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 Hortern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. John Parvan of Blackrock writing,
Speaker 2: we now see even more course to stay risk on
Speaker 2: and overweight US stocks. John joins us now for more. Joan,
Speaker 2: good morning, Good morning. Just explain yourself, sir, why.
Speaker 3: I mean it was done at the end of the day.
Speaker 3: You know, a huge amount of uncertainty. Of course, we've
Speaker 3: been going through that this year. We don't think there's
Speaker 3: much insight insight in saying that anymore. It's really about
Speaker 3: how you get a handle on this, and I guess
Speaker 3: strong conviction is that you know, when you look over
Speaker 3: the near term, we have more certainty about the outlook
Speaker 3: than we would have over the next few years. That's
Speaker 3: the very unusual environment we are in right now and
Speaker 3: over the near term. The world cannot change very quickly,
Speaker 3: so there'll be you know, noise, there will be headlines,
Speaker 3: there will be attempt to do stuff, but you know,
Speaker 3: there are immutable.
Speaker 4: Laws at play and that's going to shape the outcome.
Speaker 3: So we tend to, you know, over overall be you know,
Speaker 3: pro us assets and at the same time, like try
Speaker 3: to fade the extremes that you're going to see coming
Speaker 3: both ways.
Speaker 2: There is a distinction that when you say overall be
Speaker 2: pro us sets between stocks and bonds, what is the difference.
Speaker 3: Well, the difference is that like we like equities and
Speaker 3: bonds I think are are more tricky in this environment,
Speaker 3: and so US equities. We think there's like powerful mega
Speaker 3: forces that are at play.
Speaker 4: AI is a big team.
Speaker 3: We continue to believe in that that supersedes I guess
Speaker 3: the near term trained noise and so on. But when
Speaker 3: it comes to the bond and fixed income a bit.
Speaker 3: But but government modesl in particular, well, we have a
Speaker 3: lot of things that play that are for us pointing
Speaker 3: towards higher yields, higher long term meals term premium that
Speaker 3: needs to reappear, and so we remain on the way,
Speaker 3: you know, US treasuries as a result.
Speaker 1: Is this a US story or is this a global story?
Speaker 1: At a time when I believe that you prefer European
Speaker 1: bonds even though there's still issuing a lot of debt
Speaker 1: and facing some of the same kinds.
Speaker 3: Of issues, it is a US story to the extent
Speaker 3: that we think that's where the reprising is.
Speaker 4: The is the more more serious.
Speaker 3: It's also related to the greater uncertainty we have around
Speaker 3: the FED outlook, the inflation outlook, the debt, the debt picture,
Speaker 3: whereas in Europe, I mean, you know, inflation is on
Speaker 3: the way down. You can tell a very credible story
Speaker 3: for inflation will surprise on the downside. The CB has
Speaker 3: more room to cut even from here, so that leads to,
Speaker 3: you know, more support for Europe and bounds.
Speaker 1: But so way US equities underway US government bonds while
Speaker 1: you're overweight European government bonds, maybe underway European equities. I'm
Speaker 1: just wondering if you could give us a sense of
Speaker 1: the last time, just to sort of frame this out,
Speaker 1: that you are less exposed to US treasuries, particularly on
Speaker 1: the longer duration versus European ones. What was the last
Speaker 1: time you had this dynamic in black Rocks portfolio.
Speaker 3: Well, we've been for the last few years constantly underway
Speaker 3: US treasuries, so we've been of the view that inflation
Speaker 3: was a structural phenomenon this environment, that rates will need
Speaker 3: to adjust. There's a fiscal story that is not the
Speaker 3: new thing of this year. There's been a deficit story
Speaker 3: post pandemic that was putting pressure on yels. So that
Speaker 3: story has been with us for a few years now.
Speaker 3: That has been one of the strongest convictions we've been
Speaker 3: having throughout those that time. And there's been new layers
Speaker 3: now added to this, which which you know, it's unusual
Speaker 3: to say we've been structurally underweight US treasuries for so long, Right,
Speaker 3: it would have been tactically moving around that, but that's
Speaker 3: really like a lasting story for us.
Speaker 5: When it comes to these new layers. You're probably mentioning
Speaker 5: at least thinking about the one big beautiful bill. Why
Speaker 5: didn't we see more pushback from the bond market.
Speaker 3: Well, I think I think there is a lot of
Speaker 3: structural demand still for US treasury.
Speaker 4: So the reason why we're on the waight is not
Speaker 4: a bigger.
Speaker 3: Sensational story around US exceptionalism being questioned, or it's not
Speaker 3: about US Treasury is not playing their safe asset role
Speaker 3: as much as they had in the past, so we're
Speaker 3: not questioning the fundamental structure of the and there is
Speaker 3: a there's gonna be a need, a structural demand for this.
Speaker 3: So I think I think the markets are adjusting. There's
Speaker 3: no panic so far, and uh, but it's on the
Speaker 3: drifting up. I think there's room for digesting some.
Speaker 4: Of the of the big beautiful bill that.
Speaker 3: Came through, and then there's a lot of question now
Speaker 3: on how it's gonna come next. And so you know,
Speaker 3: I think I think it's gonna be up. Yield is
Speaker 3: gonna go up. There's it's gonna be absorb over time
Speaker 3: towards with with higher yield.
Speaker 5: You're saying this at a time when the president's talking
Speaker 5: about sending out more letters where tariff rates look very
Speaker 5: similar to what happened on Liberation Day. Do you think
Speaker 5: the Trump has primed the market to basically absorb his
Speaker 5: aggressive policies.
Speaker 3: Well, I don't know if I don't know if the
Speaker 3: President has prime the market in any way, but I
Speaker 3: think I think we have more conviction ourselves since April second,
Speaker 3: in April nine that what I talked about before, the
Speaker 3: immutable laws cannot change quickly in the near term, and
Speaker 3: one part of it is the bond market. To you,
Speaker 3: to actually connect to the previous discussion, the US realies
Speaker 3: on you know, foreign funding for for that that that
Speaker 3: we're talking about. That's maybe something that we would wish
Speaker 3: to be different, but that's the starting point that cannot
Speaker 3: change overnight, and I think that's going to limit the
Speaker 3: maximulus approach that you can expect to see.
Speaker 4: And we've seen that on April ninth.
Speaker 3: To us, it was the bond market that really like
Speaker 3: provided the discipline at that point, and we've seen it.
Speaker 3: So I guess that'd give us more conviction that going
Speaker 3: forward that's going to still be a constraint for the
Speaker 3: time being at least.
Speaker 2: That's an interesting thing to think about. Do you still
Speaker 2: believe that any potential self and treasuries will be self
Speaker 2: limiting because of that very fact?
Speaker 4: I think so.
Speaker 3: I think I don't think the US can sustain a
Speaker 3: massively higher yield, even though we are underweight and we
Speaker 3: think gilds are going to go up. It has to
Speaker 3: happen in a fairly gradual manner. And if there's any
Speaker 3: sign that this is like a very quick resetting. And
Speaker 3: we're in a world where like we have five percent
Speaker 3: ten years yield quickly on a sustained basis the whole
Speaker 3: budget ever at medic that is already pretty challenge, I
Speaker 3: think is out of the wind.
Speaker 2: So five percent is like a ceiling for you, Well,
Speaker 2: I think I.
Speaker 3: Think when we if we're sustainably in a five percent world,
Speaker 3: I think that changes the picture quite a bit.
Speaker 4: I don't think it's a ceiling.
Speaker 3: I mean will depend on other what the growth outlook
Speaker 3: is and and so on. So I don't think there's
Speaker 3: a hard ceiling. But it's a different world. If we
Speaker 3: are like adjusting to five percent sustained.
Speaker 2: We can I ask you, then, why is it so
Speaker 2: different given us only sixty basis points away? Why is
Speaker 2: sixty access points some important?
Speaker 3: I think it's it's not so much as sixty basis points,
Speaker 3: but like this is now the kind of the norm
Speaker 3: five percent that we expect to see over the next
Speaker 3: few years. That is a different world than were at
Speaker 3: four point four. It might bounce back and up, So
Speaker 3: that's more to sustained aspect.
Speaker 2: Even the team have been pretty consistent about this. Now
Speaker 2: for a number of years at a time when a
Speaker 2: lot of people have started to price in rate cuts
Speaker 2: back away than price them in. Again, you've been very
Speaker 2: consistent about this. There are structural reasons to expect inflation
Speaker 2: to remain higher, and you think bond yields remain elevated.
Speaker 2: How convinced the clients of that story right now when
Speaker 2: you tell it?
Speaker 3: Well, I think, well, I find that we're very convinced
Speaker 3: about this story, and I think you know, there's different
Speaker 3: views out there, but I think it's less now. We
Speaker 3: have less pushback than we would have had maybe you
Speaker 3: know when we started to order that view in twenty
Speaker 3: twenty two and so on. So I think this has
Speaker 3: become in some ways more consensus, so less push back,
Speaker 3: I guess in that sense. But yeah, no, I think
Speaker 3: I think that's not an easy.
Speaker 4: Hard to sell.
Speaker 2: Yues John, to appreciate your time. I here so much
Speaker 2: jump up on the of Black Croub with a S
Speaker 2: in New York at Mills franm and James Etkimonic morning.
Speaker 2: It is July ninth, and we have limited clarity how
Speaker 2: much additional clarity will we have on August one.
Speaker 6: We'll have more clarity. I don't think we'll have a
Speaker 6: lot of the details. I think the whole goal this
Speaker 6: year is to get as many MoU signed as possible,
Speaker 6: because I think what President Trump really wants to do
Speaker 6: is say I got a trade deal with one hundred
Speaker 6: and twelve countries. They're going to buy trillions of dollars
Speaker 6: worth of goods, even more trillions of dollars worth of
Speaker 6: market access, and we're going to work out all the
Speaker 6: details later. And I think that one of the good
Speaker 6: things about having this little extra time is what you
Speaker 6: need to do to get one of those MOUs is
Speaker 6: not all that complex. If you can work it out later,
Speaker 6: that's fine. And that's where I think the market is
Speaker 6: okay as long as we have this extra time sign
Speaker 6: the deal. And when you look at the letters that
Speaker 6: are going out, the new rates are not that much
Speaker 6: worse or sometimes even a little bit better than April second,
Speaker 6: So we're okay.
Speaker 5: The new rates are basically April second. It's basically Liberation
Speaker 5: Day part two. But in this letter, Trump does say
Speaker 5: that perhaps you could consider adjustment to this letter if
Speaker 5: you decide to come to the table, we may reconsider.
Speaker 5: But then yesterday he said it's August first. These are
Speaker 5: the rates we're not going to be adjusting. Which Trump
Speaker 5: do you believe the next Trump?
Speaker 6: I mean it's I mean, there is the only constant
Speaker 6: here has change. I mean, so I don't necessarily think
Speaker 6: that August first is necessarily a hard and true date.
Speaker 6: I don't necessarily think these rates are hard and true.
Speaker 6: I do think that there is going to be three
Speaker 6: buckets here. Bucket number one, new revenue. We have a
Speaker 6: huge new tax bill that is costing trillions of dollars,
Speaker 6: the most expensive bill in the history of the country.
Speaker 6: He needs that revenue. Bucket number two protect national security.
Speaker 6: Those are the sectorial terrors. If we are at war
Speaker 6: with China, what do we need to make here in
Speaker 6: the En States? And Bucket number three has always been
Speaker 6: can we use the force of the US economy to
Speaker 6: force policy change elsewhere? That piece is always going to
Speaker 6: be the hardest part, and that's what all these negotiations
Speaker 6: are about.
Speaker 5: Amory, So who gets a deal today or tomorrow? I'm
Speaker 5: thinking of three In particular, Japan was supposed to but
Speaker 5: they got the same second rate. India, I was getting
Speaker 5: tons of text messages yesterday saying it was imminent. I
Speaker 5: still see no language on it in the European Union,
Speaker 5: which seems to capitulate on a ten percent across the
Speaker 5: board tariff.
Speaker 4: Yeah.
Speaker 6: I think the most likely is India than Japan, and
Speaker 6: I think the least likely is the EU. I think
Speaker 6: one of the issues with the EU is the United
Speaker 6: States is asking Europe to make a decision. Are you
Speaker 6: with the United States or are you with China? And
Speaker 6: there are competing interests. You look at certain countries and
Speaker 6: they're like, absolutely the United States. A lot of that
Speaker 6: economy is tied to US. Others have more exports going
Speaker 6: into China because they are a block with disparate interest
Speaker 6: I think that's going to be very hard to get
Speaker 6: anything on the tape by April first. But I do
Speaker 6: think that Japan, India, Usustralia, a large part of the
Speaker 6: GDP globally, can get a deal by August first.
Speaker 1: Don't want to get into psychoanalysis here. What is it
Speaker 1: though about letters? Because it's always a letter? Why does
Speaker 1: everybody get a letter? And what is the importance of
Speaker 1: this versus just a verbal warning maybe a presidential tweet?
Speaker 5: You know, what is it about a physical.
Speaker 1: Letter getting sent out that it has some import for
Speaker 1: President Trump?
Speaker 6: Yeah, I think it shows action. I think it shows
Speaker 6: the kind of the ability to kind of flesh it
Speaker 6: out a little bit more. You know, these letters, if
Speaker 6: you read them, they're basically the same, and they are
Speaker 6: very clearly dictated exactly by him and probably edited by him,
Speaker 6: because it's like you see Trump's voice in these letters.
Speaker 6: I do think that there has been a concern by
Speaker 6: President Trump that the taco trade is out there and
Speaker 6: that he always caves. So he wants to show and
Speaker 6: project the strength that if you don't come to the table,
Speaker 6: this is what you get. I think the biggest questions
Speaker 6: from the you know, social media posts in these letters
Speaker 6: are some of the details.
Speaker 4: What does it mean.
Speaker 6: That you'll have higher tariffs if there's transhipment. We do
Speaker 6: not have a structure in place to deal with kind
Speaker 6: of how that country of origin would be different. That's
Speaker 6: why I think the details here are going to take
Speaker 6: a long time. But he wants to say, here are
Speaker 6: the general parameters. This is what I want. You come
Speaker 6: to the table, you tell me what you're going to
Speaker 6: give me.
Speaker 1: I'm taking, not its parenting No, it's because I plan
Speaker 1: on sending letters to the household and we do have
Speaker 1: a complaint box already. I am wondering going forward whether
Speaker 1: the reaction or non reaction that we're seeing in markets
Speaker 1: is sort of emboldening him to send some more letters
Speaker 1: and to raise those rates up even higher.
Speaker 4: Yeah.
Speaker 6: I think that's one of the big questions from clients
Speaker 6: yesterday at Raymond James is that after April second, what
Speaker 6: got him to pause these on April ninth was the
Speaker 6: market reaction. And we've had these conversations so many times.
Speaker 6: What caused Congress in the past to raise the debt
Speaker 6: limit is the market reaction? And so are you in
Speaker 6: this dangerous place that if there is no market reaction
Speaker 6: then you can get even more aggressive, And at what
Speaker 6: point is a mistake made. I don't think we're close
Speaker 6: to that, but I do think there's always a threat
Speaker 6: that if you need the market to correct and you
Speaker 6: don't get it, then you get more bold. The biggest
Speaker 6: change I've seen so far in this market is early
Speaker 6: on in administrations, they mostly focus on process. Later on
Speaker 6: they focus on outcomes. Right now, this is a market
Speaker 6: that is saying, all right, the process might be changing,
Speaker 6: but the outcome is not likely to change. The only
Speaker 6: way we get a market reaction if they think the
Speaker 6: outcome is actually going to materially worse than what they
Speaker 6: actually expected.
Speaker 5: What would a mistake be How do you characterize that?
Speaker 6: Yeah, I think a mistake would be actually going to
Speaker 6: fifty percent with the EU in that sticking on for
Speaker 6: a period of time. When I was in Europe two
Speaker 6: weeks ago speaking with investors at Raymond James, there is
Speaker 6: a real concern about the weakness of the dollar and
Speaker 6: exports getting more expensive coming from Europe into the United States,
Speaker 6: and then you have tariffs on top of that that
Speaker 6: could be a recession. Does that kind of have unintended
Speaker 6: consequences we talk about, you know, looking at yields here
Speaker 6: in the United States, we saw after April second, the
Speaker 6: thirty year go above five percent. Does the thirty year
Speaker 6: in the ten year start spiking as we start issuing
Speaker 6: debt over the next couple months to refill the Treasury
Speaker 6: General account, and does he put pressure on the Fed
Speaker 6: to build that out and then there is a bond
Speaker 6: market reaction. Those are the things that I think are
Speaker 6: the biggest debates for the second half of this year
Speaker 6: is kind of the rate.
Speaker 2: Path that last point the federalist of what are you
Speaker 2: ton of clients about the FED rice?
Speaker 6: So I think that I know that there is news
Speaker 6: out this morning that Hassard and warsh are considered to
Speaker 6: be the front runners. I'd put Waller in Bessent into
Speaker 6: that camp as well. I think Donald Trump loves people
Speaker 6: to compete for the job. What I'm watching to see
Speaker 6: is does Michael Barr step down as one of the
Speaker 6: FED governors now that he's no longer by seer for supervision.
Speaker 6: If he does, Hassard or worsh is probably going to
Speaker 6: get that seat. Coogler another governor her term expires in January,
Speaker 6: that is probably the second seat. And then all four
Speaker 6: compete to see who can be the Fed cheer come
Speaker 6: the May expiration of Powell seat and who is going
Speaker 6: to be the most ubish, who's going to be the
Speaker 6: most supportive of his agenda gets it. It's a perfect
Speaker 6: scenario for Trump to have another game of Apprentice, but
Speaker 6: this time for Fetcher.
Speaker 2: Oh Gamath thrines equally as Bruitsald that situation, some names
Speaker 2: are more credible than others. Let's put it that way.
Speaker 5: Yeah, or Bachelor. I mean, who gets a rose?
Speaker 6: Right?
Speaker 1: I mean, we could put this on a whole host
Speaker 1: of different shows. This does raise a question about how
Speaker 1: much the market's going to be voting to your point,
Speaker 1: you know who they're going to vote off the Island?
Speaker 5: Love Island? Maybe another one. Yesterday when the President was
Speaker 5: once again saying that j Powell is terrible, he then
Speaker 5: looked over to Scott Best and said, I like you better.
Speaker 5: And that made me think, oh, maybe Besson is back
Speaker 5: in this race, and it's not just the Kevins.
Speaker 2: Can you mention Theisconsin Love Islands? I was just going
Speaker 2: to say, this is.
Speaker 1: Like you mentioned this will I mean, I mean it
Speaker 1: just feels, you know, like you know, playing for the
Speaker 1: love and you only get love if you.
Speaker 5: Say what I want, and that's sort of a toxic relationship.
Speaker 5: You watched Love Island.
Speaker 2: Want to know more about the complaint books? Save that
Speaker 2: for another time.
Speaker 1: It's true, it comes out once a week, Okay.
Speaker 2: At Mosen Raymon Jenks that thank you seek joining us
Speaker 2: Matt to discuss the film of Trump tried advisay on
Speaker 2: good to see you, Good to see you. I'm sure
Speaker 2: you've been up whole night. What's the advisor clods.
Speaker 7: My advice to clients is to take the day off,
Speaker 7: see how this plays out, and then come back in
Speaker 7: two days and a week and see what the teriff
Speaker 7: landscape looks like. Because right now this is the endgame
Speaker 7: of a massive, massive negotiation, and there's just as mixed
Speaker 7: substance as there is theater. So if you're making real
Speaker 7: business decisions, you're best just taking a beat and waiting
Speaker 7: it out and see where things land.
Speaker 5: Having worked for Trump, is this the final moment where
Speaker 5: he's trying to extract the most concessions from all these countries?
Speaker 7: I think that there is a lot of that in
Speaker 7: this And what's so challenging about watching Trump from the
Speaker 7: outside and what makes him such an interesting negotiator is
Speaker 7: that there's just as much mix of substance as tactics,
Speaker 7: and so trying to understand the forest or the trees
Speaker 7: can be very difficult. But I do think this is
Speaker 7: the end game, and I think he's trying to say, Okay,
Speaker 7: country X, country Y, You've given me this deal, but
Speaker 7: are you really going to give me more? And that's
Speaker 7: what he's trying to get. Who was the White House
Speaker 7: most focused on right now? In terms of the foreign
Speaker 7: trading partners. So they've talked about these eighteen countries. We've
Speaker 7: heard anywhere from eighteen to thirty important trading partners. I
Speaker 7: think those are the ones that the administration's really focused
Speaker 7: on trying to land a deal with.
Speaker 1: You think this is the end game, so that we're
Speaker 1: going to get some clarity on August first? Is that
Speaker 1: what you're telling clients that essentially this isn't just a deadline,
Speaker 1: it's going to be moved to September fourth, and then
Speaker 1: the October first, and then on and on.
Speaker 7: Well both right, So at the same time as we
Speaker 7: do have this August first deadline in the President doubled
Speaker 7: down yesterday on true Social and said no, this is
Speaker 7: a firm deadline. They have also said that if you
Speaker 7: don't like your terif rates six months a year, two
Speaker 7: years from now, you can come back and try to
Speaker 7: lower that through negotiations. So I think we'll certainly see
Speaker 7: more certainty, and I'm actual actually hopeful that we do
Speaker 7: well in advance of August first, because has Customs needs
Speaker 7: time to adjust the HTS give importers notice of what
Speaker 7: those tarif rates are, and that process alone can take
Speaker 7: a couple of weeks.
Speaker 1: I just wonder how much some of this leverage is
Speaker 1: getting lost in the increasingly extreme rates, the increasingly extreme tactics.
Speaker 1: Does that actually end up bearing less fruit after using
Speaker 1: it many times? And that's sort of the question that
Speaker 1: you see in markets is a lot of people shrug
Speaker 1: this off, and frankly, some of the rhetoric that we're
Speaker 1: hearing from the trading partners saying the same thing.
Speaker 7: Well, I think I'm hearing different things from trading partners anywhere,
Speaker 7: from sheer panic to blase in terms of some of
Speaker 7: these tariff rates that have been announced. But what I
Speaker 7: would say is this is very typical of President Trump's
Speaker 7: approach to negotiations.
Speaker 5: And I do think that tariffs will go up.
Speaker 7: The question for me is by how much and with
Speaker 7: respect to what trading partner? And so you know, whether
Speaker 7: this is the boy who cried wolf? I don't think
Speaker 7: so at all. I do think that the terif rates
Speaker 7: are going to go up, But are they going to
Speaker 7: go up to thirty six percent on Indonesia? Are they
Speaker 7: going to go up to forty percent on me? Are
Speaker 7: maybe not? Let's see where things land.
Speaker 5: What I'm hearing from you is that his tactics are
Speaker 5: actually working on the other side of the negotiating table.
Speaker 5: Would you say that's correct.
Speaker 7: Yeah, Having talked to a number of trading partners, there
Speaker 7: is a bit of let's pick up the phone, find
Speaker 7: out what's going on, and see how we can de
Speaker 7: escalate this happening.
Speaker 5: Now when he comes out and announce something, maybe for India,
Speaker 5: because he said he basically signaled that yesterday I had
Speaker 5: heard that this was imminent. Is it going to be
Speaker 5: a framework like he announced with the United Kingdom or
Speaker 5: we get more substance in details to it.
Speaker 7: So India is a bit different than some of the
Speaker 7: other negotiations that are happening. This is more like a
Speaker 7: broader trade agreement. So I expect the deal with India
Speaker 7: to be about a subset of issues versus these reciprocal deals.
Speaker 7: I do think will look more like frameworks with the
Speaker 7: substance of those provisions and the details to be negotiated
Speaker 7: moving forward.
Speaker 2: Just one point one dimension of this I think we
Speaker 2: will find really interesting is transhipping. How much progress have
Speaker 2: they actually made so far to stop the flow of
Speaker 2: trade going from China through other countries and inst the
Speaker 2: United States?
Speaker 7: Well, this is an active debate and wash right now,
Speaker 7: what does that word transshipment mean? Does that really mean
Speaker 7: ships that are going from China to a third country
Speaker 7: like Vietnam and then to the United States or is
Speaker 7: it a reference to this concept of a rule of origin,
Speaker 7: meaning if you've got Chinese content in that supply chain,
Speaker 7: you're going to be paying that forty percent that higher tariff.
Speaker 7: And if that's the case, Vietnam's between a rock and
Speaker 7: a hard place, as are many of these countries because
Speaker 7: China does not like that idea or that provision. So
Speaker 7: we'll have to see what the administration means by that
Speaker 7: when we see the actual text.
Speaker 2: Outside of Vietnam, what are the countries you're tracking on
Speaker 2: that issue?
Speaker 7: So the President has had the transhipment issue in every
Speaker 7: single letter that he sent out, so Japan and Korea
Speaker 7: have it. I think this means a lot for Southeast
Speaker 7: Asia because so many companies move supply chains after the
Speaker 7: original three oh one tariffs and Trump one point zero,
Speaker 7: so this could really hit them.
Speaker 2: Kelly, I appreciate it's going to see you in person
Speaker 2: so here in New York. Thank you. The former senior
Speaker 2: Trump Trade dediser, Kenny I'm Shaw that's citizen five PERCENTDA
Speaker 2: with this to say, investors might be done with tariffs,
Speaker 2: but we doubt Trump's tariff agenda is done with investors.
Speaker 2: Nancy joins us now for more. Nancy, good Mornic, good morning.
Speaker 2: What is guiding you at the moment? What convinces you
Speaker 2: of that?
Speaker 8: Well, to be sure, this administration wants higher tariffs. They've
Speaker 8: already put in higher tariffs, and they're going to and
Speaker 8: they're going to stick. We've accepted the fact that tarriffs
Speaker 8: are here, are here to stay. Why we do need
Speaker 8: a freer trade backdrop, and too, I think misguided this
Speaker 8: administration thinks this is positive for the United States. I'm
Speaker 8: a free market economist. Terriffs are a bad idea. Nonetheless,
Speaker 8: I have to accept that they are indeed in the
Speaker 8: indeed here, and they're going to be a negative impact
Speaker 8: on the economy. It's a regressive tax on consumers. Lower
Speaker 8: end consumers are going to get hit more because of
Speaker 8: these higher because of these higher prices, and saying for
Speaker 8: small medium sized businesses. Larger businesses might be able to
Speaker 8: plow through this, but the smaller medium sized part of
Speaker 8: the econom.
Speaker 5: We are going to get squeezed. From these higher prices.
Speaker 1: When you take the politics out of it, is this
Speaker 1: more inflationary or more of a slowing growth type of
Speaker 1: ramification from the teriffs?
Speaker 8: Well, in near term, it's a tax, it's a hit.
Speaker 8: It's a hit on the economy. Whether or not it
Speaker 8: turns into sustained inflation depends upon what both monetary and
Speaker 8: fiscal policy do. I would worry about the FED stepping
Speaker 8: in and easing cutting rates to aggressively here, because that
Speaker 8: would just increase the odds that these price levels indeed stick.
Speaker 8: When you've seen tariffs before, when we had some back
Speaker 8: in twenty eighteen, it was a price shot. You saw
Speaker 8: it in furniture, household appliances. You initially had that increase
Speaker 8: in price, but then you had to decline in demand,
Speaker 8: and that eventually led to a lower lower prices actually
Speaker 8: for household appliances and furniture. So it depends how sustainable
Speaker 8: these are on what the Fed, on what the Fed does.
Speaker 1: I want to just hone in on something that you said,
Speaker 1: if the FED cuts, you think that that would lead
Speaker 1: to more protracted price increases and more sort of entrenched
Speaker 1: in inflation. What gives you the confidence to say that
Speaker 1: at a time where we're seeing on the margins some
Speaker 1: slowing and consumer spending and certainly deterioration and consumer confidence.
Speaker 8: Well as we saw and this is no nowhere near
Speaker 8: as extreme as we saw during the COVID crisis. You
Speaker 8: can have a temporary shift down in demand, but inflation
Speaker 8: is a function of what the Federal Reserve does, monetary
Speaker 8: and fiscal policy does.
Speaker 5: So even though you have that shift.
Speaker 8: Down in demand in twenty and twenty twenty, because both
Speaker 8: monetary fiscal policy so aggressively, you then had price levels
Speaker 8: stayed elevated with that supply chain disruption, and then you
Speaker 8: have the inflation in twenty one into twenty two. So
Speaker 8: near term, yes, we are having to shift down, shift
Speaker 8: down in demand, which could lead to lower prices, say
Speaker 8: later this year, next year. But if the Fed were
Speaker 8: to cut rates too aggressively, then I would again be
Speaker 8: worried about inflation in twenty twenty six. And I thought
Speaker 8: your point on the bond market here is going to
Speaker 8: be really important. The Fed cut rates last year one
Speaker 8: hundred basis points. Everyone seems to forget about that. I
Speaker 8: got raised one hundred basis points in the fourth in
Speaker 8: the in the fall of last year, what did bond
Speaker 8: deals do?
Speaker 5: They rose one hundred basis points.
Speaker 8: So the FED control is a short end of the curve,
Speaker 8: and I think some of the administration understands that, but
Speaker 8: they have to be careful of the long end.
Speaker 1: Well.
Speaker 5: The FED have enough information to cut by September, given
Speaker 5: the fact, especially that the tariff deadline has been pushed
Speaker 5: out August. First.
Speaker 8: I worry about that because we saw the employment report
Speaker 8: on the surface looked healthy. Underneath the hood, it was
Speaker 8: actually a week employment report, but on the.
Speaker 5: Surface it looked healthy.
Speaker 8: I would have thought it would have been easier for
Speaker 8: the FED actually to have cut rates here in July,
Speaker 8: where you really still have tame inflation and signs of
Speaker 8: an economic slowdown. I worry by September you could have
Speaker 8: maybe clearer signs of a week a weaker economy, but
Speaker 8: stickier inflation. I am hearing from from retailers that they're
Speaker 8: done with inventories pre co the pre tiff increase in inventories.
Speaker 5: They're they're they're fading now.
Speaker 8: They are going to be selling these higher price products
Speaker 8: in the third in the third quarter related to the
Speaker 8: tariff increases.
Speaker 5: So I worry about September. But a cycle or one
Speaker 5: price adjustment.
Speaker 8: Again, for right now, it's a one price shift up
Speaker 8: in price as we saw in twenty eighteen, But we
Speaker 8: don't have the conclusion.
Speaker 5: It depends upon how aggressive the Fed is.
Speaker 2: When you say your word about September, are you worried
Speaker 2: about the price side of things or you worried about
Speaker 2: what could happen to the labor market if they have
Speaker 2: to absorb some of this on margin.
Speaker 8: Well, I think you're going to increasingly hear stagflation as
Speaker 8: you go through the third quarter, because already you're seeing
Speaker 8: consumer spending stalling out. Already again under the hood, the
Speaker 8: labor market is deteriorating on Apluyment claims are probably the
Speaker 8: easiest number to show that, clean the number to show that.
Speaker 8: So I worry that as you go through the third quarter,
Speaker 8: the Fed.
Speaker 5: Is going to have to really balance it.
Speaker 8: On one hand, you will have a weaker economy GDP
Speaker 8: growth we have less than one percent in the third
Speaker 8: third quarter, probably a higher unemployment rate, But then the
Speaker 8: inflation data could be also more more sticky, and you're
Speaker 8: seeing it in the shelter was a good it was
Speaker 8: a headwind to inflation in the second quarter. Is that
Speaker 8: going to continue into the third quarter as these tariffs
Speaker 8: make their way through into the data.
Speaker 2: And that says, you know, there's a range of views
Speaker 2: that a federal reserve, the CEPHECA is incredibly divided. One view,
Speaker 2: I think is quite important at the moment. It's Governor
Speaker 2: Wallace view, and Governor Waller is making, I think incredible
Speaker 2: argument to say you should look through the inflation re
Speaker 2: effects potentially of tariffs maybe think about reducing interest rates.
Speaker 2: Do you find that particularly compelling?
Speaker 5: I don't one.
Speaker 8: I think if you look through the tariffs in aggregate,
Speaker 8: the economy actually is on a healthier footing. This is
Speaker 8: a soft patch volatility created from the uncertainty and the
Speaker 8: tariff and the price and the price increases. As I've
Speaker 8: said before, and I focus a lot on capital spending,
Speaker 8: you have incremental physical stimulus for twenty twenty six, importantly
Speaker 8: for capital spending, which has boosted potential GDP growth already.
Speaker 8: You don't need a lower interest rate environment. As some
Speaker 8: of your you've reported this morning, there's a lot of
Speaker 8: liquidity in the market, says why does this m and
Speaker 8: A cycle is picking is picking up, and I would
Speaker 8: I would be leary and cutting rates to aggressively. One
Speaker 8: of the economy is healthy with stronger potential GDP growth.
Speaker 8: We have basically a four percent on a plumber rate
Speaker 8: cyclicle is going to go up a little bit. But
Speaker 8: we don't need lower interest rates. This is not two
Speaker 8: thousand and eight nine. It's not a COVID crisis. I
Speaker 8: think rates should stay.
Speaker 5: Where they are.
Speaker 1: So, John, I was thinking as Nancy was talking, if
Speaker 1: you wanted to explains tagflation, there is one economist, Donald Trump,
Speaker 1: who really put it perfectly when he said just a
Speaker 1: few months ago, you know, maybe you need just two dollars.
Speaker 1: It costs a little bit more rather than thirty. And
Speaker 1: maybe that's what we're seeing trickle.
Speaker 2: Out to the economy, is that the young companies Mike
Speaker 2: can know.
Speaker 5: I don't know if he really wants to go back
Speaker 5: quite the same thing.
Speaker 4: Maybe not.
Speaker 1: I do wonder though about where the inflation comes from.
Speaker 1: If you do see consumers not as strong of a position.
Speaker 1: You pointed to the labor market and the weakening that
Speaker 1: we're seeing in certain certainly the private payrolls report, Where
Speaker 1: is it going to come from in terms of fueling
Speaker 1: the ongoing ability to absorb the price increases?
Speaker 8: So it will have to come from stronger corporate profits.
Speaker 8: I mean, because if you have a stronger corporate profit backdrop,
Speaker 8: then you'll get a stronger labor market. You'll get bigger
Speaker 8: wage increases, and so near term profits are under pressure.
Speaker 8: Two Q earnings are probably going to decline, not your year,
Speaker 8: but sequentially, which is why you have this weaker labor market.
Speaker 8: So you need this soft patch to end, which we
Speaker 8: think can end on its own without lower rates in
Speaker 8: twenty twenty six because of this incremental physical and importantly
Speaker 8: because of the capital spending cycle, and so the investment
Speaker 8: cycle fuels productivity, productivity fuels profitability, and that then that
Speaker 8: is how you get a stronger job a job, a
Speaker 8: job market.
Speaker 2: Na, Si, we'll have You're right, It's good to see
Speaker 2: you nice, Thanks for your time, Thanks for dropping by,
Speaker 2: Thanks for your time, Nanci Azad of Pipersanba.
Speaker 4: This is the.
Speaker 2: Bloomberg Sevenans podcast, bringing you the invest in markets, economics,
Speaker 2: and geopolitics. You can watch the show live on Bloomberg
Speaker 2: TV weekday mornings from six am to nine am Eastern.
Speaker 2: Subscribe to the podcast on Apple, Spotify or anywhere else
Speaker 2: you listen, and as always on the Bloomberg Terminal and
Speaker 2: the Bloomberg Business app.