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 am Marie Hordern. Join us each
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Speaker 2: is the man behind the negotiations, the forty first United
Speaker 2: States Secretary of Commace, Howard Lannik missed the Secretary before
Speaker 2: we get go in a warm congratulations for the team
Speaker 2: here at Bloomberg Surveillance on your confirmation.
Speaker 3: Oh thanks so much.
Speaker 4: It wasn't last night's speech amazing. I really I could
Speaker 4: have been more proud of President Trump.
Speaker 2: We'll get into the niceties on that in just a moment.
Speaker 2: Let's kick it off, sir, with a question about your
Speaker 2: comments yesterday when you suggested that maybe they could be
Speaker 2: a compromise on trade between the United States and Mexico
Speaker 2: and Canada and maybe we'ld hear more about that today.
Speaker 2: Has the President confirmed that is that still the plan?
Speaker 4: Well, I think what happened is you have the trade
Speaker 4: ministers and all the people from Canada really working hard
Speaker 4: with our homeland security people.
Speaker 3: Remember, this is not a trade war. This is a
Speaker 3: drug war.
Speaker 4: We've got fentanyls still pouring into the country and it's
Speaker 4: got to stop.
Speaker 3: So what's happened is they're showing us even more.
Speaker 4: Ways to try to stop the floor of fentanyl and
Speaker 4: if they can stop the floor of fenyl.
Speaker 3: The President is open minded. There are going to be tariffs, let's.
Speaker 4: Be clear, But what he is thinking about is which
Speaker 4: sections of the market that can maybe he'll consider giving
Speaker 4: them relief until we get to of course, April second,
Speaker 4: but I don't want anybody to forget.
Speaker 3: April second is the day that we announced our.
Speaker 4: Reciprocal tarraffs around the world, and so April second is coming.
Speaker 3: But this is about fetnel this month.
Speaker 2: Got that. Just want additional clarity, just to be very
Speaker 2: clear on this. Yesterday when you said I think the
Speaker 2: President's going to figure out you do more and I
Speaker 2: meet you in the middle we're probably going to announce
Speaker 2: that tomorrow as in today. Can we no longer respect
Speaker 2: that announcement?
Speaker 3: No, no, no, no, I didn't say that. I said the
Speaker 3: President is.
Speaker 4: Listening, uh to the offers from Mexico and Canada. He's
Speaker 4: thinking about trying to do something in the middle. He's
Speaker 4: thinking about it. We're talking about it. We're going to
Speaker 4: what I leave here, I'm going to go talk about
Speaker 4: it with him, and I think early this afternoon or
Speaker 4: this afternoon we expect to make an announcement. And my
Speaker 4: my thinking is it's going to be somewhere in the middle,
Speaker 4: so not one hundred percent of all products and not none,
Speaker 4: somewhere in the middle, because I think Mexico and Canada
Speaker 4: are trying the best and let's see where we end up.
Speaker 4: So I do think somewhere in the middle is a
Speaker 4: likely outcome.
Speaker 2: When you say somewhere in the middle, do you mean
Speaker 2: somewhere in the middle on tariffs, as in somewhere between
Speaker 2: zero and twenty five or do you mean that certain groups,
Speaker 2: certain industries will just get a carve out, And would
Speaker 2: that carve out be say the autos, Because the President
Speaker 2: mentioned last night he'd spoken to the auto's CEOs, the
Speaker 2: carve outs we should be thinking about.
Speaker 4: Here, Yeah, I think I think it's by product and
Speaker 4: by regent. Remember the us MCA, right, the United States,
Speaker 4: Mexico and Canada agreement set up some policies that said
Speaker 4: you've got to have a certain amount of US content
Speaker 4: in your products to be USMCA compliant.
Speaker 3: So I think he's thinking.
Speaker 4: About those categories, the us MCA compliant and does not
Speaker 4: make sense to you, Right, if you complied with the agreement, then.
Speaker 3: Maybe you avoid tariffs. And if you.
Speaker 4: Didn't comply with the agreement, well you did sue at
Speaker 4: your own risk. You knew you weren't complying, and therefore
Speaker 4: it seems likely that's a place where the president will go.
Speaker 3: Again, the president gets to make the decision.
Speaker 4: I'm there talking with him about it, and so is
Speaker 4: the team. But our expectation is that it'll be categories.
Speaker 4: It will be twenty five percent, but it'll be there
Speaker 4: will be some categories left out. It could well be autos,
Speaker 4: could be others as well. USMCA go look at that.
Speaker 3: That was the agreement we made with.
Speaker 4: US Mexico and Canada saying those products are exempt. Everyone
Speaker 4: who didn't live under those terms and did so at
Speaker 4: their own risk and knew they were doing it at
Speaker 4: their own risk always.
Speaker 1: Secretary Latna, good morning.
Speaker 5: Would you say right now that you think that US
Speaker 5: autos like GM and Ford are compliant under USMCA.
Speaker 4: That is my understanding is the Big Three say they
Speaker 4: produce cars that are compliant under USMCA, which means they
Speaker 4: have sufficient US content in them to be part of
Speaker 4: the USMCA agreement. So I think that's part of our
Speaker 4: discussion and the President's really thinking about that.
Speaker 5: So it's fair to assume, then, especially given the constituencies
Speaker 5: of autoworkers that the President was able to pick up
Speaker 5: in this past election, that it is the auto industry
Speaker 5: that can potentially get that exemption later this afternoon.
Speaker 4: It's not really the decemption, remember, it's it's we're trying
Speaker 4: to end fentanyl coming into the country. So we're trying
Speaker 4: to send a message that fetanyl has got to end
Speaker 4: coming in from Mexico and Canada.
Speaker 3: It just has to end.
Speaker 4: And they've done a reasonable job on the border, and
Speaker 4: they're going to do a better job on the border.
Speaker 4: But this is memory, it's a key about fentanyl for
Speaker 4: this month April tewcond We could talk about the rest,
Speaker 4: but this month it's about fentanyl, and the President's trying
Speaker 4: to give Mexico and Canada some statement, some move forward
Speaker 4: because they are doing they are trying their hardest, and
Speaker 4: we believe they're trying their hardest. But the fact is
Speaker 4: that we're going to put something on because depths in
Speaker 4: America have not decreased in a way that is sufficient.
Speaker 3: Depths of ferialisms were in America.
Speaker 5: Many families will sympathize with this, remarks me myself, I
Speaker 5: know families who have been at the end of the
Speaker 5: suffering when it comes to fentanyl. But yesterday though, the
Speaker 5: President questioned the fairness of Canadian banks, So what is
Speaker 5: it about. Is it about Canada's banking system or is
Speaker 5: it really about fentanyl?
Speaker 4: So this month, right now is about fentanyl. When we
Speaker 4: talk about April second, we will talk about the bigger
Speaker 4: trade picture between our trading partners Canada and our trading
Speaker 4: partners of Mexico. So April second, I'll be happy to
Speaker 4: come on and talk to you about our thinking and
Speaker 4: our thoughts about a broad trading model. But right now
Speaker 4: it's about fentanyl. This is a drug related issue. Drugs
Speaker 4: coming into the United States of America have got to stop.
Speaker 3: The border. It's got to remain closed.
Speaker 4: That's the key of how you treat your great trading partner.
Speaker 4: You treat your great trading partner with respect, and you
Speaker 4: stop letting sentinel.
Speaker 3: Into the country.
Speaker 4: So my view is the President is thinking about it,
Speaker 4: he's thinking about autos, he's thinking about USMCA. He's going
Speaker 4: to come up with a plan. This afternoon. We're going
Speaker 4: to announce that plan. I think it's going to be
Speaker 4: in the middle somewhere. There's going to be twenty five
Speaker 4: percent tariffs. It's not the middle as in a number.
Speaker 3: I think it's in middle in terms of USMCA, not USMCA.
Speaker 4: But the President will decide that this afternoon and then
Speaker 4: we'll go on from there. But think about that, if
Speaker 4: you were compliant with USMCA, you did what President Trump
Speaker 4: asked in his last term.
Speaker 3: And if you weren't compliant, you did that at your
Speaker 3: own risk.
Speaker 6: Secretary Latnik, I just want to make sure that I
Speaker 6: understand this correctly. You're talking about the idea that this
Speaker 6: all has to do with the drug wars, and at
Speaker 6: the same time, some people have speculated that this could
Speaker 6: lead to a renegotiation of USMCA that.
Speaker 1: Would lead all around to even lower tariffs than before.
Speaker 1: Are you saying that's off the table.
Speaker 6: The tariffs are still part of this at the twenty
Speaker 6: five five percent level.
Speaker 4: Well, remember April second, we begin our reciprocity model, which
Speaker 4: is how you treat us as how we treat you,
Speaker 4: and that is going to be part of his exemption,
Speaker 4: part of his tier policy. And then he's got industries, autos, semiconductors, pharmaceuticals,
Speaker 4: steel and aluminum.
Speaker 3: And copper lumber. These issues need to come home.
Speaker 4: We need to help our domestic industries grow and flourish,
Speaker 4: and so we called out those product sets for extra focus.
Speaker 3: But that's April second.
Speaker 4: So on April second, our reciprocal trade policy will come out.
Speaker 4: In twenty twenty six, we renegotiate USMCA with Canada and Mexico,
Speaker 4: and we're going to have really clear analysis and clear
Speaker 4: focus on how that changes.
Speaker 3: But right today, let's be clear, today is about Fentanel.
Speaker 1: We heard from last night the President.
Speaker 6: He said that he was fine with a little disturbance,
Speaker 6: but going forward, there will be all of these gains realized.
Speaker 1: Secretary Lutnik.
Speaker 6: Are you concerned about the level of uncertainty express not
Speaker 6: just in markets, but just even from people who you
Speaker 6: used to work with, where they're saying, we don't have
Speaker 6: a clear sense of what the goal is. And I
Speaker 6: understand you're saying it'll come on April second, But in
Speaker 6: the meantime people are just putting all plans on hold.
Speaker 4: Well, I'm not seeing all plants at all. In fact,
Speaker 4: I'm seeing the opposite.
Speaker 7: Right.
Speaker 4: We saw Apple commit to five hundred billion dollars. We
Speaker 4: saw open Ai an Oracle commit to five hundred billion
Speaker 4: dollars of investments.
Speaker 3: TSMC just the.
Speaker 4: Other day saying one hundred billion dollar investment in America.
Speaker 4: Saw Bank two hundred billion dollar investment in America. So
Speaker 4: a trillion, three hundred billion dollars. And you think people
Speaker 4: are waiting on the sidelines. We feel it every day.
Speaker 4: All these companies are coming, they're building in America, they're
Speaker 4: committing to America.
Speaker 3: We agree a April second is coming.
Speaker 4: We have to do our work before we announce our
Speaker 4: plans on April second. Of course, we have to do
Speaker 4: our work and do it properly and do it thoughtfully.
Speaker 4: But in this period of time, America needs a president
Speaker 4: to protect people from fentanyl that shouldn't be killing people
Speaker 4: in our country. China still has fentanyl as a highest
Speaker 4: list of subsidies.
Speaker 3: Subsidies.
Speaker 4: They subsidize the production of precursors, the ingredients to fentanyl.
Speaker 4: They send it to Mexico and Canada and into the
Speaker 4: country it comes. So our president has said enough already,
Speaker 4: enough already, and that's why he's come up with this
Speaker 4: tariff plan today. April second will be a fairness plan.
Speaker 4: And fairness plan is not that hard to figure out.
Speaker 3: If you have a vet look it.
Speaker 5: Can I jump in there on the on the fairness plan?
Speaker 5: Is that an initial, partial assessment and response or will
Speaker 5: tariffs actually hit on April second?
Speaker 4: Well, there are a whole variety of laws in the
Speaker 4: United States of America that we will follow with precision.
Speaker 4: Some tariffs will come on right away, and then some
Speaker 4: tariffs will go be registered and they will take three
Speaker 4: weeks or four weeks, and they will come on in
Speaker 4: due course.
Speaker 3: So there's a process for tariffs in America.
Speaker 4: But we will announce them and we will be negotiating
Speaker 4: with all these countries thereafter, and then they go into
Speaker 4: effect over a period of months, so basically.
Speaker 3: April six, as you know, we will announce them and
Speaker 3: then they come.
Speaker 5: In because there's months of studies, massive report, public opinion.
Speaker 1: This can take a very long time.
Speaker 5: So legally there's no law that's short enough really to
Speaker 5: put tariffs in place.
Speaker 1: On the second.
Speaker 5: So how long between April second till the tariffs actually
Speaker 5: hit do you think we'll see?
Speaker 4: As I said there, we launched our studies on January twentieth,
Speaker 4: so April second of.
Speaker 3: Studies are done.
Speaker 4: Some tariffs can come straight away, some can come weeks later,
Speaker 4: some can come some can take over a month or
Speaker 4: two to come online.
Speaker 3: But it will be very, very.
Speaker 4: Thoughtful, very organized, and we begin on April second. We've
Speaker 4: announced it from January twentieth, that April second was the day.
Speaker 3: We're sticking with our day.
Speaker 4: We're sticking with reciprocity at this time for America to
Speaker 4: be treated fairly.
Speaker 3: And that's what the President Trump is going to do.
Speaker 3: He's going to.
Speaker 4: Make sure we are treated fairly. He's talked about it
Speaker 4: last night. He's made this clear. So Mexico and Canada
Speaker 4: is about fentanyl today for the month of March, but
Speaker 4: on April second, it's about fairness. And yes, that is
Speaker 4: a process that comes in that is strictly specific to
Speaker 4: the laws, but it'll take over a month or two
Speaker 4: months to come in. But once it's in, they will
Speaker 4: stick which is treat us fairly, treat us properly, or
Speaker 4: don't trade with us.
Speaker 2: Missus Secretary, I was a man of my word. I
Speaker 2: am a man of my word, and I promise would
Speaker 2: come back the address last night, So let's finish there.
Speaker 2: The President of the United States talked about a big,
Speaker 2: beautiful job in interest rates. A lot of people in
Speaker 2: this market are curious whether the President is no longer
Speaker 2: sensitive to the deadly gyrations of the equity market, that
Speaker 2: the focus, the emphasis now is on the bond market.
Speaker 2: Is that the shift is that the way to understand things.
Speaker 1: All.
Speaker 4: I think that is too specific. I mean, let's face it,
Speaker 4: if we balance the budget of the United States of America,
Speaker 4: interest rates are going to come smashing down. And I
Speaker 4: don't mean ten basis points, I mean one hundred and
Speaker 4: fifty basis points. You're going to have an explosion in
Speaker 4: the housing market.
Speaker 3: You're going to have an explosion in the equity markets.
Speaker 4: Because this is not a manufactured cut in the interest
Speaker 4: rates like you saw last time with this huge money
Speaker 4: supply which created the vast inflation.
Speaker 3: This is the right way to do it.
Speaker 4: You stop printing money, you stop running deficits, you balance
Speaker 4: the budget of the United States of America. You smash
Speaker 4: interest rates down, produce enormous amounts of energy, drive those
Speaker 4: prices down, and you will see the greatest equity market
Speaker 4: and the greatest.
Speaker 3: Economy in the United States of America.
Speaker 4: Now, remember this president is worried about the United States
Speaker 4: of America. Sometimes I get asked questions about am I
Speaker 4: worried about Canadam I worried about Mexican And am I
Speaker 4: worried about Peu? My president is worried about the United
Speaker 4: States of America. And you are going to see the
Speaker 4: greatest equity market and bond markets under President Trump.
Speaker 2: Well, let's want to be apparently American data right now,
Speaker 2: because equities have rolled over just a little bit, you
Speaker 2: know the market. Well, I won't make a big deal
Speaker 2: of it. We're just a bit software at the back
Speaker 2: of this data from ADP, which is a downside surprise
Speaker 2: at seventy seven K the estimate was one forty so
Speaker 2: with sub one hundred we'll see what we get on
Speaker 2: the m later on this morning and on payrolls on Friday.
Speaker 2: But as you know, mister Secretary, the data over the
Speaker 2: last few weeks hasn't been great. The survey data has
Speaker 2: been softer, and a lot of these companies in these
Speaker 2: surveys have pointed to tariff uncertainty. Do Youmick scept that
Speaker 2: the business community needs some clarity or whether it's twenty five, fifteen, ten, whatever,
Speaker 2: the number is going to be, that the volatility around
Speaker 2: the trade story, the cumulative effect of persistent uncertainty is
Speaker 2: trying to wink into this economy a little bit.
Speaker 3: No way.
Speaker 4: I mean, the President spoke about him last night. He
Speaker 4: said Biden left him a pile of poop. Okay, he
Speaker 4: left him a louse of the economy that he's trying
Speaker 4: to fix.
Speaker 3: You're looking at data that's Biden data.
Speaker 4: Do not try to besmirch my President Trump with Biden's nonsense.
Speaker 2: Do you think the manufacturing number is Biden date? So
Speaker 2: I just want to be very clear, that's your opinion.
Speaker 2: You're entitled to it. You think that's his dates.
Speaker 3: My opinion, Okay, what possible could change? Seriously, we are
Speaker 3: in early March. My president took over January twentieth.
Speaker 4: You think economic data coming out in early March is
Speaker 4: Donald Trump related data monthly surveys.
Speaker 2: I'm to be kidd mister Secretary, are you suggesting about it?
Speaker 2: You suggesting so when Bonyard's drop in a market that's
Speaker 2: worth trillions of dollars and investors place bets off the
Speaker 2: back of that economic data, that that data doesn't count
Speaker 2: front of thing, that that data somehow misleading.
Speaker 3: I think that.
Speaker 4: Data is leading you to understand if Joe Biden was
Speaker 4: still in charge, you'd be in trouble.
Speaker 3: But you have a new president. There's a new sheriff
Speaker 3: in town.
Speaker 4: And I would bet, I would bet on the economic
Speaker 4: growth that is coming from Donald Trump.
Speaker 3: You see the investments. You see it already.
Speaker 4: There's trillions of dollars of manufacturing moving to America.
Speaker 3: It's moving to America. That means the cavalry is coming.
Speaker 3: For every trillion.
Speaker 4: Dollars that invests in the United States of America that
Speaker 4: produces one percent of GDP growth, imagine that you have
Speaker 4: a president bringing GDP growth directly to his economy.
Speaker 3: That's amazing.
Speaker 2: It's the Secretary, We appreciate your time and your opinion
Speaker 2: as always. The US Commerce Secretary Howard love Nick there
Speaker 2: on the economic data, financial markets, and what's going to
Speaker 2: happen with trade, joining us now to discuss JP Morgan
Speaker 2: Act managements. But Michael Bob, good morning, good morning. We've
Speaker 2: got a lot to get through. We're getting Europe quickly,
Speaker 2: but I want to start with the United States. Does
Speaker 2: it bring you comfort that the White House seems to
Speaker 2: be more interested in your bond market than the equity market.
Speaker 8: It does to some extent. I think bond investors are
Speaker 8: going to go through a period of discomfort, to borrow
Speaker 8: a phrase from the President, where probably yields have gotten
Speaker 8: a little ahead of themselves. So you know, any kind
Speaker 8: of backup to the mid fours looks like a good
Speaker 8: level for us to get in.
Speaker 2: So you're not a buyer here, not right now, you're
Speaker 2: a buyer of buns here. Can we bring up the curve.
Speaker 2: Let's get back to the German curve two year, ten year,
Speaker 2: thirty year, double digit move we're seeing over in Germany
Speaker 2: off the back of the prospect of a lot more supply.
Speaker 2: The ten Europe by twenty basis points. Where do you
Speaker 2: stand on Europe?
Speaker 8: Now I think you're looking at steeper curves in Europe.
Speaker 8: I think you're going to see a lot of issuance.
Speaker 8: They've thrown fiscal austerity to the side. They've looked at
Speaker 8: what's going on in China and the US and they
Speaker 8: want to join the party and they're going to I
Speaker 8: still see the ECB bringing rates down towards two percent,
Speaker 8: but I think with the amount of supply that's potentially
Speaker 8: coming in Germany, you're going to drift up towards three percent.
Speaker 8: I think that's fantastic for bond investors. Again, discomfort ear term,
Speaker 8: but the ability to have a bond market that has
Speaker 8: yield to it and that's durable fantastic.
Speaker 6: There's a fantastic bond market for investors, and they're fantastic
Speaker 6: bond markets for traders. A fantastic bond market for investors
Speaker 6: is one where there's actual coupon, there's actual yield. A
Speaker 6: fantastic bond for traders. Bond market for traders is when yield.
Speaker 1: Are going down. Is that move over?
Speaker 6: Is it not any longer a fantastic market for traders.
Speaker 8: I think there's potential for a yield to go down
Speaker 8: in the front end of curves. I think central banks,
Speaker 8: whether it's the ECBER, the FED, or looking for that
Speaker 8: opportunity to bring yields down a little bit get closer
Speaker 8: to what they perceive is neutral. But I think the
Speaker 8: long end is going to stay about where it is.
Speaker 8: We're having conversations every day with plan sponsors who want
Speaker 8: to get into this bond market. They're looking at it
Speaker 8: as the anchor in the storm. They like the fact
Speaker 8: they can buy the US aggregate bond market at a
Speaker 8: yield of close to five percent. They're looking to bring
Speaker 8: money out of cash and out of risk assets, whether
Speaker 8: it's privates or equities, and go into the market. Fantastic.
Speaker 1: You said this bond market.
Speaker 6: Are you talking about the United States or develop markets
Speaker 6: more broadly? At a time where we were just talking
Speaker 6: with a number of guests, Peter Share among them saying
Speaker 6: maybe Europe is going to draw capital away from the
Speaker 6: United States, I think it's all bond markets.
Speaker 8: I think when you look at what equities have done,
Speaker 8: they've become lopsided in terms of portfolio allocations. The plans
Speaker 8: that we're talking to are looking to do some rebalancing
Speaker 8: and they're embracing yields where they are I met as
Speaker 8: I said, I met with a plan yesterday. I met
Speaker 8: with them. Five years ago, the aggregate bond market was
Speaker 8: yielding two two and a quarter percent. They didn't invest.
Speaker 8: Now today they've won. Yields have doubled from where they are.
Speaker 8: They're coming in and we're hearing that everywhere from every
Speaker 8: channel around the world.
Speaker 6: You said that you think that yields on the long
Speaker 6: end are probably where they're going to stay, at least
Speaker 6: in the United States. They're not going to go significantly lower.
Speaker 6: Do you see them going significantly higher now?
Speaker 8: I think you're stuck in the force. We're probably a
Speaker 8: buyer in the mid forest because with another round of
Speaker 8: tariffs coming and the blizzard of policies that come out
Speaker 8: of Washington, there's going to be a lot of volatility,
Speaker 8: and there may be a period where people run to
Speaker 8: trades and you get down towards three ninety or four percent.
Speaker 8: But I think we're going to look back on twenty
Speaker 8: twenty five and they're going to have spent almost all
Speaker 8: of their time either side of four and a half percent.
Speaker 2: A period when we run to treasuries. Let's build on that.
Speaker 2: Could we be going to get to a period where
Speaker 2: we run away from dollar denominated assets. Certainly not my view,
Speaker 2: but of you that is out there, people who believe
Speaker 2: that maybe the policy mix of the United States at
Speaker 2: the moment pushes capital away. We've had that a few
Speaker 2: times already this morning. What do you stand on that call?
Speaker 8: It should be your view, John. I think dollar exceptional
Speaker 8: lensum has ended this week. We've done a lot of work.
Speaker 8: We've gone back and we've looked at Trump version one,
Speaker 8: and we see a similar path where the dollar peaks
Speaker 8: early a couple months into the term and then tends
Speaker 8: to come off. We've talked about the dollar being overvalued
Speaker 8: for a year or so now, and I think now
Speaker 8: you're looking at fiscal spend in China, you're looking at
Speaker 8: fiscal spend across Europe, and we're looking looking at we
Speaker 8: didn't talk about Japan. We're looking at close to one
Speaker 8: and a half percent ten year JGB yields. I don't
Speaker 8: even remember when I last saw that.
Speaker 2: When you say a period of dollar exceptionalism is over,
Speaker 2: do you mean for the currency specifically, or do you
Speaker 2: mean the dollar long that we've built up over the
Speaker 2: last decade in dollar denominated assets across fixed income and
Speaker 2: equities alike. Would you go that far?
Speaker 8: I think yes, I would go that far. I think
Speaker 8: everyone has talked about how expensive US markets have gotten
Speaker 8: relative to non US markets, but nobody wanted to step
Speaker 8: in front of the steam roller. And now the steam
Speaker 8: rollers rolling the other way. And I think you're going
Speaker 8: to see this flow out of dollar denominated assets, and
Speaker 8: I think the dollar comes off from where it is.
Speaker 2: I think that process is underway substantially, if you're correct
Speaker 2: at leasta, these are huge changes potentially for financial markets worldwide.
Speaker 6: I just wonder how much it reduces some of the
Speaker 6: flows into US risk markets, and I wonder how much
Speaker 6: that gives more fuel to what we've already seen, particularly
Speaker 6: with some of the most consensus bests, which is the
Speaker 6: technology firms.
Speaker 2: All these things we've been asking for for such a
Speaker 2: long time. China needs to do more deficit spending headline overnight,
Speaker 2: You're going to get it. Germany needs to invest more
Speaker 2: in infrastructure, in defense headlines in the last twenty four hours,
Speaker 2: You're going to get it. Deutsche Banks George Soravellos talked
Speaker 2: about it about twenty minutes ago. Put it perfectly. You
Speaker 2: cannot overstate the changes we're seeing in the global economy.
Speaker 2: I know a lot of people sit here in the
Speaker 2: media every single day and say, big wee, come guilty
Speaker 2: of it, big wee coming up payrolls Friday. Forget payrolls,
Speaker 2: forget the data. These are massive policy shifts.
Speaker 6: This is the time, and this is something Jim Reid
Speaker 6: says every morning that years happen in the period of days.
Speaker 6: And we've seen that again and again, reshifting expectations. There's
Speaker 6: a lot to be determined. But my big question is
Speaker 6: how much how far does this go in rearranging tradelines
Speaker 6: kind of.
Speaker 1: What Donald Trump wanted. So this is the new world.
Speaker 2: Payroll still important. Friday, eight thirty Eastern time, right, don't
Speaker 2: forget payroll. So take that back. But Michael a JP
Speaker 2: Organ Asset Management, Bob some big calls. I appreciate your time, sir.
Speaker 2: Thank you. George Saravellas of Deutsche Bank writing it is
Speaker 2: hard to overestimate the scale of change taking place in
Speaker 2: global economic and geopolitical relations in just a matter of days.
Speaker 2: George joins us now for more. George, welcome to the program.
Speaker 2: Let's start with the call of the euro talk to
Speaker 2: me about the change.
Speaker 7: So there's really two key components, John.
Speaker 9: The first one is.
Speaker 7: Very much this shift coming out of Germany, which I
Speaker 7: would call generational.
Speaker 9: We have been.
Speaker 7: Expecting some sort of shift over the last two weeks.
Speaker 7: As soon as the election was over. It looked like
Speaker 7: the ingredients were building.
Speaker 9: But even we and we've been on the.
Speaker 7: Optimistic end, were very surprised with the magnitude of the
Speaker 7: fiscal shift that was announced. From my perspective, it's the
Speaker 7: biggest shift in fiscal po I've seen in my career,
Speaker 7: both in terms of magnitude and pace, and this has
Speaker 7: huge consequences for both growth, the ECB and even Europe's strategic.
Speaker 9: Autonomy versus the US.
Speaker 7: So that is one component, and I would say that
Speaker 7: policy is increasing shifting to be cyclically relevant even in
Speaker 7: coming quarters, rather than just structurally relevant. And then on
Speaker 7: the flip side, you have a situation in the US
Speaker 7: where tariff policy is taking place in such a haphazard
Speaker 7: way it ends up creating self inflicted damage to the
Speaker 7: US economy. I think that is one reason why FED
Speaker 7: expectations and US heels are coming down and the broader
Speaker 7: fiscal picture remains very murky.
Speaker 9: So we have a situation which is the complete.
Speaker 7: Opposite from what I personally would have expected at the
Speaker 7: start of the year. But when the facts change, we
Speaker 7: change our minds, and that's what's happened over the last
Speaker 7: few weeks.
Speaker 2: So George, let's talk about a couple of things. Let's
Speaker 2: talk about this first on Wall Street. As you know,
Speaker 2: there are certain phrases the scare people. One of them
Speaker 2: is this time is different. George, why is this time
Speaker 2: so different? Why should we really believe this is hamnik?
Speaker 7: I think the first reason is it's now been announced,
Speaker 7: it has cross party support. What I found the most
Speaker 7: interesting in Murcher's statements yesterday is he used.
Speaker 9: The phrase whatever it takes.
Speaker 7: But take note it wasn't used in German, it was
Speaker 7: in English, and it was also posted on x on
Speaker 7: his feed. And this is a very conscious message by
Speaker 7: the Chancellor in waiting of wanting to reflect on what
Speaker 7: Dragie did and sending the same message for Germany. So
Speaker 7: it does have to go through parliamentary approval. We have
Speaker 7: a fairly high degree of confidence that it will, and
Speaker 7: once it does, we are speaking of immense amounts in
Speaker 7: terms of orders of magnitude. So you discussed earlier on
Speaker 7: the show the shift around the big infrastructure fund, the
Speaker 7: potential unlimited defense spending.
Speaker 9: I would also add they're.
Speaker 7: Going to reform the debt break to allow a greater
Speaker 7: degree of fiscal spend at the state level, which provides
Speaker 7: cyclical steamulus as well.
Speaker 9: So if you add all of these.
Speaker 7: Things up, they are going to have a very material
Speaker 7: economic impact on Germany and by extension, I think the
Speaker 7: whole of Europe.
Speaker 6: George, if you had so much conviction, why is your
Speaker 6: euro usd target one ten?
Speaker 1: Why isn't it higher?
Speaker 9: That's a great question. I would say, one step at
Speaker 9: a time.
Speaker 7: Every day we're seeing newsflow that would usually take years
Speaker 7: or even decades to potentially feed through.
Speaker 9: So I would say what we need to.
Speaker 7: Argue for an even weaker dollar is for persistent economic
Speaker 7: weakness in the US. That's going to be a function
Speaker 7: of what happens from the administration overcoming weeks. Do we
Speaker 7: see a reversal in the tariff policy? So I think
Speaker 7: there's still a tremendous degree of uncertainty on the US side,
Speaker 7: and how much the recent weekends continues. It is a
Speaker 7: function of fiscal in the US and tariff and then
Speaker 7: there is some execution.
Speaker 9: Risk as we discussed around Europe.
Speaker 7: But it is the first step one ten, and we're
Speaker 7: very open minded in terms of how we think about
Speaker 7: the outlook.
Speaker 2: I think they've got to be up and minded about
Speaker 2: everything right now, George, including the United States. So let's
Speaker 2: finish on the US. You mentioned the US side of things,
Speaker 2: a question we've gone back to repeatedly on this program
Speaker 2: ever since the election. Do you see a policy mix
Speaker 2: that attracts capital to the United States or a policy
Speaker 2: makes that pushes it away. I asked that question earlier
Speaker 2: this morning. George. What's your call on that now and
Speaker 2: has it changed?
Speaker 3: Well?
Speaker 7: I think it's becoming a bit more ambivalent over the
Speaker 7: last couple of months, And I would say there's two
Speaker 7: drivers around that.
Speaker 9: One just relates to the policy mix itself.
Speaker 7: That is, it's less about the specifics and it's almost
Speaker 7: about the lack of specifics and the uncertainty around the
Speaker 7: reaction function. Now, if you're putting twenty twenty five percent
Speaker 7: tariffs on half of your imports and you don't know
Speaker 7: are they going to be there the next day, are
Speaker 7: they going to be removed? That is naturally going to
Speaker 7: be creating economic uncertainty and I think we're seeing that
Speaker 7: materialize and that is why US risk markets are underperforming.
Speaker 9: So that's one aspect.
Speaker 7: The second one is broader, and you could even call
Speaker 7: it a positive but to the extent that President Trump
Speaker 7: is encouraging other countries to build strategic autonomy and is
Speaker 7: encouraging other countries to spend all of a sudden, you
Speaker 7: have an investment thesis potentially for Europe.
Speaker 9: Now that's the more positive angle. The more negative angle is.
Speaker 7: The policy uncertainty in the US itself, which I think
Speaker 7: deshually needs a bit more clarity.
Speaker 2: Hey, George, appreciate your time. Joe Saravella staf toutsche Bank
Speaker 2: looking for one ten on EU Rotllar. Monica Querra of
Speaker 2: Morgan Stanley writing the market could be undercounting the long
Speaker 2: term impact of tariffs because of policy uncertainty. Monica joined
Speaker 2: US now for more Monica and Mornic, good morning. I'm
Speaker 2: so pleased you went there because I think this is
Speaker 2: so important, whether the tariffs at twenty five, twenty fifteen,
Speaker 2: or ten. I think the business community just wants to
Speaker 2: know and have certainty and starts a plan for the
Speaker 2: next year several years. That uncertainty that volatility of the
Speaker 2: policy itself. How much damage could we see off the
Speaker 2: bank of that.
Speaker 10: The policy itself, I think could you know, have significant
Speaker 10: implications depending on the different industries that it's impacting.
Speaker 1: When we're thinking.
Speaker 10: About the policy uncertainty piece not under essentially undercounting potential impacts.
Speaker 1: It's what happens next, you know. Now with.
Speaker 10: Mexico and Canada, we spoke last week. We thought that
Speaker 10: something like this might happen, right that the tariffs could
Speaker 10: be implemented, they could be renegotiated. You have USMCA potentially
Speaker 10: pulled forward into twenty twenty five. That situation, our relationship
Speaker 10: with our neighbors is incredibly dynamic. It's what happens in April,
Speaker 10: and I think that staying on top of potential tariff
Speaker 10: risk is important.
Speaker 6: There's a question about who President Trump is speaking to,
Speaker 6: because Marcus had just expected heading into this year that
Speaker 6: he would be catering to them on some level, that
Speaker 6: he'd be looking for market approval. Seems like that's not
Speaker 6: the case. With a little bit of disturbance being just fine,
Speaker 6: do we have a sense of where President Trump is
Speaker 6: looking to sort of get that approval?
Speaker 10: So the little bit of disturbance piece I think is
Speaker 10: key because the selloff we saw was you know, just
Speaker 10: in the you know, the range of two five or
Speaker 10: on the day on the second right when the tariffs
Speaker 10: were implemented, you saw you know, the biggest hits right
Speaker 10: to tech and energy given the types of tariffs that
Speaker 10: were being you know, proposed. Now, what's important here is
Speaker 10: that that's not this big market downturn. If you had
Speaker 10: a greater correction on that that was prolonged, that I
Speaker 10: think would get the president's attention. But a day point
Speaker 10: in time, momentary response is expected and something that I think,
Speaker 10: you know, he's saying we can all live with that.
Speaker 1: Markets are rebounding.
Speaker 10: They're looking to the potential of his negotiating tax tactics
Speaker 10: long term.
Speaker 6: You aren't seeing the deals being announced, you actually saw
Speaker 6: them and a volumes fall pretty significantly in February. We've
Speaker 6: talked to a number of executives saying we just don't
Speaker 6: have the certainty and to John's point, that uncertainty drags
Speaker 6: on growth and you're starting to see that some of
Speaker 6: the data in your conversations with people in Washington, DC.
Speaker 6: Is President Trump and his cabinet concerned about that level
Speaker 6: of uncertainty and some of the soft data rolling over now.
Speaker 1: I don't think they're concerned.
Speaker 10: Now what we've seen as far as their strategy and
Speaker 10: Trump one point zero it.
Speaker 1: Was the growth policies for first and then teariff second.
Speaker 1: This is the reverse.
Speaker 10: They're intentionally doing this. They're coming in at a point
Speaker 10: of extreme geopolitical tension and conflicts, so they're looking to
Speaker 10: address that, essentially reinforce the America First agenda, and then
Speaker 10: hoping that off the back of that, the growth policies
Speaker 10: pick up. So when you're thinking about this is where
Speaker 10: budget and.
Speaker 1: Tax come in.
Speaker 10: That if you get the cuts, if you get additional
Speaker 10: cuts to corporates, they're hoping that that's going to create
Speaker 10: tailwinds through twenty twenty six succe that's when they go
Speaker 10: into effect. So twenty twenty five is a restaging, resetting.
Speaker 1: Resizing year. It's going to be choppy.
Speaker 10: This is something we talk to our clients about regularly,
Speaker 10: that this is a bumpy year that.
Speaker 1: You have to see through it.
Speaker 10: And that's what I think the Trump administration is they're
Speaker 10: looking at, too, is what happens in twenty twenty six
Speaker 10: and then legacy going forward.
Speaker 2: At LISTA mentioned this earlier. I think is an important
Speaker 2: point regarding taxes twenty seventeen, we've been talking about text
Speaker 2: cuts twenty twenty five into twenty six, we're talking about
Speaker 2: the extension of tax cuts. How different is that? What
Speaker 2: we get additional cuts beyond just the extension of what
Speaker 2: we did back in seventeen eighteen.
Speaker 1: So they are different.
Speaker 10: If you're looking at it from a budgeting perspective, you
Speaker 10: have to start from where we are now what would
Speaker 10: be the impact long term? So if you extend the
Speaker 10: tax cuts as is, that would add four.
Speaker 1: Trillion just off the bat to the deficit.
Speaker 10: Now, if you get additional cuts, it's likely to be
Speaker 10: you know, to social Security, to you know, no tax
Speaker 10: on tips, those types of giveback to the individual. But
Speaker 10: more importantly, on the corporate side, Trump has said he
Speaker 10: wants corporate income tax top line as low as fifteen percent,
Speaker 10: So that is, you know, significantly stimulative in the long
Speaker 10: run when you're thinking about corporate America.
Speaker 2: Once fifteen with a US production element attached to it. Yes,
Speaker 2: so we really understand what that's going to look like
Speaker 2: and how it works.
Speaker 10: I don't, especially because I think that There is a
Speaker 10: component here that people are missing is that you have
Speaker 10: to pay for those tax cuts somehow.
Speaker 1: Tariffs is one way.
Speaker 10: That they're looking to do that through that external revenue
Speaker 10: service passing through funding right through an accounting adjustment. The
Speaker 10: other thing that people aren't looking at is the potential
Speaker 10: for increased corporate taxes on foreign revenues. So this is
Speaker 10: something they did in twenty seventeen. It's i would say,
Speaker 10: an easy, low hanging fruit if they're looking to raise
Speaker 10: taxes because it speaks to and only trying to reincentivize
Speaker 10: businesses to bring their production, manufacturing, sales home. But it
Speaker 10: also helps offset any top line corporate income tax production.
Speaker 2: And you need the tax paych it to ready fully
Speaker 2: understand the overall effort alongside the trade effort.
Speaker 6: So if for example, some of the auto manufacturers had
Speaker 6: to pay twenty five percent tax on parts from Mexico
Speaker 6: and Canada, it would be offset with a fifteen percent
Speaker 6: tax rate top line tax rate that would come later on.
Speaker 1: It's in theory.
Speaker 2: Yeah, that's how it comes.
Speaker 6: To right, but then sequencing doesn't matter.
Speaker 2: Monitor matters. Yes, we've got to go. I appreciate your
Speaker 2: time as always, Thank you, Monica Quera there of Morgan Stanley.
Speaker 9: This is the.
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