WEBVTT - Here's Why Uncertainty Is An Economic Killer

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<v Speaker 1>Hi. I'm Stephen Carroll, host of Bloomberg's Here's Why podcast.

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<v Speaker 1>I'm dropping into your feed because we borrowed Joe Wisenthal

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<v Speaker 1>for our latest episode while he was in London, so

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<v Speaker 1>we wanted to share it with you. If you like it,

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<v Speaker 1>you can subscribe to us wherever you usually listen. There

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<v Speaker 1>is a link in the show notes Enjoy Bloomberg Audio Studios, podcasts,

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<v Speaker 1>radio news. I'm Stephen Carroll, and this is Here's Why,

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<v Speaker 1>where we take one new story and explain it in

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<v Speaker 1>just a few minutes with our experts. Here at Bloomberg,

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<v Speaker 1>people getting really a bit tired.

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<v Speaker 2>They don't know even if something's announced whether two days

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<v Speaker 2>later it's not changed again. So you really see some

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<v Speaker 2>fatigue of decision makers.

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<v Speaker 1>That's the CEO of Logistics Giant DHL, Tobias Meyer. For

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<v Speaker 1>executives like him navigating the near daily shifts in US

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<v Speaker 1>economic policy, it's like driving through fog with no headlights.

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<v Speaker 1>When the rules are changing so quickly, it's not just

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<v Speaker 1>hard to keep it's almost impossible to make decisions. Should

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<v Speaker 1>a company build a new factory, order more supplies, hor

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<v Speaker 1>or more workers, and where to do any of this?

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<v Speaker 1>And when you don't know what's coming. You hit the brakes.

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<v Speaker 1>But we haven't I don't think spent enough time talking

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<v Speaker 1>about just the uncertainty out there.

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<v Speaker 2>Operating in this highly uncertain environment means go slow.

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<v Speaker 1>The higher uncertainty and greater risk of recession, the fear

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<v Speaker 1>that on a daily basis, you wake up in the

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<v Speaker 1>morning and not wondering whether which sectors again to have

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<v Speaker 1>twenty five percent towers, which country's twerffs again to be

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<v Speaker 1>at one hundred percent. That's where the damage is caused.

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<v Speaker 1>So here's why uncertainty is an economic killer. Joe Wisenthal,

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<v Speaker 1>host of Bloomberg's Odd Lots podcasters with me in London. Joe,

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<v Speaker 1>great to see you, Thank.

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<v Speaker 2>You for having me, thrilled to be here.

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<v Speaker 1>Tell me, with your brain and knowledge of these matters,

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<v Speaker 1>how can we define uncertainty in this moment in twenty

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<v Speaker 1>twenty five.

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<v Speaker 2>Yeah, I mean it's a great question, and I think

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<v Speaker 2>there are sort of two different elements, Which is one

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<v Speaker 2>is okay, we know there's going to be a change

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<v Speaker 2>in the trading environment between the rest of the world

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<v Speaker 2>and the US, right, like that's obviously a done deal,

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<v Speaker 2>and nobody knows like what type of arrangements will be

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<v Speaker 2>profitable in those environments and so forth. So that's a

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<v Speaker 2>form of uncertainty, but that there's another, you know, the

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<v Speaker 2>more deeper form of uncertainty is, yes, we know there's

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<v Speaker 2>going to be a change, but we don't know to

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<v Speaker 2>what right. And part of that is I don't think,

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<v Speaker 2>you know, the White House has clearly articulated what it

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<v Speaker 2>wants the new environment to be. There's a message uncertainty

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<v Speaker 2>because various people speak for the White House on behalf

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<v Speaker 2>of the White House, and there's a lot of ambiguity

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<v Speaker 2>about the degree to which anything they say actually reflects

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<v Speaker 2>the thinking of the administration. And when I say the administration,

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<v Speaker 2>I only mean the president because you know, typically one

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<v Speaker 2>would think there is a coherent message, but I don't

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<v Speaker 2>think there is. There's you know, there's rivals within the

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<v Speaker 2>White House that have different priorities. And I think that

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<v Speaker 2>even the President himself, well, he has some intuitions that

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<v Speaker 2>you know, he believes that tariffs are a tool that

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<v Speaker 2>can be used to revive the US manufacturing sector. The

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<v Speaker 2>degree to which that policy has cemented seems still very

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<v Speaker 2>up in the air.

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<v Speaker 1>Can we say that it's more uncertain now that it

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<v Speaker 1>has been in years. Yeah, I'm sure. How do we

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<v Speaker 1>sort of measure uncertainty? I mean, you can look at

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<v Speaker 1>the mats for one example.

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<v Speaker 2>Well, look, I think you know, in the two big

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<v Speaker 2>recent crises that we had, there were clear goals. During COVID,

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<v Speaker 2>the goal was to stop the spread of the disease

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<v Speaker 2>and then from an economic side, to sort of replaced

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<v Speaker 2>all the lost money, you know, all the lost economic

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<v Speaker 2>activity for those months during lockdown in two thousand and

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<v Speaker 2>eight and two thousand and nine. The goal was to

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<v Speaker 2>stop a bank run. And there was a lot that

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<v Speaker 2>they didn't know at the time, and they certainly, you know,

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<v Speaker 2>may have misjudged the speed and scale through which the

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<v Speaker 2>financial system was deteriorating in two thousand and eight and

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<v Speaker 2>two thousand and nine. But the goal is to stop

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<v Speaker 2>a bank run. In this case, you know, as they say,

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<v Speaker 2>the call is coming from inside the house, so you

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<v Speaker 2>don't really know what the goal is. Is the goal

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<v Speaker 2>to improve our ability to manufacture high tech things that

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<v Speaker 2>are important for national security? Maybe is the goal to

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<v Speaker 2>fundamentally restructure the economy such that everyone or a lot

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<v Speaker 2>more people are in what we call production work. Is

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<v Speaker 2>the goal to stop the flow of fentanyl is the

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<v Speaker 2>goal to slow international migration. So whereas in the last

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<v Speaker 2>two crises, there is certainly a lot of uncertainty, and

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<v Speaker 2>there's a lot of debating about, well, what's it going

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<v Speaker 2>to take and how long will it take to stop

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<v Speaker 2>the spread of a pandemic or a bank run, et cetera.

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<v Speaker 2>I don't think we actually even know what the goal

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<v Speaker 2>is here, and so in some sense, I would say, again,

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<v Speaker 2>there are various attempts to measure uncertainty. There are market

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<v Speaker 2>based measures, there are sentiment based measures. But I would

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<v Speaker 2>say there is a degree of uncertainty now that is

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<v Speaker 2>in a way incomparable to any recent crisis.

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<v Speaker 1>What's the macro picture when we have this level of uncertainty,

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<v Speaker 1>given that, as you say, it doesn't really have a

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<v Speaker 1>parallel something we've looked at before.

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<v Speaker 2>Well, look, at a minimum, it's very hard to imagine

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<v Speaker 2>any company in the world committing to like serious investment

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<v Speaker 2>right now. And what I mean by investment obviously is

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<v Speaker 2>opening up new locations, opening up new production facilities, expanding headcount,

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<v Speaker 2>et cetera. Why would anyone do that in this environment?

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<v Speaker 2>And that's at a minimum. Furthermore, there has been this

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<v Speaker 2>hit to financial markets of financial tightening, as they say,

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<v Speaker 2>and so stock prices have gone down, yields on government

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<v Speaker 2>debt have gone up, credit spreads have gotten wider. So

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<v Speaker 2>there is just an increased cost of doing business already

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<v Speaker 2>on the financial side, and then you layer in the

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<v Speaker 2>actual literal increase cost of doing business because the goods

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<v Speaker 2>that a company imports, whether they're for resale or whether

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<v Speaker 2>their inputs to production, have also gone up. So you

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<v Speaker 2>layer in the inherent policy uncertainty and the fact that

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<v Speaker 2>until there's some policy stability, no one is going to

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<v Speaker 2>do anything new, on top of the fact that the

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<v Speaker 2>existing cost we're on day to day operations for both

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<v Speaker 2>financial and goods have gone up. And this is why

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<v Speaker 2>many people believe we're either going into a recession in

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<v Speaker 2>the US or that we're already in one.

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<v Speaker 1>At what points do businesses, consumers, markets simply get used

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<v Speaker 1>to things being so uncertain. Is there a point at

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<v Speaker 1>which that we all just sort of shrug and move on.

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<v Speaker 2>It's hard to imagine that you can ever fully shrug

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<v Speaker 2>and move on. But the answer to that persistent uncertainty

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<v Speaker 2>is to take fewer risks to shore up your balance sheet.

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<v Speaker 2>To cut everything that you can theoretically cut. You know,

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<v Speaker 2>it's interesting, like in twenty twenty two, when there was

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<v Speaker 2>significant inflation, there were a lot of concerns. Then you know,

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<v Speaker 2>the Federal Reserve was jacking up interest rates and so

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<v Speaker 2>there was a lot of a concern. Then I was like, oh,

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<v Speaker 2>we're going to go into a recession. But one of

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<v Speaker 2>the overriding dynamics of that period was this visceral fear

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<v Speaker 2>of companies to be short of labor. Because twenty twenty,

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<v Speaker 2>twenty twenty one, twenty twenty two, twenty twenty three, it

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<v Speaker 2>was probably the first time in recent corporate history where

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<v Speaker 2>companies realized that there is not an endless supply of

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<v Speaker 2>workers out there. I'd say, you ahead, restaurants like, oh,

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<v Speaker 2>we literally can't operate right because we can't find the

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<v Speaker 2>workers in this environment. And so what that means is

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<v Speaker 2>that there was this real reluctance to fire anyone because

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<v Speaker 2>you might think, well, you know, things are uncertain, but

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<v Speaker 2>I can't fire anyone because the last thing I want

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<v Speaker 2>to do is to be caught short labor. Again. I

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<v Speaker 2>just had this very visceral experience of being short. We're

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<v Speaker 2>in a very different environment right now. You know, arguably,

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<v Speaker 2>even going into middle of February, which is when the

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<v Speaker 2>turbulence really began, there were signs of economic slow down

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<v Speaker 2>a little bit that may had nothing to do with Trump.

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<v Speaker 2>Maybe you know, it's time for like the fit of

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<v Speaker 2>reserve to cut rates, signs of the housing market, which

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<v Speaker 2>is very important stalling out. So even then there was

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<v Speaker 2>probably already this sort of negative growth impulse emerging in

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<v Speaker 2>the US economy. And so I think this time around

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<v Speaker 2>right now, I suspect that inside many companies the conversations

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<v Speaker 2>are about what can we cut. We want to preserve capital,

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<v Speaker 2>we want to preserve cash, we want to preserve operational flexibility,

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<v Speaker 2>just to survive to the next month, of the next

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<v Speaker 2>half of the next quarter.

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<v Speaker 1>Where do we look for signs that things are calming down,

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<v Speaker 1>that things are becoming more certain.

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<v Speaker 2>I mean, look, I'm a big fan of the stock

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<v Speaker 2>market as an indicator. The stock market is not as

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<v Speaker 2>volatile as it was. The policy environment, I guess, you know,

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<v Speaker 2>is less fluid that it seemed like a we ago,

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<v Speaker 2>right although that could change it change, you know, but

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<v Speaker 2>like the pace of new news that's come out is

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<v Speaker 2>slowed down a little bit. You know, there's only so

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<v Speaker 2>far you can really go with that. So like at

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<v Speaker 2>the margins, things are more certain than they were a

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<v Speaker 2>week ago, but we're just talking marginal changes.

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<v Speaker 1>And we'll have to watch them to see where things

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<v Speaker 1>go next. Joe, great to have you, Thanks for having me.

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<v Speaker 1>Joe Wisenthal Houst is brilliant to Odd Lots podcast and

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<v Speaker 1>author of its newsletter. Thank you. For more explanations like

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<v Speaker 1>this from our team of three thousand journalists and analysts

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<v Speaker 1>around the world, go to Bloomberg dot com slash explainers.

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<v Speaker 1>I'm Stephen Carroll. This is Here's why. I'll be back

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<v Speaker 1>next week with more. Thanks for listening.