1
00:00:00,640 --> 00:00:03,920
Speaker 1: Hello, Odd Latch listeners, This is Joe Wisenthal. You are

2
00:00:03,960 --> 00:00:07,680
Speaker 1: listening to an emergency episode of the podcast. It was

3
00:00:07,800 --> 00:00:12,680
Speaker 1: recorded at ten a m. Monday morning, February third. The

4
00:00:12,720 --> 00:00:15,760
Speaker 1: reason I am telling you this is because markets and

5
00:00:15,840 --> 00:00:19,080
Speaker 1: news are moving very fast, and so by the time

6
00:00:19,200 --> 00:00:21,560
Speaker 1: you listen to this, parts of it may already be

7
00:00:21,680 --> 00:00:25,000
Speaker 1: out of date. But the context for the discussion was

8
00:00:25,720 --> 00:00:29,520
Speaker 1: over the weekend, Trump announcing twenty five percent tariffs against

9
00:00:29,560 --> 00:00:33,800
Speaker 1: Canada and Mexico, ten percent tariffs on oil, another ten

10
00:00:33,840 --> 00:00:37,839
Speaker 1: percent tariffs on China. Since we recorded this, about a

11
00:00:37,920 --> 00:00:42,000
Speaker 1: minute after we got out of the studio, Mexican President

12
00:00:42,040 --> 00:00:45,839
Speaker 1: Claudia Schinbaum announcing that the tariffs had been delayed on

13
00:00:45,960 --> 00:00:48,879
Speaker 1: Mexico for a month. We're still waiting to hear if

14
00:00:48,920 --> 00:00:53,280
Speaker 1: something similar happens in Canada. Other than that, take a listen.

15
00:00:56,680 --> 00:01:10,640
Speaker 2: Bloomberg Audio Studios, Podcasts News.

16
00:01:12,160 --> 00:01:15,399
Speaker 3: Hello and welcome to another episode of the Odd Lots podcast.

17
00:01:15,520 --> 00:01:17,000
Speaker 3: I'm Tracy Alloway.

18
00:01:16,720 --> 00:01:17,959
Speaker 1: And I'm Jill Wisenthal.

19
00:01:18,240 --> 00:01:21,000
Speaker 3: Joe, how many of these emergency episodes do you think

20
00:01:21,040 --> 00:01:23,480
Speaker 3: we're going to need to do over the next four years?

21
00:01:23,840 --> 00:01:25,000
Speaker 1: Oh my god?

22
00:01:25,280 --> 00:01:25,520
Speaker 2: You know.

23
00:01:26,040 --> 00:01:28,040
Speaker 1: Well, anyway, I don't know, but this is two weeks

24
00:01:28,080 --> 00:01:30,039
Speaker 1: in a row. A week ago. You know, we had

25
00:01:30,040 --> 00:01:33,399
Speaker 1: to rustle up a deep seek expert last Monday, this

26
00:01:33,600 --> 00:01:35,280
Speaker 1: time a trade expert.

27
00:01:35,319 --> 00:01:37,080
Speaker 3: That's all right, I feel like we might as well

28
00:01:37,120 --> 00:01:40,280
Speaker 3: just preemptively convert the show into a daily because I

29
00:01:40,319 --> 00:01:42,080
Speaker 3: feel like there's going to be a lot of newsflow.

30
00:01:42,319 --> 00:01:46,399
Speaker 3: But anyway, as you mentioned, over the weekend, President Trump

31
00:01:46,600 --> 00:01:51,000
Speaker 3: basically confirmed that the US would be imposing twenty five

32
00:01:51,040 --> 00:01:54,560
Speaker 3: percent tariffs on imports from Canada and Mexico, which are,

33
00:01:54,640 --> 00:01:58,680
Speaker 3: of course, you know, massive US trading partners. He's also

34
00:01:58,720 --> 00:02:01,920
Speaker 3: implementing a ten percent tariff on China. All of this

35
00:02:01,960 --> 00:02:06,480
Speaker 3: is being done via the International Emergency Economic Powers Act,

36
00:02:06,880 --> 00:02:10,880
Speaker 3: and the tariffs are supposed to become effective as of Tuesday,

37
00:02:11,200 --> 00:02:13,600
Speaker 3: February fourth, And of course, you know, a lot of

38
00:02:13,600 --> 00:02:18,079
Speaker 3: stuff can change. The news cycle is very compressed at

39
00:02:18,080 --> 00:02:21,520
Speaker 3: the moment, it feels like, and we're recording this Monday morning,

40
00:02:21,600 --> 00:02:23,840
Speaker 3: so we'll see what happens overnight by the time this

41
00:02:23,919 --> 00:02:27,320
Speaker 3: episode comes out. But in the meantime, there are a

42
00:02:27,320 --> 00:02:31,280
Speaker 3: lot of questions, and who better to ask than Paul Donovan.

43
00:02:31,360 --> 00:02:34,280
Speaker 3: He is, of course chief economist over at Ubs Global

44
00:02:34,280 --> 00:02:37,440
Speaker 3: Wealth Management, someone we've had on the show quite a lot,

45
00:02:37,480 --> 00:02:39,840
Speaker 3: and someone who's been following the ins and outs of

46
00:02:39,840 --> 00:02:42,680
Speaker 3: the tariffs, including some of the technicalities of how they

47
00:02:42,720 --> 00:02:45,240
Speaker 3: actually work, where I think there is quite a bit

48
00:02:45,280 --> 00:02:48,000
Speaker 3: of confusion. So, Paul, thank you so much for coming

49
00:02:48,040 --> 00:02:50,080
Speaker 3: on Odd Blots at short notice too.

50
00:02:50,919 --> 00:02:52,040
Speaker 4: No, thank you for having me on.

51
00:02:52,400 --> 00:02:55,040
Speaker 3: Why don't we just start with I guess there's a

52
00:02:55,160 --> 00:02:57,560
Speaker 3: question that a lot of people have been asking. There's

53
00:02:57,600 --> 00:03:00,000
Speaker 3: a lot of confusion, as I mentioned, about who exactly

54
00:03:00,040 --> 00:03:03,320
Speaker 3: actly is paying these tariffs and when? And the Trump

55
00:03:03,360 --> 00:03:07,200
Speaker 3: administration initially seemed to suggest that foreign countries were going

56
00:03:07,280 --> 00:03:09,560
Speaker 3: to pay, and that they were going to set up

57
00:03:09,560 --> 00:03:13,360
Speaker 3: this external revenue service to collect the income. Now though,

58
00:03:13,400 --> 00:03:15,560
Speaker 3: there seems to be a lot more talk about Americans

59
00:03:15,600 --> 00:03:18,760
Speaker 3: having to accept short term pain for longer term gain.

60
00:03:19,520 --> 00:03:23,440
Speaker 3: A twenty five percent tariff on Mexican or Canadian goods,

61
00:03:23,960 --> 00:03:28,000
Speaker 3: Where is that money actually collected and who is paying

62
00:03:28,120 --> 00:03:28,480
Speaker 3: for it?

63
00:03:29,639 --> 00:03:32,680
Speaker 4: So the US consumer is paying, there is no question

64
00:03:32,720 --> 00:03:36,160
Speaker 4: about this. We have over four thousand years of economic

65
00:03:36,240 --> 00:03:40,120
Speaker 4: history on tariffs. There are literally clay tablets from ancient

66
00:03:40,200 --> 00:03:45,640
Speaker 4: Mesopotamia detailing this. Consumers pay tariff's end of discussion. The

67
00:03:46,200 --> 00:03:49,440
Speaker 4: point at which the tariff is collected, though, is very important.

68
00:03:49,840 --> 00:03:54,040
Speaker 4: The point of entry, when the goods arrive physically in

69
00:03:54,080 --> 00:03:57,200
Speaker 4: the United States, that's when the tariff is paid. And

70
00:03:57,240 --> 00:04:00,720
Speaker 4: that's why a twenty five percent tariff does not fully

71
00:04:00,800 --> 00:04:04,400
Speaker 4: equate into a twenty five percent consumer price increase. Twenty

72
00:04:04,440 --> 00:04:07,240
Speaker 4: five percent tariff would mean about a ten percent consumer

73
00:04:07,280 --> 00:04:07,960
Speaker 4: price increase.

74
00:04:08,360 --> 00:04:09,280
Speaker 1: Explain that further.

75
00:04:10,400 --> 00:04:12,800
Speaker 4: So essentially, if you think about it, the goods arrive

76
00:04:12,880 --> 00:04:16,160
Speaker 4: in the United States, your television has arrived from China

77
00:04:16,160 --> 00:04:19,280
Speaker 4: in the port of Los Angeles. That's the point at

78
00:04:19,279 --> 00:04:21,000
Speaker 4: which you have to pay the tariff. So you pay

79
00:04:21,040 --> 00:04:22,920
Speaker 4: it on the value of the television at the point

80
00:04:22,960 --> 00:04:27,120
Speaker 4: of Los Angeles. But after that point, the consumers still

81
00:04:27,160 --> 00:04:30,640
Speaker 4: got to pay for transporting that television around the country,

82
00:04:30,800 --> 00:04:33,080
Speaker 4: for the advertising, for the whole sale of the retail costs.

83
00:04:33,200 --> 00:04:35,640
Speaker 4: Retailers take a quarter of your money to cover their

84
00:04:35,680 --> 00:04:38,560
Speaker 4: costs and profit margins. So of course all of those

85
00:04:38,560 --> 00:04:41,359
Speaker 4: costs add up to about sixty percent of the consumer price.

86
00:04:41,640 --> 00:04:44,960
Speaker 4: The import price on average is about forty percent.

87
00:04:45,640 --> 00:04:49,560
Speaker 3: Okay, so maybe prices on maple syrup or avocados or

88
00:04:49,600 --> 00:04:52,920
Speaker 3: whatever don't automatically translate to a twenty five percent price

89
00:04:53,000 --> 00:04:55,280
Speaker 3: increase because of the dynamics.

90
00:04:54,800 --> 00:04:56,159
Speaker 1: That you just laid out.

91
00:04:56,240 --> 00:04:59,159
Speaker 3: But I guess the other question that's floating around in

92
00:04:59,240 --> 00:05:01,880
Speaker 3: terms of the impact on the broader economy is are

93
00:05:01,920 --> 00:05:07,280
Speaker 3: these types of tariffs, you know, net inflationary or net deflationary,

94
00:05:07,279 --> 00:05:09,839
Speaker 3: Because on the face of it, it seems like prices

95
00:05:09,880 --> 00:05:13,400
Speaker 3: will go up that would add to inflation, But there's

96
00:05:13,480 --> 00:05:17,880
Speaker 3: this sort of contextual impact as well, where you could see,

97
00:05:17,960 --> 00:05:21,600
Speaker 3: you know, maybe there are fewer jobs and slower economic

98
00:05:21,640 --> 00:05:25,440
Speaker 3: growth as the US economy has to adjust to a

99
00:05:25,520 --> 00:05:30,720
Speaker 3: new trade dynamic, and maybe that exerts downward pressure on prices.

100
00:05:30,800 --> 00:05:34,880
Speaker 3: Net net, do you see this as inflationary or deflationary?

101
00:05:35,400 --> 00:05:37,279
Speaker 4: So in the short term, by which I mean the

102
00:05:37,320 --> 00:05:40,000
Speaker 4: next year, this is going to add to inflation in

103
00:05:40,000 --> 00:05:43,279
Speaker 4: the United States because you know, it's it's a sales tax,

104
00:05:43,320 --> 00:05:46,520
Speaker 4: it's like a VAT tax increase or a consumer tax increase.

105
00:05:46,680 --> 00:05:48,719
Speaker 4: And if you look at Japan when it's ready to

106
00:05:48,720 --> 00:05:51,839
Speaker 4: consumer taxes or the UK when it's really value added tax,

107
00:05:52,000 --> 00:05:55,279
Speaker 4: you see inflation coming through in the in the first instance,

108
00:05:55,400 --> 00:05:57,320
Speaker 4: and this is just the same it's a sales tax

109
00:05:57,640 --> 00:06:00,880
Speaker 4: under a pseudonym, so you will see inflation in the

110
00:06:00,880 --> 00:06:03,720
Speaker 4: first instance. But then you're right. The question is do

111
00:06:03,800 --> 00:06:08,159
Speaker 4: we then see jobs being lost, Particularly because these taxes

112
00:06:08,520 --> 00:06:12,800
Speaker 4: are a lot more focused on complicated supply chains than

113
00:06:13,000 --> 00:06:15,840
Speaker 4: was the case back in twenty eighteen, that may be

114
00:06:15,960 --> 00:06:19,200
Speaker 4: a lot more disruptive to the economy and potentially could

115
00:06:19,279 --> 00:06:23,679
Speaker 4: create unemployment or just fear of unemployment, which would lower demand,

116
00:06:23,960 --> 00:06:27,159
Speaker 4: and that would then be a disinflation force, but not now,

117
00:06:27,480 --> 00:06:32,200
Speaker 4: a disinflation force in the future accompanied by significantly lower growth.

118
00:06:32,360 --> 00:06:36,320
Speaker 1: One of the arguments made by advocates of terrorists from

119
00:06:36,320 --> 00:06:38,880
Speaker 1: time to time is that the US is still by

120
00:06:39,080 --> 00:06:42,040
Speaker 1: far and away the biggest consumer market in the world,

121
00:06:42,560 --> 00:06:44,360
Speaker 1: and it's sort of a privilege to be able to

122
00:06:44,440 --> 00:06:45,919
Speaker 1: sell to US. So if you want to sell to

123
00:06:46,000 --> 00:06:49,840
Speaker 1: US and there's the tariff, just eat the cost yourself,

124
00:06:49,920 --> 00:06:52,720
Speaker 1: lower your prices by ten percent or twenty five percent

125
00:06:52,800 --> 00:06:55,279
Speaker 1: or whatever so that you could still sell into the

126
00:06:55,360 --> 00:06:58,360
Speaker 1: US market competitively. Does that logic fly?

127
00:06:58,960 --> 00:07:02,279
Speaker 4: Not really one thing. The debatable point is whether the

128
00:07:02,360 --> 00:07:04,479
Speaker 4: US is the largest consumer market in the world. The

129
00:07:04,640 --> 00:07:07,359
Speaker 4: Europe is the largest middle income consumer market in the world,

130
00:07:07,760 --> 00:07:10,920
Speaker 4: so it's not all about the United States. The other thing,

131
00:07:10,920 --> 00:07:14,120
Speaker 4: of course, is that the US is generally a relatively

132
00:07:14,120 --> 00:07:16,920
Speaker 4: competitive market. So in other words, you know, it's not

133
00:07:17,000 --> 00:07:20,840
Speaker 4: that consumers are making super normal beta partment producers are

134
00:07:20,840 --> 00:07:24,120
Speaker 4: making super normal profits when they're selling into the United States,

135
00:07:24,120 --> 00:07:25,680
Speaker 4: and we're just chipping away at those.

136
00:07:25,880 --> 00:07:26,040
Speaker 2: No.

137
00:07:26,320 --> 00:07:29,000
Speaker 4: You know, exporters to the United States are very efficient.

138
00:07:29,040 --> 00:07:31,760
Speaker 4: They're operating on thin margins. They don't have the room

139
00:07:31,800 --> 00:07:33,640
Speaker 4: to do this. And if you look back at what

140
00:07:33,800 --> 00:07:38,720
Speaker 4: happened in twenty eighteen, there was no change in import

141
00:07:38,800 --> 00:07:44,080
Speaker 4: prices trends pre tariff, so import prices are the price

142
00:07:44,200 --> 00:07:46,560
Speaker 4: before the tariff is applied. There was no change in

143
00:07:46,600 --> 00:07:49,000
Speaker 4: those trends when tariffs were applied, you know, because the

144
00:07:49,680 --> 00:07:52,640
Speaker 4: exporters to the United States just basically don't have the

145
00:07:52,680 --> 00:07:53,560
Speaker 4: room to cut the margin.

146
00:07:54,560 --> 00:07:57,200
Speaker 3: The other thing that you sometimes hear is that, Okay,

147
00:07:57,400 --> 00:08:00,520
Speaker 3: maybe this means prices go up for American can consumers,

148
00:08:00,560 --> 00:08:03,720
Speaker 3: but some of that price increase could in theory be

149
00:08:03,960 --> 00:08:06,960
Speaker 3: offset by a stronger dollar. And we have seen the

150
00:08:07,000 --> 00:08:10,520
Speaker 3: dollar rallying in recent weeks. And I have a twofold

151
00:08:10,600 --> 00:08:14,480
Speaker 3: question on this, so one, you know, how valid is

152
00:08:14,520 --> 00:08:18,600
Speaker 3: that particular argument the dollar offset idea. But then, secondly,

153
00:08:18,680 --> 00:08:21,400
Speaker 3: why is it that the dollar actually goes up when

154
00:08:21,400 --> 00:08:25,200
Speaker 3: the US announces additional trade measures. I've kind of taken

155
00:08:25,240 --> 00:08:27,560
Speaker 3: that for granted and I've never stopped to actually think

156
00:08:27,560 --> 00:08:28,880
Speaker 3: about why that's happening.

157
00:08:29,520 --> 00:08:33,000
Speaker 4: Well, let's start with the second part first. So essentially,

158
00:08:33,200 --> 00:08:36,440
Speaker 4: I think what is happening is traders are assuming that

159
00:08:36,720 --> 00:08:41,240
Speaker 4: because the tariffs will raise consumer prices over a period

160
00:08:41,280 --> 00:08:43,960
Speaker 4: of time, not all at once, that will then lead

161
00:08:44,160 --> 00:08:47,120
Speaker 4: to a more cautious approach on the part of the

162
00:08:47,120 --> 00:08:50,440
Speaker 4: Federal Reserve with regards to policy interest rates. If interest

163
00:08:50,480 --> 00:08:52,920
Speaker 4: rates don't go down so much, or indeed start to

164
00:08:52,920 --> 00:08:55,720
Speaker 4: go up, that tends to be supportive for the dollar

165
00:08:55,920 --> 00:08:58,480
Speaker 4: at a time when other countries are still on an

166
00:08:58,559 --> 00:09:03,600
Speaker 4: easing trajectory. So it's an interest rate differential expectation. Generally speaking,

167
00:09:04,240 --> 00:09:07,640
Speaker 4: does a stronger dollar help offset the tariffs? I mean,

168
00:09:07,760 --> 00:09:10,240
Speaker 4: to a very minor extent, a stronger dollar will tend

169
00:09:10,280 --> 00:09:15,440
Speaker 4: to lower commodity prices that are globally denominating dollars. But

170
00:09:15,480 --> 00:09:19,440
Speaker 4: the issue here is that ninety five percent of US

171
00:09:19,679 --> 00:09:24,719
Speaker 4: imports are priced in US dollar terms, and so what

172
00:09:24,760 --> 00:09:27,760
Speaker 4: that means is that if the dollar is strengthening, there's

173
00:09:27,800 --> 00:09:31,720
Speaker 4: no automatic response in terms of the price of those things.

174
00:09:31,760 --> 00:09:34,760
Speaker 4: Because the contract specifies UO as one hundred dollars for

175
00:09:34,800 --> 00:09:37,840
Speaker 4: this product, doesn't matter what the exchange rate is. That's

176
00:09:37,880 --> 00:09:40,920
Speaker 4: what the US has dictated. And again, when we look

177
00:09:41,000 --> 00:09:45,640
Speaker 4: at what happens historically, you know, for example, China's twenty

178
00:09:45,640 --> 00:09:49,560
Speaker 4: eighteen devaluation of the rnimbi against the dollar, that didn't

179
00:09:49,640 --> 00:09:54,920
Speaker 4: change the trend in prices to the United States because effectively,

180
00:09:55,559 --> 00:09:58,960
Speaker 4: the exporters to the United States were just grateful to

181
00:09:58,960 --> 00:10:01,000
Speaker 4: get a little bit more proper a margin coming out

182
00:10:01,040 --> 00:10:03,719
Speaker 4: of that process, and the dollar didn't really have a

183
00:10:03,720 --> 00:10:16,520
Speaker 4: big effect in terms of offset.

184
00:10:21,559 --> 00:10:23,920
Speaker 1: As of right now, by the way, it's now ten

185
00:10:24,040 --> 00:10:28,280
Speaker 1: twelve am Monday, the third markets following a little bit more,

186
00:10:28,440 --> 00:10:31,120
Speaker 1: nazdak down two point three percent s and P five

187
00:10:31,559 --> 00:10:34,760
Speaker 1: down one point seven eight percent. You know, this is

188
00:10:34,800 --> 00:10:37,679
Speaker 1: not a gigantic sell off by any stretch. On the

189
00:10:37,720 --> 00:10:41,200
Speaker 1: other hand, it's significant. So it does seem to be

190
00:10:41,200 --> 00:10:44,800
Speaker 1: a surprise. One of the things you heard the people

191
00:10:44,800 --> 00:10:47,200
Speaker 1: love to say it, Oh, take don't take Trump literally,

192
00:10:47,200 --> 00:10:49,439
Speaker 1: take him seriously. But as far as I'm concerned, it's

193
00:10:49,440 --> 00:10:52,840
Speaker 1: not clear that anyone is taking him literally or seriously.

194
00:10:52,840 --> 00:10:54,560
Speaker 1: When it came to tariff, people were just sort of

195
00:10:54,960 --> 00:10:56,679
Speaker 1: I don't think they really think about it at all. Well,

196
00:10:56,720 --> 00:10:58,520
Speaker 1: you know, when you talk to clients, when they ask

197
00:10:58,559 --> 00:11:02,199
Speaker 1: you questions, how much surprise is there, how much do

198
00:11:02,280 --> 00:11:06,120
Speaker 1: you how different is this versus say, what basically would

199
00:11:06,120 --> 00:11:06,880
Speaker 1: people were expecting?

200
00:11:07,960 --> 00:11:10,120
Speaker 4: I think it very much depends on who you ask.

201
00:11:10,320 --> 00:11:13,480
Speaker 4: I think that quite a lot of clients in Asia

202
00:11:14,200 --> 00:11:17,480
Speaker 4: had been expecting quite an aggressive tariff response, because of

203
00:11:17,480 --> 00:11:20,040
Speaker 4: course they bore the brunt of the tariffs in Trump's

204
00:11:20,040 --> 00:11:22,920
Speaker 4: first term, whereas I don't think that that has been

205
00:11:23,120 --> 00:11:26,640
Speaker 4: such an expectation in North America and Europe is a

206
00:11:27,040 --> 00:11:31,400
Speaker 4: bit mixed on this particular point overall, I think as well.

207
00:11:31,480 --> 00:11:36,240
Speaker 4: I mean, the president trides themselves on their unpredictable management style,

208
00:11:36,559 --> 00:11:38,400
Speaker 4: which you know makes my job as somebody who has

209
00:11:38,400 --> 00:11:40,839
Speaker 4: to predict for a living a lot more difficult. But

210
00:11:40,880 --> 00:11:43,720
Speaker 4: it also of course means that if we look at

211
00:11:43,760 --> 00:11:47,760
Speaker 4: what happened with Columbia, where Trump retreated, you know, within

212
00:11:47,840 --> 00:11:51,160
Speaker 4: hours from threats of tariff, but you know, Columbia didn't

213
00:11:51,160 --> 00:11:53,680
Speaker 4: really do anything. No, all of a sudden, we're backtracking

214
00:11:53,720 --> 00:11:55,640
Speaker 4: because we can't have the price of coffee going up.

215
00:11:56,000 --> 00:11:58,320
Speaker 4: That sort of thing, I think means that there is

216
00:11:58,360 --> 00:12:03,480
Speaker 4: still this lingering hope that there will be some sort

217
00:12:03,520 --> 00:12:08,120
Speaker 4: of Columbia style reversal coming out of the administration on

218
00:12:08,240 --> 00:12:10,800
Speaker 4: the tariffs. We've not seen it yet and the clock sticking,

219
00:12:11,080 --> 00:12:14,360
Speaker 4: but I think there's that sort of background belief still

220
00:12:14,400 --> 00:12:15,800
Speaker 4: in the minds of many investors.

221
00:12:16,520 --> 00:12:18,800
Speaker 3: This is actually the other thing I wanted to ask you,

222
00:12:18,840 --> 00:12:22,240
Speaker 3: which is we have seen Trump historically use the threat

223
00:12:22,320 --> 00:12:26,120
Speaker 3: of tariffs as a negotiating tool, right, so hopefully he

224
00:12:26,200 --> 00:12:28,880
Speaker 3: gets at least some of what he wants before the

225
00:12:28,920 --> 00:12:32,880
Speaker 3: tariffs actually have to come into effect. But I feel

226
00:12:32,880 --> 00:12:36,760
Speaker 3: like the more he does this, the less impact or

227
00:12:36,800 --> 00:12:38,959
Speaker 3: the less bang for his buck he's going to be

228
00:12:39,040 --> 00:12:41,760
Speaker 3: able to get, because at some point people are going

229
00:12:41,800 --> 00:12:45,360
Speaker 3: to start calling his bluff. I guess all of this

230
00:12:45,480 --> 00:12:48,640
Speaker 3: is a way of asking, like, how many times can

231
00:12:48,679 --> 00:12:51,160
Speaker 3: he do this with the same impact.

232
00:12:52,679 --> 00:12:56,400
Speaker 4: Well, it's more than just sort of you know, crying

233
00:12:56,440 --> 00:12:59,400
Speaker 4: wolf all the time, which is part of what we're seeing.

234
00:13:00,080 --> 00:13:03,600
Speaker 4: Actually some quite serious long term implications from this, because

235
00:13:04,000 --> 00:13:08,040
Speaker 4: of course, you know, Trump in their first term renegotiated NAFTA,

236
00:13:08,080 --> 00:13:11,120
Speaker 4: and you know, within days of taking office in their

237
00:13:11,120 --> 00:13:15,040
Speaker 4: second term has torn up nafter. So if you do

238
00:13:15,120 --> 00:13:19,120
Speaker 4: a trade deal with the US in a year's time,

239
00:13:19,559 --> 00:13:21,720
Speaker 4: how much confidence have you got that trade deal still

240
00:13:21,760 --> 00:13:23,480
Speaker 4: going to be operable in two years time or three

241
00:13:23,559 --> 00:13:26,240
Speaker 4: years time. And so that's going to make doing deals

242
00:13:26,400 --> 00:13:29,280
Speaker 4: actually more difficult over the longer term. So I think

243
00:13:29,320 --> 00:13:33,199
Speaker 4: that's a particular challenge that we are facing here. I

244
00:13:33,200 --> 00:13:36,000
Speaker 4: would also say, though, that the rhetoric from the Trump

245
00:13:36,080 --> 00:13:40,320
Speaker 4: administration does seem to have shifted, and I think that

246
00:13:40,920 --> 00:13:44,960
Speaker 4: President Trump believes that tariffs are a good thing all

247
00:13:45,000 --> 00:13:48,800
Speaker 4: in capital letters, and not just a bargaining tool. That

248
00:13:49,240 --> 00:13:52,200
Speaker 4: they think that tariff's can be useful for revenue raising,

249
00:13:52,240 --> 00:13:54,880
Speaker 4: which I personally would disagree with, but it doesn't matter

250
00:13:54,920 --> 00:13:56,960
Speaker 4: what I think. That's what the president seems to believe.

251
00:13:57,200 --> 00:13:59,880
Speaker 4: So I think there has been a break from the

252
00:14:00,320 --> 00:14:04,000
Speaker 4: very clear bargaining tool position of the first term, that

253
00:14:04,040 --> 00:14:07,600
Speaker 4: there is sort of a larger role for tariffs in

254
00:14:07,679 --> 00:14:09,760
Speaker 4: Trump's mind in the second term.

255
00:14:10,400 --> 00:14:12,960
Speaker 1: I just have one last question. Explain to us you

256
00:14:13,000 --> 00:14:17,880
Speaker 1: said it earlier, on the disruptive potential of tariffing intermediate goods.

257
00:14:18,000 --> 00:14:19,800
Speaker 1: One of the things we know, for example, about the

258
00:14:19,800 --> 00:14:22,720
Speaker 1: auto industry, whether we're talking about the Canadian border or

259
00:14:22,720 --> 00:14:25,600
Speaker 1: the Mexican border, or maybe both. You see parts and

260
00:14:25,640 --> 00:14:30,680
Speaker 1: you see component crisscross the border several times along the way.

261
00:14:31,160 --> 00:14:34,440
Speaker 1: Talk to us about how this potential intersects.

262
00:14:35,360 --> 00:14:37,680
Speaker 4: I think one of the problems that we have is

263
00:14:38,360 --> 00:14:40,680
Speaker 4: a number of people, including I would suggest some people

264
00:14:40,680 --> 00:14:43,400
Speaker 4: in the administration, are sort of stuck in the early

265
00:14:43,480 --> 00:14:47,040
Speaker 4: nineteen seventies in an imperial model of trade. You import

266
00:14:47,120 --> 00:14:50,240
Speaker 4: raw materials, everything is manufactured at home, you export the

267
00:14:50,240 --> 00:14:52,960
Speaker 4: finished product. And that's sort of the state of play

268
00:14:53,000 --> 00:14:55,840
Speaker 4: when Nixon did universal tariffs back in nineteen seventy one.

269
00:14:56,640 --> 00:14:59,520
Speaker 4: But that's not how the world works now. A majority

270
00:14:59,600 --> 00:15:03,920
Speaker 4: of globe mobal trade is a company shuffling goods between

271
00:15:03,960 --> 00:15:07,360
Speaker 4: its subsidiaries. So a majority of global trade takes place

272
00:15:07,640 --> 00:15:12,800
Speaker 4: inside companies as part of complicated supply chains within a firm.

273
00:15:13,240 --> 00:15:15,640
Speaker 4: So when you start to impose these tariffs, if you've

274
00:15:15,640 --> 00:15:17,760
Speaker 4: got an auto part in the United States, in a

275
00:15:17,800 --> 00:15:20,440
Speaker 4: car made in the United States crossing the border with

276
00:15:20,480 --> 00:15:25,160
Speaker 4: Mexico twelve fourteen times, if every single time it comes

277
00:15:25,160 --> 00:15:27,080
Speaker 4: back into the United States, you're slapping a twenty five

278
00:15:27,120 --> 00:15:29,880
Speaker 4: percent tax on it that very very quickly becomes on

279
00:15:29,920 --> 00:15:33,760
Speaker 4: an uneconomic proposition, and that's the real risk. So that's

280
00:15:33,800 --> 00:15:36,520
Speaker 4: where the disruption comes through. Supply chains were a lot

281
00:15:36,600 --> 00:15:38,800
Speaker 4: more complicated than they were fifty years ago. This ain't

282
00:15:38,840 --> 00:15:40,120
Speaker 4: nineteen seventy one anymore.

283
00:15:40,680 --> 00:15:43,080
Speaker 3: We sort of touched on this earlier, but I think

284
00:15:43,120 --> 00:15:45,760
Speaker 3: it's an important point to hammer home and is the

285
00:15:45,880 --> 00:15:49,880
Speaker 3: proximate source of the market's confusion at the moment. And

286
00:15:49,960 --> 00:15:52,480
Speaker 3: also we would be remiss if we didn't ask Paul

287
00:15:52,520 --> 00:15:56,200
Speaker 3: to do his impression of a central banker. But how

288
00:15:56,240 --> 00:15:59,600
Speaker 3: do you expect central bankers to react to all of this? Because,

289
00:15:59,800 --> 00:16:01,880
Speaker 3: as we spoke about earlier, on the one hand, you

290
00:16:01,880 --> 00:16:04,760
Speaker 3: would expect this to be inflationary in the short term,

291
00:16:04,800 --> 00:16:08,640
Speaker 3: so maybe they might raise rates to try to offset.

292
00:16:08,200 --> 00:16:08,600
Speaker 4: Some of that.

293
00:16:08,720 --> 00:16:11,880
Speaker 3: But at the same time, you would expect this to

294
00:16:12,160 --> 00:16:16,760
Speaker 3: slow GDP in one way or another. Eventually, central banks

295
00:16:17,320 --> 00:16:19,880
Speaker 3: like being ahead of the curve, or at least they

296
00:16:19,920 --> 00:16:23,560
Speaker 3: say they do. Would they perhaps try to lower rates

297
00:16:23,600 --> 00:16:26,960
Speaker 3: in order to offset that contraction? Which way are they

298
00:16:26,960 --> 00:16:27,600
Speaker 3: going to go here?

299
00:16:28,280 --> 00:16:32,119
Speaker 4: So, like most questions and economics, the answer is it depends.

300
00:16:32,600 --> 00:16:35,920
Speaker 4: So if we just get first round effects. If all

301
00:16:36,000 --> 00:16:39,800
Speaker 4: you see is the tax being paid by US consumers

302
00:16:39,840 --> 00:16:43,560
Speaker 4: pushing up prices, central banks should ignore that. Central banks

303
00:16:43,560 --> 00:16:46,480
Speaker 4: should not respond to a one off tax increase, which

304
00:16:46,520 --> 00:16:48,840
Speaker 4: is a one off price increase, because there's nothing they

305
00:16:48,880 --> 00:16:52,160
Speaker 4: can do about it. However, if we see second round effects,

306
00:16:52,200 --> 00:16:54,440
Speaker 4: and this is where it starts to get very problematic.

307
00:16:54,880 --> 00:17:00,000
Speaker 4: If we see, for example, retailers expanding profit margins, again

308
00:17:00,040 --> 00:17:06,280
Speaker 4: another profit led inflation episode. If we see US companies saying, well,

309
00:17:06,520 --> 00:17:08,760
Speaker 4: you know, our competitors' goods are now being TechEd, so

310
00:17:08,800 --> 00:17:11,000
Speaker 4: why don't we raise our own prices? Has happened with

311
00:17:11,000 --> 00:17:13,960
Speaker 4: the washing machine tariff? Why you slap attacks on imported

312
00:17:14,080 --> 00:17:18,040
Speaker 4: washing machines? And domestic manufacturers raise their prices because they

313
00:17:18,080 --> 00:17:22,120
Speaker 4: can because there's less competition that the central bank needs

314
00:17:22,119 --> 00:17:24,679
Speaker 4: to respond to. That then becomes a problem, and then

315
00:17:24,680 --> 00:17:27,400
Speaker 4: there's sort of associated second round effects. Do you see

316
00:17:27,440 --> 00:17:31,080
Speaker 4: wage pressures coming through in certain sectors? I think that's unlikely,

317
00:17:31,200 --> 00:17:33,640
Speaker 4: but if you do, the FED would have to respond.

318
00:17:34,000 --> 00:17:37,160
Speaker 4: If you see, for example, higher auto prices, that could

319
00:17:37,240 --> 00:17:40,480
Speaker 4: lead to higher second hand auto prices, which would lead

320
00:17:40,480 --> 00:17:43,600
Speaker 4: to higher insurance costs for auto and that sort of

321
00:17:43,760 --> 00:17:46,600
Speaker 4: chain effect is something the FED needs to start paying

322
00:17:46,600 --> 00:17:49,679
Speaker 4: attention to. So the direct effect of the tariff I

323
00:17:49,680 --> 00:17:52,840
Speaker 4: think the central banks should ignore, and indeed the FED

324
00:17:52,920 --> 00:17:56,120
Speaker 4: could conceivably continue to cut rates. But if you see

325
00:17:56,160 --> 00:17:59,800
Speaker 4: those second round effects coming through, that is a five

326
00:18:00,080 --> 00:18:03,880
Speaker 4: lom bell warning. That's where the Federal Reserve or any

327
00:18:03,920 --> 00:18:06,040
Speaker 4: other central bank needs to stop paying attention.

328
00:18:06,640 --> 00:18:09,720
Speaker 3: All right, Paul Donovan from UBS Wealth Management, thank you

329
00:18:09,760 --> 00:18:12,119
Speaker 3: so much for coming on odd lots for what is

330
00:18:12,160 --> 00:18:15,639
Speaker 3: probably going to be the first of many impromptu episodes

331
00:18:15,680 --> 00:18:18,240
Speaker 3: I mentioned. Thank you, Paul, Thank you.

332
00:18:31,400 --> 00:18:31,560
Speaker 2: Joe.

333
00:18:31,640 --> 00:18:34,200
Speaker 3: I'm really glad we could do that at short notice.

334
00:18:34,320 --> 00:18:36,800
Speaker 3: It answered a lot of questions for me and also

335
00:18:36,960 --> 00:18:39,439
Speaker 3: kind of contextualized a lot of the big questions. I

336
00:18:39,480 --> 00:18:42,840
Speaker 3: will just say on that second order effect point that

337
00:18:42,840 --> 00:18:46,200
Speaker 3: Paul made at the very end, already I'm looking at

338
00:18:46,240 --> 00:18:49,119
Speaker 3: my inbox right now at a note from Bank of

339
00:18:49,160 --> 00:18:53,320
Speaker 3: America saying they expect US car insurance rates to go

340
00:18:53,480 --> 00:18:55,919
Speaker 3: up as a result of the tariffs, so you know,

341
00:18:56,440 --> 00:18:58,000
Speaker 3: sort of already in motion.

342
00:18:58,480 --> 00:19:00,960
Speaker 1: The two big things for me are the sort of

343
00:19:01,000 --> 00:19:03,480
Speaker 1: real risk of the second order effects, all these other

344
00:19:03,600 --> 00:19:06,080
Speaker 1: things that could happen the more persistent. And then this

345
00:19:06,200 --> 00:19:09,240
Speaker 1: idea I like what he called, you know, the imperial

346
00:19:09,320 --> 00:19:12,520
Speaker 1: model of trade, where one the old style, you're importing

347
00:19:12,600 --> 00:19:14,879
Speaker 1: raw goods, you build it all here, you export it,

348
00:19:14,960 --> 00:19:18,960
Speaker 1: you capture that value ad versus these really complex supply

349
00:19:19,119 --> 00:19:22,560
Speaker 1: chains where something goes across the border multiple times. And

350
00:19:22,600 --> 00:19:25,040
Speaker 1: then to your point, to your question, I thought this

351
00:19:25,240 --> 00:19:27,840
Speaker 1: was key, Like, even if these get reversed really quickly,

352
00:19:28,400 --> 00:19:30,439
Speaker 1: the idea of like, well, what does that mean for

353
00:19:30,480 --> 00:19:34,119
Speaker 1: the prospect of any sustained sort of free trade block

354
00:19:34,240 --> 00:19:38,000
Speaker 1: or free trade zone that it's also rip up able,

355
00:19:38,119 --> 00:19:39,000
Speaker 1: I think is really key.

356
00:19:39,080 --> 00:19:42,320
Speaker 3: Yeah, lots of questions. Time to start brushing up on

357
00:19:42,600 --> 00:19:46,240
Speaker 3: our tiff and trade history. So shall we leave it there?

358
00:19:46,280 --> 00:19:46,960
Speaker 1: Let's leave it there.

359
00:19:47,040 --> 00:19:49,680
Speaker 3: This has been another episode of the ad Thoughts podcast.

360
00:19:49,800 --> 00:19:53,240
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.

361
00:19:52,960 --> 00:19:55,840
Speaker 1: And I'm Jill Wisenthal. You can follow me at The Stalwart.

362
00:19:56,119 --> 00:19:59,720
Speaker 1: Follow our producer Carman Rodriguez at Carman Ermann, Dashel Bennett

363
00:19:59,720 --> 00:20:03,159
Speaker 1: at kill Brooks Killbrooks. From all odd lotscontent, go to

364
00:20:03,200 --> 00:20:05,840
Speaker 1: Bloomberg dot com slash odd lots. We have transcripts the

365
00:20:05,880 --> 00:20:08,119
Speaker 1: blog in a newsletter, and you can chat about all

366
00:20:08,160 --> 00:20:10,560
Speaker 1: of these topics twenty four to seven in our discord

367
00:20:10,960 --> 00:20:14,119
Speaker 1: Discord dot gg slash od Lots and if.

368
00:20:14,000 --> 00:20:16,199
Speaker 3: You enjoy odd Lots, if you like it when we

369
00:20:16,280 --> 00:20:19,560
Speaker 3: do these emergency episodes, then please leave us a positive

370
00:20:19,600 --> 00:20:23,080
Speaker 3: review on your favorite podcast platform. And remember, if you

371
00:20:23,119 --> 00:20:26,199
Speaker 3: are a Bloomberg subscriber, you can listen to all of

372
00:20:26,200 --> 00:20:29,239
Speaker 3: our episodes absolutely ad free. All you need to do

373
00:20:29,359 --> 00:20:32,560
Speaker 3: is find the Bloomberg channel on Apple Podcasts and follow

374
00:20:32,600 --> 00:20:35,600
Speaker 3: the instructions there. If you're a subscriber, you'll also get

375
00:20:35,640 --> 00:20:39,159
Speaker 3: access to our daily Odd Lots newsletter. Joe and I

376
00:20:39,200 --> 00:20:41,080
Speaker 3: are going to have some thoughts on the tariffs in

377
00:20:41,119 --> 00:20:42,840
Speaker 3: there as well. Thanks for listening