WEBVTT - How Animal Spirits Can Carry US Equities 0:00:02.400 --> 0:00:06.760 Bloomberg Audio Studios, podcasts, radio news. 0:00:11.920 --> 0:00:16.320 This is the Bloomberg Surveillance Podcast. Catch us live weekdays 0:00:16.360 --> 0:00:19.640 at seven am Eastern on Apple car Player, Android Auto 0:00:19.760 --> 0:00:23.080 with the Bloomberg Business App. Listen on demand wherever you 0:00:23.120 --> 0:00:26.160 get your podcasts, or watch us live on YouTube. 0:00:26.360 --> 0:00:29.240 Long Goodwin joints as chief market strategist and economists for 0:00:29.280 --> 0:00:31.240 New York Life. She braves, the rain comes into our 0:00:31.240 --> 0:00:34.760 New York studio, not mailing it in. Lauren, You've got 0:00:34.760 --> 0:00:37.760 a research piecee. You're looking at the earnings from this 0:00:37.800 --> 0:00:40.000 past season, and you kind of say, hey, we got 0:00:40.000 --> 0:00:40.960 two Americas out there. 0:00:40.960 --> 0:00:41.879 What do you mean by that? 0:00:42.479 --> 0:00:46.839 Well, it's really leveraging a Tom Keen sort of topic 0:00:46.920 --> 0:00:51.320 of the decade. But there is a very clear bifurcation 0:00:51.640 --> 0:00:55.440 in not just the consumer but also in corporate America. 0:00:55.480 --> 0:00:58.120 And what I mean by that is, if you have 0:00:58.480 --> 0:01:02.040 a little bit of investment money, a salary job, you 0:01:02.120 --> 0:01:06.360 are doing despite everything just fine. In this economy. You've 0:01:06.400 --> 0:01:09.280 been making money on your money, including your cash. Your 0:01:09.319 --> 0:01:12.399 salary's been keeping up with inflation. But for those that 0:01:12.480 --> 0:01:15.119 benefit in the early days of the pandemic from stimulus 0:01:15.240 --> 0:01:19.120 checks from strong wage growth, the lower income. Consumer is 0:01:19.240 --> 0:01:22.960 really really struggling with inflation with the cost of capital, 0:01:23.360 --> 0:01:26.320 and that exact same thing is happening for companies. And 0:01:26.360 --> 0:01:29.600 so what it means is a couple of things. First, 0:01:30.400 --> 0:01:33.560 the risk the biggest risk to the economy and this 0:01:33.600 --> 0:01:35.360 is a little bit backwards. The biggest risk to the 0:01:35.400 --> 0:01:38.839 economy I think in the next year is a twenty 0:01:38.920 --> 0:01:40.800 percent pull back in the S and P five hundred, 0:01:41.280 --> 0:01:45.000 because so much of this economy is driven by consumer spending, 0:01:45.360 --> 0:01:47.920 and so much of that wealth effect and confidence is 0:01:47.960 --> 0:01:49.640 sitting in the equity market. 0:01:49.360 --> 0:01:52.960 And especially because the last if you go back the 0:01:53.040 --> 0:01:55.200 down years for the S and P five hundred, I 0:01:55.240 --> 0:01:57.160 mean because I mean back to back gains for the 0:01:57.240 --> 0:02:00.000 past two years, I mean on pace for over twenty percent. 0:02:00.040 --> 0:02:01.720 We haven't seen that since the dot com bubble. But 0:02:01.760 --> 0:02:04.680 also the only down years twenty twenty two we had 0:02:04.680 --> 0:02:07.200 the bear market, and then twenty eighteen because there was 0:02:07.240 --> 0:02:09.280 that big sell off of that final quarter in that 0:02:09.320 --> 0:02:11.400 December was like the worst quarter since two thousand and eight. 0:02:11.480 --> 0:02:13.720 But I mean, other than that, I mean, what is 0:02:13.760 --> 0:02:16.280 the It seems kind of tricky because we're so early 0:02:16.320 --> 0:02:17.880 in into a bull run. The S and P five 0:02:17.919 --> 0:02:20.080 hundreds up like seventy percent since low in October of 0:02:20.080 --> 0:02:22.720 twenty twenty two. That's not even like half the average 0:02:22.760 --> 0:02:25.600 of a typical bull run. So I mean, what would 0:02:25.680 --> 0:02:27.840 really take to see a down year and not just 0:02:27.919 --> 0:02:29.760 have like an average type of gain of around nine 0:02:29.840 --> 0:02:31.120 or ten percent, you know. 0:02:32.320 --> 0:02:34.520 Any number of things. And it's not really even our 0:02:34.520 --> 0:02:37.239 base case that we would see that that draw down. 0:02:37.280 --> 0:02:41.919 It's a it's just a reflection that this economy, though 0:02:42.080 --> 0:02:45.760 incredibly robust, is starting to see its phrase on the edges. 0:02:45.760 --> 0:02:47.120 And I think what that means is that if you 0:02:47.280 --> 0:02:49.680 if you have our base case, which is a pretty 0:02:49.680 --> 0:02:52.160 good year we're expecting, you know, five to seven percent 0:02:52.200 --> 0:02:54.480 on the equity market might not feel so great after 0:02:54.560 --> 0:02:56.639 the last couple of years that we had, but it's. 0:02:56.480 --> 0:02:58.600 Wondering to five to seven percent, is that more because 0:02:58.600 --> 0:03:01.960 of the broadening out and so you'd see more equal weight, 0:03:02.320 --> 0:03:04.720 small caps, other things taking parts. So then the ones 0:03:04.720 --> 0:03:07.080 that have been the bigger waitings, like the mag seven, 0:03:07.440 --> 0:03:09.600 it's like still there strong gains, it's just you're seeing 0:03:09.600 --> 0:03:11.480 other parts of the index catching up. Is that the 0:03:11.480 --> 0:03:12.280 case for next year? 0:03:12.440 --> 0:03:12.639 Yeah? 0:03:12.639 --> 0:03:14.600 I think it is part of the case for next year. 0:03:14.720 --> 0:03:19.040 Really five to seven percent is a function of economic growth. 0:03:19.120 --> 0:03:22.200 Right now three and a half percent real. That's wild, 0:03:22.280 --> 0:03:25.400 and I expect growth to slow back to trend. That's 0:03:25.440 --> 0:03:29.359 still a good economic outcome. It's just also still slowing 0:03:29.400 --> 0:03:31.520 growth from where we are today, and that's an environment 0:03:31.560 --> 0:03:33.600 where you do need to see more of the S 0:03:33.639 --> 0:03:36.160 and P five hundred do the work. We're not enormously 0:03:36.200 --> 0:03:39.280 bullish on small caps or junkiear stocks because of this 0:03:39.440 --> 0:03:42.840 bifurcation we're seeing in the economic environment, but what it 0:03:42.880 --> 0:03:46.000 means is that you probably have leadership EBB and flow 0:03:46.160 --> 0:03:48.400 a bit more over the next couple of years, whereas 0:03:48.400 --> 0:03:51.280 there's been a pretty clear dominant leadership from the Magnificent 0:03:51.360 --> 0:03:53.480 Seven as a result of Ai Laaren. 0:03:53.520 --> 0:03:57.280 When we all woke up on Wednesday two weeks ago 0:03:57.560 --> 0:04:02.160 with a new president and now I decidedly Republican led Congress, 0:04:02.200 --> 0:04:04.800 did that change your outlook of the markets at all 0:04:04.880 --> 0:04:06.320 or how you think about opportunities. 0:04:06.600 --> 0:04:08.960 It's such an important question because I think over those 0:04:08.960 --> 0:04:11.480 same couple of weeks we've been sort of grappling with 0:04:11.560 --> 0:04:13.320 what are the Trump trades and now what are the 0:04:13.320 --> 0:04:16.720 Trump trade offs? Which which of those knee jerk reactions 0:04:16.760 --> 0:04:18.599 are going to sit with us, and there are a 0:04:18.600 --> 0:04:20.479 couple that I think will, and those are the ones 0:04:20.520 --> 0:04:23.400 that are accentuated by some of the things we already knew. 0:04:23.920 --> 0:04:27.680 First of all, that growth has been stickier, inflation been 0:04:27.720 --> 0:04:31.479 stickier than even year after year economists like myself have 0:04:31.640 --> 0:04:35.839 expected that. When you add uncertainty around how much government 0:04:35.839 --> 0:04:39.839 spending will have points to higher and more volatile interest rates. 0:04:39.920 --> 0:04:43.000 It means that even though credit quality is pretty strong, 0:04:43.279 --> 0:04:46.279 we need to stay short duration or focused on structured credit. 0:04:46.279 --> 0:04:49.240 From my perspective. Another one that I expect to stick 0:04:49.279 --> 0:04:51.880 with us for the same combination of reasons is the 0:04:51.880 --> 0:04:54.560 strength and the US dollar. When you see the US 0:04:54.680 --> 0:04:58.039 dollar weekend, it's because x US growth is outperforming and 0:04:58.080 --> 0:05:00.200 I just don't see any path to that in the 0:05:00.200 --> 0:05:02.440 next year. Doesn't mean we'll keep seeing gains in the 0:05:02.440 --> 0:05:04.640 dollar like we've seen in the past couple weeks consistently. 0:05:04.680 --> 0:05:07.560 It just means that we're likely to see that strength persist. 0:05:07.640 --> 0:05:09.800 That's interesting because the DXY, if you look at this 0:05:09.920 --> 0:05:12.760 right now and you kind of draw back to twenty 0:05:12.800 --> 0:05:15.440 twenty one, in that timeframe, it's bumping up that resistance 0:05:15.440 --> 0:05:17.640 that we would have seen back in about a year ago, 0:05:17.640 --> 0:05:19.400 in twenty twenty three, and then going back to twenty 0:05:19.440 --> 0:05:22.000 twenty one. But is that kind of the biggest risk 0:05:22.160 --> 0:05:25.400 to potentially more of a more robust gains in the 0:05:25.440 --> 0:05:27.920 equity market if you continue to see dollar strength. 0:05:28.400 --> 0:05:31.159 I think the biggest risk to the equity market is rates, 0:05:31.200 --> 0:05:33.440 but they are they're not driven by one hundred percent 0:05:33.480 --> 0:05:35.200 exactly the same things, but they have a lot of 0:05:35.240 --> 0:05:40.200 the same underlying underlying contributors. Namely that US growth has 0:05:40.240 --> 0:05:44.640 been outperforming, US inflation has been outperforming. That keeps rates sticky, 0:05:45.520 --> 0:05:47.640 like unlikely to see the volume of FED cuts that 0:05:48.320 --> 0:05:51.320 we'd expect, and that also of course keeps the dollar higher. 0:05:52.160 --> 0:05:53.839 What did you take away from this earning season that 0:05:53.839 --> 0:05:55.479 we're just kind of wrapping up here, What did it 0:05:55.520 --> 0:05:55.880 tell you? 0:05:56.480 --> 0:05:58.880 Well, it told me that this sort of bifurcation of 0:05:58.920 --> 0:06:02.000 the consumer bifurcation and quality that we're seeing as persisting. 0:06:02.040 --> 0:06:06.560 And though as I do expect that we'll see more 0:06:06.600 --> 0:06:08.919 winners not just from the AI trade as it broadens 0:06:08.920 --> 0:06:12.600 into energy and electrification, but also from the market in 0:06:12.640 --> 0:06:18.520 general as growth sort of stabilizes. But that is that 0:06:18.720 --> 0:06:22.800 demands an acid allocation shift over the course of the year. 0:06:22.839 --> 0:06:26.679 A new focus for investors really reflected in that data. 0:06:26.800 --> 0:06:28.960 Something else I've been keeping a close eye on, too, 0:06:29.320 --> 0:06:32.159 is looking at S and P five hundred earnings but 0:06:32.279 --> 0:06:34.840 excluding energy, because that was the one that saw kind 0:06:34.839 --> 0:06:37.440 of the biggest markdowns coming into third quarter earning season. 0:06:37.560 --> 0:06:39.600 Right now, I mean, the growth is still around ten 0:06:39.720 --> 0:06:43.240 eleven percent when you're excluding that sector going into next year, 0:06:43.279 --> 0:06:46.280 even those revisions look like it's more commodity driven. How 0:06:46.279 --> 0:06:48.559 do you view energy in particular, and do you still 0:06:48.560 --> 0:06:50.680 think the other parts of the index will still hold 0:06:50.760 --> 0:06:52.360 up for next year when it comes to earnings growth. 0:06:52.560 --> 0:06:55.640 I am relatively constructive on energy because I think that 0:06:55.760 --> 0:06:59.560 not only is it an important part of the administration 0:07:00.320 --> 0:07:02.560 and the sort of Trump trade dynamic just from a 0:07:02.600 --> 0:07:07.720 sentiment perspective, but increasingly it is the bottleneck for artificial intelligence. 0:07:08.000 --> 0:07:10.640 There's lots of really cool and interesting stats about how 0:07:10.640 --> 0:07:13.640 we as a global economy need to add Germany's size 0:07:13.640 --> 0:07:16.280 of electricity production over the next couple of years to 0:07:16.360 --> 0:07:19.880 keep up. Increasingly, chip makers have been able to keep 0:07:19.960 --> 0:07:23.240 up with Moore's law, but energy efficiency hasn't kept up. 0:07:23.280 --> 0:07:26.360 We need more energy per unit of compute now already 0:07:26.640 --> 0:07:28.720 than was the case a year ago, and so that 0:07:28.840 --> 0:07:32.720 constraint on the one of the most important trends in 0:07:32.720 --> 0:07:36.160 the economy I think, involves more capital intensive investment in 0:07:36.160 --> 0:07:37.200 support of that sector. 0:07:38.840 --> 0:07:41.160 Tom Keen and I and some others we were part 0:07:41.240 --> 0:07:44.720 of the AI panel that hosted by Bloomberg Intelligence a 0:07:44.760 --> 0:07:45.520 couple of days. 0:07:45.320 --> 0:07:46.160 Ago here in New York. 0:07:47.760 --> 0:07:48.120 AI. 0:07:48.320 --> 0:07:50.000 I mean, how do you think about it? Do you 0:07:50.200 --> 0:07:52.720 just how important is that to you as a strategist 0:07:52.720 --> 0:07:53.480 and the economist. 0:07:53.880 --> 0:07:56.720 Well, it's important in two ways, at least two ways. 0:07:57.040 --> 0:08:01.040 One is the broader economic trajectory we're on and the 0:08:01.120 --> 0:08:05.200 idea that this capital intensity of not just AI but reglobalization, 0:08:05.840 --> 0:08:09.920 it does give us a medium term constructive outlook when 0:08:09.960 --> 0:08:12.280 you think about the private capital markets or a long 0:08:12.360 --> 0:08:15.600 term view, you do see a lot to be constructive 0:08:15.600 --> 0:08:18.760 about in terms of just investment needs related to this trend. 0:08:19.040 --> 0:08:21.320 But the other thing that's important as a strategist is 0:08:21.360 --> 0:08:25.320 just the acknowledgment that though every move up in the 0:08:25.360 --> 0:08:28.920 Magnificent seven has been justified by earnings, we are beginning 0:08:28.920 --> 0:08:31.240 to see their constraints. We are beginning to see more 0:08:31.280 --> 0:08:33.520 competition I don't know that that plays out in the 0:08:33.520 --> 0:08:36.160 first half of twenty twenty five, but the broadening of 0:08:36.200 --> 0:08:39.600 the trend into infrastructure and then eventually into corporate use 0:08:39.640 --> 0:08:42.640 cases will mean a broadening in S and P five 0:08:42.679 --> 0:08:43.400 hundred earnings. 0:08:43.640 --> 0:08:45.319 Lauren, thank you so much for joining us. I really 0:08:45.320 --> 0:08:45.800 appreciate it. 0:08:45.840 --> 0:08:48.839 Lauren Goodwin, she's a chief market strategist and economists to 0:08:48.840 --> 0:09:01.400 add New York Life. 0:08:57.400 --> 0:09:01.240 You're listening to the Bloomberg Surveillance podcast. Catch US Live 0:09:01.360 --> 0:09:04.680 weekday afternoons from seven to ten am. Easter Listen on 0:09:04.720 --> 0:09:07.920 Apple car Play and Android Otto with a Bloomberg Business app, 0:09:08.080 --> 0:09:09.800 or watch US live on YouTube. 0:09:10.040 --> 0:09:11.680 Let's talk about the economics over in Europe. 0:09:11.960 --> 0:09:15.040 Some weaker pmis came out today, I think, surprising some 0:09:15.080 --> 0:09:17.400 people as to you know, kind of going back into 0:09:17.400 --> 0:09:18.800 a contraction across there. 0:09:19.360 --> 0:09:20.000 Doctor vania A. 0:09:20.080 --> 0:09:25.439 Stravakova, professor of economics that the London Business School joins us. Professor, 0:09:25.640 --> 0:09:28.360 talk to us about the economic activity we're seeing across 0:09:28.440 --> 0:09:29.360 Europe these days. 0:09:29.480 --> 0:09:32.040 I mean, the center banks are easy, but still some 0:09:32.160 --> 0:09:33.400 challenges out there. What are you seeing? 0:09:35.320 --> 0:09:37.880 So thank you so much for having me. Unfortunately we 0:09:37.920 --> 0:09:40.560 don't have many good news in Europe, both the Eurozone 0:09:40.600 --> 0:09:44.280 and the UK, and we have seen significant divergence also 0:09:44.280 --> 0:09:47.240 reflected in the stock market performance, as you're of course aware. 0:09:47.679 --> 0:09:50.920 So since the Trump elections, the you know, the eurostocks 0:09:50.920 --> 0:09:54.800 fifty has decreased substantially, while the smp it struck has increased. 0:09:55.520 --> 0:09:58.160 What's interesting is if you look at historical data, and 0:09:58.240 --> 0:10:00.280 let's go not go back that much in his readly, 0:10:00.280 --> 0:10:03.360 but post the global financial crisis, you find a very 0:10:03.400 --> 0:10:08.320 high correlation between augur good stock market price growth returns 0:10:08.400 --> 0:10:11.200 across the US and the Eurozone for example. So in 0:10:11.280 --> 0:10:14.800 the data the correlation is around eighty six percent. However 0:10:15.120 --> 0:10:18.960 we see sometimes divergence. So nowadays we definitely have the 0:10:18.960 --> 0:10:21.199 divergence since the election. And another period during which we 0:10:21.480 --> 0:10:26.400 had significant divergence was during the post twenty sixteen Trump elections. 0:10:26.679 --> 0:10:29.200 So if you look particularly during the period from June 0:10:29.200 --> 0:10:32.840 twenty sixteen until June twenty nineteen, you find that the 0:10:32.880 --> 0:10:36.200 correlation between the US and the Eurozone stock market drops 0:10:36.200 --> 0:10:39.320 to seventy percent, which is a drop of sixteen percent. 0:10:40.200 --> 0:10:43.360 Now what does this mean. Well, actually, I have recent 0:10:43.440 --> 0:10:46.599 work which allows me to decompose the movements of it 0:10:46.760 --> 0:10:49.760 U syncratic stock prices, but also our good stock market 0:10:49.840 --> 0:10:53.160 indices into easy to interpret components. So what do we 0:10:53.200 --> 0:10:56.600 do in a paper titled Elephants and Equity Markets. So 0:10:56.640 --> 0:10:59.160 we take let's say individual stock price growth rate or 0:10:59.160 --> 0:11:02.600 the augur good stock market, and we decompose that growth 0:11:02.679 --> 0:11:06.439 rate into the subcomponents of the growth rate of holdings. 0:11:06.800 --> 0:11:09.240 So what are those components. Well, the stock price could 0:11:09.240 --> 0:11:13.680 be moving because the portfolio managers are rebalancing their weights, 0:11:13.800 --> 0:11:15.880 the weights that they place on this stock or stock 0:11:15.920 --> 0:11:18.760 market in their portfolio. It could be moving because of 0:11:18.800 --> 0:11:20.960 what we called wealth effects. So let's say the native 0:11:20.960 --> 0:11:22.920 fit returns of the funds. They're good, so it is 0:11:22.960 --> 0:11:27.000 like an implification effect. They could be moving because of 0:11:27.040 --> 0:11:30.040 final inflos alsos into the funds and also exchange the 0:11:30.080 --> 0:11:33.199 evaluation effects which kepture for example that US do or 0:11:33.280 --> 0:11:35.440 investors called global stocks for examples. 0:11:35.960 --> 0:11:38.120 Also, we won't point up because Paul was talking about 0:11:38.120 --> 0:11:40.880 this earlier, looking at the euro in particular fall into 0:11:40.880 --> 0:11:43.439 its lowest level since twenty twenty two, walk us through 0:11:43.480 --> 0:11:45.800 kind of the dynamics when you're thinking about Germany and France, 0:11:45.840 --> 0:11:49.080 because that's obviously the Eurozone's two largest economies, and we 0:11:49.120 --> 0:11:52.000 were thinking about those increasing bets that the ECB is 0:11:52.040 --> 0:11:54.520 going to have to boost the economies' region by potentially 0:11:54.559 --> 0:11:56.480 a half point cut, whereas over here, if you're thinking 0:11:56.480 --> 0:12:00.000 about the Federal Reserve, that's getting dialed back to potentially 0:12:00.080 --> 0:12:03.080 maybe even a pause potentially in December. Walk us through 0:12:03.080 --> 0:12:05.600 the dynamics when you're thinking about what's happening in the 0:12:05.640 --> 0:12:07.599 Eurozone versus what's happening over here in the US. And 0:12:07.640 --> 0:12:09.600 then of course very different dynamics if you're thinking about 0:12:09.600 --> 0:12:10.240 the being Japan. 0:12:11.960 --> 0:12:14.440 Yeah, so in general, you know, using this the complition, 0:12:14.480 --> 0:12:15.960 it can trace you to Portfoy a way changes. So 0:12:15.960 --> 0:12:16.840 it's the same nowadays. 0:12:16.880 --> 0:12:17.520 So why are the. 0:12:17.480 --> 0:12:21.680 Investors rebalancing their portfolios differently with respect to Eurozone countries 0:12:21.720 --> 0:12:24.040 than the US, Which is kind of aligned with your question. 0:12:24.480 --> 0:12:27.040 Why now we see that we're pricing differently, let's say, 0:12:27.040 --> 0:12:29.280 French and German stocks relative to the US stocks. So 0:12:29.320 --> 0:12:32.240 what are the news potentially driving the divergency at the moment? 0:12:32.679 --> 0:12:36.200 So what they see happening is definitely there is a 0:12:36.200 --> 0:12:39.880 lot of concern of course, around tariffs and differential regulation 0:12:40.000 --> 0:12:42.800 across the industries in the US and Europe. Granted that 0:12:42.800 --> 0:12:44.920 the euro Zone is a much more open economy, tariffs 0:12:44.960 --> 0:12:47.880 are going to hurt much more the Eurozone than the US, 0:12:47.920 --> 0:12:50.400 So that's one of the factors. Another factor, which I 0:12:50.480 --> 0:12:53.080 believe is going to be first over the importance. Maybe 0:12:53.160 --> 0:12:54.959 not so much priced in at the moment, but it's 0:12:55.000 --> 0:12:56.840 going to be priced in soon enough and definitely in 0:12:56.840 --> 0:13:00.720 the medium run, is the different physical sustainability across the 0:13:00.760 --> 0:13:03.880 Eurozone and the US. So we already seen in the 0:13:03.960 --> 0:13:07.600 UK we saw the latest budget which implied significantly increased 0:13:08.800 --> 0:13:12.560 in terms of taxes the for essentially capital, you know, 0:13:12.679 --> 0:13:16.200 essentially forums. So this is definitely going to slow down growth. 0:13:16.600 --> 0:13:18.880 I do believe that the Eurozone is not different in 0:13:18.920 --> 0:13:21.800 the UK. Both the UK and the Eurozone have unsustainable 0:13:21.800 --> 0:13:24.560 welfare states given the current tax system. What do I 0:13:24.600 --> 0:13:27.920 mean by this? We're taxing labor as much as possible, 0:13:28.080 --> 0:13:31.200 meaning probably we have reached the maximum amount of taxation 0:13:31.280 --> 0:13:35.320 we can impose on middle income and higher income earners. 0:13:35.640 --> 0:13:37.600 So we need to start taxing capital. We're seeing that 0:13:37.640 --> 0:13:39.600 in the form of labor. This is not so easy 0:13:39.640 --> 0:13:42.280 to do. If you tax capital, also you decrease real 0:13:42.320 --> 0:13:44.240 down growth. What do you see in the US, it's 0:13:44.280 --> 0:13:47.480 exactly the opposite. Right, we got Trump, people anticipate lower 0:13:47.880 --> 0:13:51.920 taxes on farms. But moreover the fact that he appointed 0:13:51.960 --> 0:13:55.520 Ellen must do a newly formed essentially agency that is 0:13:56.240 --> 0:13:58.400 the only goal of which is to decrease the size 0:13:58.400 --> 0:14:01.920 of the government. We would inspect that the goal of 0:14:01.960 --> 0:14:04.640 the Troup administration is to decrease the amount of taxes 0:14:04.679 --> 0:14:06.880 you need to essentially get in the future in order 0:14:06.920 --> 0:14:09.439 to finance the government. This is very different for what's 0:14:09.440 --> 0:14:11.679 happening in Europe. So this is going to definitely hint 0:14:11.679 --> 0:14:14.480 the growth in Europe overall. How do we fund the 0:14:14.520 --> 0:14:16.840 welfare states? What do we tax? Who do we tax? 0:14:16.920 --> 0:14:19.640 Higher taxes definitely have going to translate with so in 0:14:19.680 --> 0:14:22.280 lower growth and of course worse performance in the stock markets. 0:14:22.480 --> 0:14:26.440 Is there any political appetite, professor, to lower some of 0:14:26.520 --> 0:14:30.080 the expenditures across Europe? You talk about the welfare state, 0:14:30.120 --> 0:14:34.440 is there any political you know, expectations that could be 0:14:34.520 --> 0:14:35.360 reduced over time? 0:14:36.200 --> 0:14:39.880 That is a very good question. Unfortunately, within an equilibrium 0:14:39.960 --> 0:14:43.400 ware a lot of I mean fortunately and unfortunately when 0:14:43.440 --> 0:14:46.360 you have big welfare states, you have usually a large 0:14:46.400 --> 0:14:50.080 fraction of the voting population benefiting from these big welfare states. Right, 0:14:50.120 --> 0:14:52.680 So the statistics shows that in the UK more than 0:14:52.720 --> 0:14:56.000 fifty percent of the population or net receives more benefits 0:14:56.040 --> 0:14:58.160 than pay in the form of taxes. If you have 0:14:58.200 --> 0:15:01.800 a big chunk of the population benefiting for the welfare state, 0:15:02.040 --> 0:15:04.920 it's highly unlikely for them to vote a party in 0:15:05.000 --> 0:15:07.880 power that is going to promote cutting the welfare state. 0:15:08.400 --> 0:15:10.640 So I do believe that the only way we can 0:15:10.680 --> 0:15:13.360 reduce if I mean, I'm not saying that's optimal or not, 0:15:13.600 --> 0:15:16.720 but this is from the perspective of growth and performance 0:15:16.720 --> 0:15:19.480 of European stock market. The only way to decrease the 0:15:19.520 --> 0:15:23.080 welfare state in Europe is over time to reach the 0:15:23.280 --> 0:15:26.360 limited physical sustainability, meaning you have very high level of 0:15:26.400 --> 0:15:29.040 the two GDP, you have reached the max level of 0:15:29.040 --> 0:15:32.040 taxation on labor income, right, you know, you are finding 0:15:32.040 --> 0:15:35.360 that increasing taxes is actually not increasing revenue. So once 0:15:35.360 --> 0:15:38.360 we reach that point, essentially any party in power is 0:15:38.400 --> 0:15:40.440 not going to have a choice and they'll have to 0:15:40.480 --> 0:15:42.840 do something about essentially the welfare state. But that is 0:15:42.920 --> 0:15:45.360 very costly. It's going to take time to get there, 0:15:45.680 --> 0:15:48.320 and it might mean at least a decade or even 0:15:48.400 --> 0:15:50.239 more of low broad in Europe. 0:15:50.480 --> 0:15:52.640 Professor, thank you so much for We appreciate that as always, 0:15:52.640 --> 0:15:55.479 Doctor Van yester Rakova. She is a professor of economics 0:15:55.520 --> 0:15:57.080 at the London Business World. 0:15:57.200 --> 0:16:01.440 This is the Bloomberg Surveillance Podcast. Listen live each weekday 0:16:01.560 --> 0:16:04.760 starting at seven am Eastern on applecar Play and Android 0:16:04.760 --> 0:16:07.640 Auto with a Bloomberg Business app. You can also listen 0:16:07.720 --> 0:16:10.840 live on Amazon Alexa from our flagship New York station, 0:16:11.240 --> 0:16:13.960 just say Alexa playing Bloomberg eleven thirty. 0:16:14.120 --> 0:16:17.680 What is going on with bitcoin approaching one hundred thousand? 0:16:17.760 --> 0:16:19.760 This might be the Matt who also forgot his token 0:16:20.320 --> 0:16:22.480 number and it's just asking for a friend here. But 0:16:22.800 --> 0:16:27.320 let's go to Mike mcgloonan senior macro strategist for Bloomberg Intelligence. Mike, 0:16:27.800 --> 0:16:30.080 you know you're the only one that's explained to me 0:16:30.120 --> 0:16:31.440 what's going on here with this bitcoin. 0:16:31.480 --> 0:16:33.480 So I guess it's just more buyers and sellers. 0:16:33.200 --> 0:16:36.800 Here, definitely, now, Paul, more buyers. You're looking at this 0:16:36.880 --> 0:16:40.360 month alone, ETF flows and in tf's are approaching six 0:16:40.440 --> 0:16:44.680 billion dollars. That's the biggest month ever. Total ETF's tracking 0:16:44.680 --> 0:16:46.920 bitcoin now around one hundred and twenty billion to put 0:16:46.920 --> 0:16:50.120 that in context, that's about half what do you see 0:16:50.120 --> 0:16:52.560 the total mount tracking goal, which is about two hundred 0:16:52.560 --> 0:16:54.920 and twenty billion, so it's catching up really fast. A 0:16:55.000 --> 0:16:57.800 year ago at this time, total ETF's tracking bitcoin was 0:16:57.840 --> 0:17:01.720 around ten billions, so mass of buying for good reason. 0:17:01.840 --> 0:17:04.600 We have a crypto president member Nozelt like a convert. 0:17:04.680 --> 0:17:07.360 When he was president, he thought cryptos were a scam 0:17:07.600 --> 0:17:10.959 and now he's realizing, oh boy, this basic space tracks 0:17:10.960 --> 0:17:14.240 the dollar. But all we've had some major dog double 0:17:14.280 --> 0:17:17.240 dog deer potential peak signs lately and I'm really concerned 0:17:17.240 --> 0:17:18.679 about it. I'd like to tell you about. 0:17:18.600 --> 0:17:20.840 Well talk more about that because it looks like it's 0:17:20.920 --> 0:17:23.600 up about forty percent just so far this month. So 0:17:23.640 --> 0:17:26.240 how much more gas is left in the tank here? 0:17:26.359 --> 0:17:28.959 And where you looking at for like resistance support levels? 0:17:29.680 --> 0:17:32.120 Well, there you go, Jess, the key level everybody's looking 0:17:32.160 --> 0:17:35.200 at round number one hundred thousand dollars. I first mentioned 0:17:35.240 --> 0:17:38.760 it almost I think it was four years ago. Yeah, 0:17:39.240 --> 0:17:41.119 kind of felt the horse for a little while, but 0:17:41.200 --> 0:17:44.160 you know, just the diminishing supply, increasing demand and adoption. 0:17:44.400 --> 0:17:46.480 But there's a key thing, is a key thing. So 0:17:46.480 --> 0:17:49.680 one hundred thousand, very good resistance. It's it's traded in futures, 0:17:49.720 --> 0:17:52.240 but that's a little different. The key thing I'm watching 0:17:52.320 --> 0:17:55.520 is bitcoin versus gold. Right now, that ratio it takes 0:17:55.600 --> 0:17:58.480 basically about thirty six sounds of gold for when bitcoin 0:17:58.560 --> 0:18:00.280 the all time high is still in place. That was 0:18:00.320 --> 0:18:03.360 thirty seven in twenty twenty one. But there's one key 0:18:03.520 --> 0:18:06.520 headline that really struck me yesterday. I was really concerned about. 0:18:06.560 --> 0:18:09.119 For it's a lesson. You're learning the trading pests and 0:18:09.160 --> 0:18:11.720 it's never messed with the market gods, particularly if you 0:18:11.760 --> 0:18:13.720 have profits, you kind of kind of should be modest 0:18:13.720 --> 0:18:16.280 about this. Here's a headline in Bloomberg term a Warren 0:18:16.280 --> 0:18:20.160 Buffett destroying three billion a month of Berkshire capital by 0:18:20.200 --> 0:18:23.959 not investing in bitcoin, says Micro Strategies Michael Saylor. I 0:18:24.000 --> 0:18:26.480 saw that, and I remember Michael Sarely, here's one of 0:18:26.520 --> 0:18:29.560 the persons that really kicked over my bullishness in twenty twenty. 0:18:29.800 --> 0:18:31.840 That was in the back of the Attorney General in New 0:18:31.840 --> 0:18:34.440 York coming down and tether in twenty nineteen. It all 0:18:34.560 --> 0:18:37.560 proved how bullish bitcoin is. But now when you double 0:18:37.600 --> 0:18:40.000 dog dear markets like that, I think I gotta be careful. 0:18:40.480 --> 0:18:43.359 So I don't know, michaed Man. Maybe I'm wrong on this, 0:18:43.400 --> 0:18:46.840 but I kind of think of this as a commodity. 0:18:47.119 --> 0:18:51.280 How do you can you put valuations on commodities or 0:18:51.320 --> 0:18:53.600 do I know in the past you've kind of talked 0:18:53.600 --> 0:18:56.399 about it in relation to other commodities in this case gold. 0:18:57.240 --> 0:18:59.200 Yeah, definitely, so I look at versus gold. So one 0:18:59.200 --> 0:19:01.240 thing I about point out today Bitcoin is actually dropping 0:19:01.240 --> 0:19:03.040 a little bit down at ninety eight just split a 0:19:03.080 --> 0:19:05.280 ninety eight hundred, and gold's up over a percent. Part 0:19:05.280 --> 0:19:09.200 of that is the re escalation of global tensions, most 0:19:09.240 --> 0:19:14.399 notably in Ukraine. But you don't it's the machine supply, 0:19:14.840 --> 0:19:16.960 increasing demand and adoption. We get that, and that's why 0:19:16.960 --> 0:19:19.679 I pointed out right away massive inflows and ETFs. But 0:19:19.840 --> 0:19:22.200 one thing about this space pall it's the most widely 0:19:22.240 --> 0:19:26.239 traded speculative digital asset on the planet ever. Twenty four 0:19:26.280 --> 0:19:28.840 to seven comes Saturday Sunday. Sometimes I can't stop watching 0:19:28.840 --> 0:19:30.320 it because it gives you indication what's going on, so 0:19:30.400 --> 0:19:32.960