0:19:43.159 market has become inured to all of these changes, and 0:19:43.200 --> 0:19:47.200 they're waiting for something of great significance economically to occur, 0:19:47.520 --> 0:19:51.320 or something of great significance to occur in terms of 0:19:51.359 --> 0:19:53.840 earnings for the stocks. And remember, at the same time, 0:19:53.880 --> 0:19:56.520 you're also looking at investors who are getting five percent. 0:19:56.960 --> 0:19:59.720 Five percent in a thirty year has been very difficult 0:19:59.760 --> 0:20:03.040 to s pass on a considered level. You know, every 0:20:03.040 --> 0:20:06.160 time the bond market gets the thirty year to five percent, 0:20:06.600 --> 0:20:09.639 suddenly you have buyers who swoop in and they say, 0:20:09.760 --> 0:20:12.760 that's something i'd like to lock in. Locking in that 0:20:12.960 --> 0:20:17.280 level of return over a thirty year period is attractive 0:20:17.680 --> 0:20:21.960 a foreign investor that just years ago was getting something 0:20:22.000 --> 0:20:24.520 in the order of one to two percent on very 0:20:24.560 --> 0:20:29.520 long dated paper. So it's a very weird situation, and 0:20:29.600 --> 0:20:33.040 I think that it's allowed to go on simply because 0:20:33.680 --> 0:20:38.960 the economic situation has not deteriorated enough to draw a reaction. 0:20:39.359 --> 0:20:41.320 Anna, I'll give you the last word. I said at 0:20:41.359 --> 0:20:44.040 the start, the stock market isn't the US economy, but 0:20:44.119 --> 0:20:47.880 they're clearly it's hard for the stock market to continue 0:20:47.920 --> 0:20:51.320 to be strong if they are a fundamental question marks, 0:20:51.400 --> 0:20:55.280 let alone a return of the risk of recession when 0:20:55.280 --> 0:20:57.640 it comes to the US economy. I know you've said 0:20:57.640 --> 0:20:59.399 in the past that it's sort of too soon to 0:20:59.400 --> 0:21:02.080 say in terms of the impact of tariffs, but we've 0:21:02.119 --> 0:21:04.960 also discussed reasons why the impact on inflation might not 0:21:05.040 --> 0:21:09.240 be as large as some had feared. It looks like 0:21:09.320 --> 0:21:12.800 the impact on the economy overall could be less than 0:21:12.880 --> 0:21:14.760 many had feared. Do you think we're going to end 0:21:14.800 --> 0:21:18.879 this year thinking this set of policies one way or another. 0:21:19.720 --> 0:21:21.920 Partly because of some of the offsets that have come 0:21:22.040 --> 0:21:25.120 with tax cuts and other things, this set of policies 0:21:25.119 --> 0:21:27.680 from this administration is not as damaging as we might 0:21:27.720 --> 0:21:28.920 have thought the beginning of the year. 0:21:30.160 --> 0:21:32.720 Yeah. I think on the growth side that might be it, 0:21:32.840 --> 0:21:36.119 because we do have the resolution of the tax policy 0:21:36.280 --> 0:21:40.040 and that's proposing as tailwind going into next year. However, 0:21:40.160 --> 0:21:43.680 my views on the impact of tariff on inflation has 0:21:44.160 --> 0:21:47.280 evolved slightly. I think the upside risk on inflation is 0:21:47.359 --> 0:21:50.200 now higher and going into the end of the year, 0:21:50.560 --> 0:21:53.800 because even though the stock market is not the whole economy, 0:21:54.160 --> 0:21:57.520 the stock market is the whole economy for the top 0:21:57.600 --> 0:22:01.640 twenty percent of the population. And as long as these 0:22:01.800 --> 0:22:06.560 top twenty percent of household are doing fine with wealth effect, 0:22:07.480 --> 0:22:10.280 then firms will find that they will be able to 0:22:10.320 --> 0:22:14.479 pass through these tariffs to these guys. And most of 0:22:14.520 --> 0:22:17.240 the disinflation we have seen in the last four months 0:22:17.359 --> 0:22:21.240 that turned the narrative of tariff and inflation over his head, 0:22:21.440 --> 0:22:23.960 that was driven by these top twenty percent people. They're 0:22:23.960 --> 0:22:26.879 not spending on hotels, they're not spending on airfares. But 0:22:26.960 --> 0:22:29.320 I see that reversing in the rest of it this year. 0:22:29.680 --> 0:22:33.480 So we might still see inflation flaring up later this year, 0:22:33.520 --> 0:22:34.320 but not due. 0:22:34.200 --> 0:22:38.399