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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.

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Speaker 3: I'm Joe Wisenthal and I'm Tracy Allaway.

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Speaker 2: Tracy the number. One of the main things I'm watching

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Speaker 2: right now are those container shipping numbers that, at least

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Speaker 2: looking out at the next few weeks, it looks like

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Speaker 2: lots of actual orders are being canceled and there's the

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Speaker 2: risk of material shortage of things from China emerging in

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Speaker 2: a fairly short period of time.

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Speaker 3: Yeah, I think we're kind of getting to the rubber

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Speaker 3: meets the road portion of the tariffs, right. So everyone

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Speaker 3: was talking about the potential of some sort of trade

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Speaker 3: restrictions going into this year because we knew that Trump

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Speaker 3: had won the election and he wanted to do some

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Speaker 3: of the stuff. And so what we saw broadly for

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Speaker 3: the first quarter was people trying to get ahead of that,

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Speaker 3: so building up their inventories, ordering a bunch of stuff

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Speaker 3: before some of those restrictions were expected to get in.

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Speaker 3: But of course that can only last so long. And

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Speaker 3: on Liberation Day, April second, Trump unveiled these really quite sweeping,

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Speaker 3: quite dramatic tariffs, as we all know by now, Yes,

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Speaker 3: and so I think people are starting to get concerned

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Speaker 3: that like now is when we're really going to begin

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Speaker 3: to see some of that impact.

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Speaker 1: That's right.

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Speaker 2: So, by the way we are recording this April twenty third,

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Speaker 2: it's two to thirty six pm. Yesterday we got a

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Speaker 2: little bit of softening and Trump saying, oh, it's not

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Speaker 2: gonna be one hundred and forty five. But then today

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Speaker 2: we got stuff there's like, there's not going to be

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Speaker 2: any unilateral concessions. We don't really know. There has been

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Speaker 2: this little softening of the tone. But look, one point

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Speaker 2: of tariffs is to reduce a reliance on China, to

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Speaker 2: partially decouple, et cetera. But then when you look at

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Speaker 2: the reality of okay, well that's what we're doing. We're decoupling,

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Speaker 2: we're buying less, it looks like it's coming very sharp

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Speaker 2: and fast, and perhaps to a degree that it's not

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Speaker 2: even really about inflation per se. Right, because I'll let

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Speaker 2: you know, a year ago people were talking about this

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Speaker 2: in the abstract, what does the fedgod do inflation? People

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Speaker 2: are talking about empty shelves of a lot of things.

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Speaker 3: Well, I think this is still a big question, Like

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Speaker 3: I think there is some of this that could be

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Speaker 3: attenuated by companies just choosing to raise their prices and

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Speaker 3: maybe not order as many different types of things. But yeah,

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Speaker 3: we are seeing some analysts start to talk about the

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Speaker 3: possibility of empty shelves, and in fact, we're going.

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Speaker 2: To speak to one now, that's right, we have the

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Speaker 2: perfect guest. We are going to be speaking with Anna Wong.

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Speaker 2: She is our chief US economist at Bloomberg Economics. Thank

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Speaker 2: you for joining us. Anna, you tweeted about empty shelves

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Speaker 2: in the sort of imminent term. What is the data

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Speaker 2: you're looking at and when would you expect to see

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Speaker 2: start people really start noticing it.

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Speaker 4: Yeah, so and Tracy happy to be here again. So so,

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Speaker 4: you know, many people have been talking about how based

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Speaker 4: on the cancelation shipment and right now we have, as

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Speaker 4: you mentioned, we have seen plummeting container bookings, and already

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Speaker 4: in April, the first two weeks of April, we have

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Speaker 4: seen weekly imports data from China to US, even from

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Speaker 4: South Korea to US dropping very quickly. And and typically

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Speaker 4: when we think about holidays season retail, which is which

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Speaker 4: starts really with Halloween, uh in October, the US company

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Speaker 4: should be planning right now, right usually they plan uh

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Speaker 4: in the spring and they and then they start putting

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Speaker 4: in the orders now, especially for items like toys and

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Speaker 4: apparels and electronics longle time and so in in in

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Speaker 4: the summer, basically throughout June, July, August is when China

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Speaker 4: should be shipping these things to us. So we are

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Speaker 4: right in this period where all this planning has to happen.

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Speaker 4: Yet this is also when tariffs are implemented. So as

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Speaker 4: a result, the basically the inventory for Christmas, for Halloween

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Speaker 4: is already being disrupted right now. So even though it's

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Speaker 4: still many months away, and you know, with the ninety

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Speaker 4: day delay on the reciprocal tariffs, we are not you know,

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Speaker 4: it's not until July ninth where we have US firms

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Speaker 4: have better clarity on whether these tariffs fees of the

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Speaker 4: other country would be raised. And so basically it exactly

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Speaker 4: fell on this planning and shipping and producing period for

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Speaker 4: holiday season. So I think this is one reason why

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Speaker 4: just based on the high frequency data we have on

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Speaker 4: the volumes, on the quantities, the dropping of it, and

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Speaker 4: also just the you know, the timing of this this period,

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Speaker 4: it suggests that there's a high probability that we may

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Speaker 4: be seeing some empty shells in the holiday season, and

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Speaker 4: even with less varieties, I consider I basically consider that

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Speaker 4: part of the empty shelves just having less varieties.

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Speaker 3: So talk to us about prices here, because you know,

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Speaker 3: I sort of mentioned in the intro that one thing

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Speaker 3: you could do if you're a retailer who isn't importing

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Speaker 3: as much as you used to, you could just raise

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Speaker 3: your prices massively, right in order to try to offset

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Speaker 3: some of the loss of supply. So this kind of

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Speaker 3: goes back to the old price over volume theme that

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Speaker 3: we saw during the COVID pandemic. Is that an option

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Speaker 3: here or is it the case that you think the

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Speaker 3: uncertainty is so high that people just aren't ordering pretty

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Speaker 3: much anything.

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Speaker 4: Yeah, So we can look at some of the data,

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Speaker 4: because we already have data up to March for impro

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Speaker 4: prices PPI and CPI, and that covers basically two months

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Speaker 4: of the trade war, where US raise tariffs on China

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Speaker 4: by ten percent in February and then another ten percent

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Speaker 4: in March. That's already many times larger than in the

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Speaker 4: first trade war. So what we are seeing in the

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Speaker 4: in prices so far indicate that number one, most of

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Speaker 4: the Chinese tariffs have indeed been fully born by on

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Speaker 4: the US side, by you know whoever. But just we

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Speaker 4: can see that it's mostly one hundred percent passed through

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Speaker 4: at the border to US importers. This is with two

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Speaker 4: months of data. And second look at PPI data. This

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Speaker 4: is the next stage. Right once the US importers bring

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Speaker 4: in those products, they sell those products to intermediate firms

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Speaker 4: or even to know wholesale firms, to distributors. So the

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Speaker 4: next stage is looking at PPI. And we also have

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Speaker 4: seen a positive correlation between tariff shots across products in

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Speaker 4: February and March versus PPI increase in March. So there

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Speaker 4: is also some small pass through to PPI prices, but

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Speaker 4: not one hundred percent. So finally from PPI to CPI,

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Speaker 4: there you still have that big segment of wholesaler distributors

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Speaker 4: and this is where that passed through broke down. We

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Speaker 4: have not seen much evidence yet that it's showing up

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Speaker 4: in consumer prices. And in fact, if you plot a

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Speaker 4: similar scatter plot where you have on the vertical axis

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Speaker 4: the CPI change in March versus on the x axis

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Speaker 4: the tariff increased by product, you actually would see negative

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Speaker 4: correlation and meaning that the more China exposed it is

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Speaker 4: to that to in that good is actually the more

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Speaker 4: deflation you've seen. And we have seen that negative correlation

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Speaker 4: held over the last three months as well as for

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Speaker 4: most of last year, which suggests that there is actually

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Speaker 4: another major part to this whole trade war price pass

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Speaker 4: through story, which is China is going through a deflationary spiral,

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Speaker 4: and domestic prices in China is very very competitive right now.

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Speaker 4: So that's one element, and I think broadly these three

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Speaker 4: type of prices is consistent with what we are seeing

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Speaker 4: also in soft data, so in recent in recent days,

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Speaker 4: we have seen from Richmond FED, Philly FED, and various

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Speaker 4: manufacturing survey data that shows price paid have surged, yet

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Speaker 4: price received, even though it also has increased, has not

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Speaker 4: increased even to the amount of the price paid, which

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Speaker 4: suggests that a lot of the at least up to March,

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Speaker 4: the evidence is that much of the tariffs number one

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Speaker 4: has been born by the US side number two have

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Speaker 4: been absorbed through a compression of profit margins.

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Speaker 3: Yeah, I think this is really important and also basically

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Speaker 3: the big question here is how much of that cost

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Speaker 3: passed through actually makes it down to consumers. And I'm

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Speaker 3: so glad Anna brought up the wholesalers because they're sort

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Speaker 3: of the forgotten, the forgotten element of price passed through

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Speaker 3: in all of this. And obviously they have their own

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Speaker 3: profit margins to worry about, but if they all absorbing

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Speaker 3: potentially some of the costs, and that does add a

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Speaker 3: sort of extra cushion on for consumers.

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Speaker 2: By the way, yesterday April twenty second, in the newsletter,

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Speaker 2: I spotlighted this gap between prices received and prices paid

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Speaker 2: in some of those regional FED surveys, and Tracy was

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Speaker 2: kind enough to draw teeth on it to make it

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Speaker 2: look like the jaws of death that are coming for

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Speaker 2: your profit margins. And Okay, maybe the prices don't get

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Speaker 2: passed on to consumers fully, or maybe it's just partially

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Speaker 2: prices received just go up a lot. Tracy described it

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Speaker 2: as cushion. But what does economics tell us about when

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Speaker 2: profit margins get clobbered to profit margins go negative? What

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Speaker 2: does that do to the impulse for investment in hiring

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Speaker 2: and then the possibility of layoffs?

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Speaker 4: Yeah, exactly, that is the key question. And when profit

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Speaker 4: margins are squeezed, it means the primary burden of adjustment

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Speaker 4: to tariffs fall on stock prices and also on unemployment

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Speaker 4: and capex. So we're expecting investment to significantly slow down

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Speaker 4: in the second half of this year and responds to

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Speaker 4: lower profit. Right, everything on the investment side respond to profits, right,

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Speaker 4: And also then ultimately on employment and real wages will adjust.

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Speaker 4: So on employment we are expecting it to go up

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Speaker 4: to four point eight percent by the end of this

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Speaker 4: year and peaking at five point three percent next year,

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Speaker 4: and real wages will fall. And you know services sector

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Speaker 4: account for about two thirds of the core PCE basket.

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Speaker 4: And so when you think about how you know, at

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Speaker 4: the end of the day, maybe a year from now,

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Speaker 4: what we will see is that there's basically a reality

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Speaker 4: between prices, right, so goods prices probably will be higher

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Speaker 4: on a level basis, but at the same time, real wages,

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Speaker 4: which drives services costs, will come down significantly. And you know,

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Speaker 4: some of the most demand elastic sectors in the economy

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Speaker 4: are travel related and with elasticity of demand that's higher

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Speaker 4: than one, and also to income as well, to income

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Speaker 4: that's higher than one. That means that when the economy

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Speaker 4: slows down, we should be seeing a lot of disinflationary

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Speaker 4: pressure coming from the services sector, and in fact, I

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Speaker 4: think we already have seen some early clues of that

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Speaker 4: in the March CPI report. Hotels, car rentals, airfares have

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Speaker 4: all been plummeting, seeing deflation actually in March, and even

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Speaker 4: in the Sep. Five hundred you see that it's the

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Speaker 4: airlines stock prices that have been hit the hardest because

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Speaker 4: that's where the discretionary spending will be pulling back.

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Speaker 3: Let me just ask one question. One of the frustrations

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Speaker 3: that pretty much everyone operating in the economy right now

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Speaker 3: seems to have, including podcasters, by the way, is there

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Speaker 3: is so much uncertainty and the headlines are coming out

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Speaker 3: fast and furiously, it's really hard to keep up. And

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Speaker 3: you know, even if we get this episode out in

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Speaker 3: the next one or two days, we don't know if

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Speaker 3: the Trump administration is going to announce something completely different

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Speaker 3: when it comes to tariffs. How hard or easy will

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Speaker 3: it be to actually start to rebuild inventories if we

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Speaker 3: were to get some certainty on the Yeah, on the

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Speaker 3: Terroff question.

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Speaker 4: Going back to the planning for a holiday season, right, so,

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Speaker 4: firms should be planning now for if they want goods

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Speaker 4: to be on the shelf in October, so it takes

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Speaker 4: at least six months for the whole planning to take place.

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Speaker 4: But does anybody have enough certainty about six you know,

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Speaker 4: and even in thirty days time to know to to

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Speaker 4: be ready to potentially get hit by tariffs. So an

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Speaker 4: example is what we have seen in February March in

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Speaker 4: the import price data and mentioned that almost one hundred

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Speaker 4: percent of the tariffs on China has been passed through

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Speaker 4: through the US border. And the thing is it's because

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Speaker 4: most of those goods had been entransit already before these

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Speaker 4: tariffs were even on the horizon, so they were already

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Speaker 4: en route in January, so there was no time to

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Speaker 4: discuss between the import and exporter how to share the burden. So,

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Speaker 4: for if the US firm is thinking about restore stocking,

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Speaker 4: suppose that they have enough stock to last them until

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Speaker 4: June based on the front running we have seen in

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Speaker 4: the imports data so far, so they have enough until

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Speaker 4: June and now they're planning. Should they start to uh

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Speaker 4: plan for restocking beyond June, then they need to basically

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Speaker 4: think like a risk neutral agent. So in economics, when

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Speaker 4: one is you know, In these models, when we think

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Speaker 4: about how does a person make a decision rational decision

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Speaker 4: in the phase of uncertainty, you calculate the risk neutral

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Speaker 4: you know, optimization equation. So it would be you know,

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Speaker 4: a probability of the scenario on the tariff multiplied by

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Speaker 4: the net cost UH and then plus you know different

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Speaker 4: probability of scenarios. So right now we have seen that

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Speaker 4: tariffs on China is you know, over well over one

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Speaker 4: hundred percent, and because of that extremely high cost to

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Speaker 4: that tail outcome, like suppose that there were further escalation

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Speaker 4: between you as a China and now you know that

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Speaker 4: the probability of tariff on China could potentially even go

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Speaker 4: to two hundred percent if you know, I'm not saying

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Speaker 4: that will happen, but it seems like quite plausible. Now

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Speaker 4: anything could happen. So in that case, your loss in

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Speaker 4: this you're trying to minimize this loss function, and then

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Speaker 4: you have a massive loss. This is why we are

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Speaker 4: seeing cancelation of orders. It's because in the risk neutral optimization,

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Speaker 4: given these high risk outcome, it doesn't make sense for

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Speaker 4: you to actually take the risk of potentially you know,

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Speaker 4: having the good arrived at the border only to find

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Speaker 4: out that, oh, you are two hundred percent of the tariffs.

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Speaker 4: And this is why there's it's a high probability that,

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Speaker 4: given the uncertainty and the time it takes to plan

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Speaker 4: for the goods to be on the shelf in the fall,

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Speaker 4: that I think is the high high probability outcome that

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Speaker 4: we all have all empty shells and lack of varieties.

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Speaker 2: I just have one last question. You know, we're in

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Speaker 2: this sort of weird space where you know, we see

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Speaker 2: what's on the screen, and we see the surveys and

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Speaker 2: all that, but day to day life when I go

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Speaker 2: to the store is like pretty normal. And you know,

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Speaker 2: like we said, we haven't seen to pick up in

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Speaker 2: the layoffs data yet, even though everyone is anticipating all

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Speaker 2: the surveys are dismal. But you know, I think for most,

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Speaker 2: you know, the three of us anyway, buy and large

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Speaker 2: life goes on. Although Tracy has received emails from various

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Speaker 2: companies that she buys from.

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Speaker 3: One of the things I'm learning in all of this

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Speaker 3: is that I am on a lot of mailing us

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Speaker 3: for random stuff. So I've gotten an email from a

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Speaker 3: company that sells fake flowers saying that their prices are

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Speaker 3: probably going to go up because so much of it

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Speaker 3: is made in China. I've gotten an email from a

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Speaker 3: provider of a home battery storage system because I was

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Speaker 3: kind of interested in that, saying that prices we're also

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Speaker 3: going to go up. So we'll see, we'll see what else.

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Speaker 2: One thing about fake flowers, by the way, is that

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Speaker 2: was one of Hong Kong's very first export industries was

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Speaker 2: that they really they like current, they really like Yeah

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Speaker 2: they did. That was a huge you know. Then they

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Speaker 2: eventually did high tech things, but fake flowers was an

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Speaker 2: early uh it was an early industry. They came to

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Speaker 2: dominate this.

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Speaker 5: And one of those random oh yes, Joe, and in

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Speaker 5: fact it was the bread and butter of the richest

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Speaker 5: man in Hong kongly couching has uh got has start

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Speaker 5: with making plastic flowers.

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Speaker 1: This is so great.

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Speaker 2: I like have this random random fact stuck in my

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Speaker 2: head and you know, I don't know how you remember that.

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Speaker 2: And then you were able to the alip there between

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Speaker 2: me and a real quickly holiday season potentially very damage.

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Speaker 2: But when do you would you say, we start to

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Speaker 2: see this in sort of either our day to day

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Speaker 2: lives or at least in hard data, Well, I.

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Speaker 4: Think anecdotally it's already these stories are filtering in. I mean,

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Speaker 4: for anyone who will be having a broken AC system,

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Speaker 4: especially a central AC system, and comes summer, you'll find

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Speaker 4: that many of the parts are actually came from China,

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Speaker 4: only manufactured in China, and your service company will tell

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Speaker 4: you if they can't do nothing about it because nobody

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Speaker 4: is importing any of those parts. And you know there

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Speaker 4: will be more and more stories like that. In terms

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Speaker 4: of the hard data, I think in the April, meaning

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Speaker 4: next month, we will get the April's import volume data,

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Speaker 4: which for the whole month, and it will be clear

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Speaker 4: that the volume is already declining very quickly. And I

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Speaker 4: would I think for now, for people who collect big

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Speaker 4: data so web scraping, I think one could be scraping.

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Speaker 4: You know. You know how on Amazon it actually lists

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Speaker 4: how many of these items are remaining, Like it tells

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Speaker 4: you like three more left, more left. Start paying attention

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Speaker 4: to that, and you see that those three more left,

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Speaker 4: two more left is dwindling without increasing.

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Speaker 3: Anna, You're going to add to my already innate tendency

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Speaker 3: to stockpile things. Thank you for the advice.

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Speaker 2: Anna, think I'm sure you're as busy as we are,

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Speaker 2: updating models every day with every new headline. Thank you

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Speaker 2: so much for coming on odd Lote, No problem, Tracy,

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Speaker 2: that was unnerving. You know, this didn't actually come up.

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Speaker 2: But one of the things I've been thinking about is

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Speaker 2: the disparate impact that this will have on small versus

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Speaker 2: big businesses, because like a really big business, you know,

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Speaker 2: they can you know, could lose money right for a

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Speaker 2: quarter or two and go be you know, continue for

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Speaker 2: a while. As a going there are going to be

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Speaker 2: small businesses that literally just cannot pay that tariff bill

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Speaker 2: and that's lights out for them.

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Speaker 5: Yeah.

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Speaker 3: I think I wrote about this in the newsletter a

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Speaker 3: few weeks ago, but that seems almost certain to happen.

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Speaker 3: And also, you know, the bigger businesses obviously do have

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Speaker 3: some pricing power. They might have some ability to negotiate

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Speaker 3: with their suppliers, like I think Walmart is already trying

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Speaker 3: to do that with China at the moment. So yeah,

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Speaker 3: the scales seem very very much tipped in favor of

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Speaker 3: the big guys over at the small it is. It

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Speaker 3: is also very unsettling just to think that all of

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Speaker 3: this is by choice, right, Yeah, like this is a

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Speaker 3: policy decision by the current administration. It almost seems like

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Speaker 3: it was probably a bad time to do this, right

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Speaker 3: in the spring planning season, right before the summer shipping

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Speaker 3: season for the later retail buying season. Feels like this was, yeah,

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Speaker 3: not a great time.

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Speaker 2: Well, you know, I find it interesting that for years,

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Speaker 2: since I was a teen, culture work the war on Christmas.

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Speaker 2: This is a literal no for real, right that we've

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Speaker 2: been hearing that forever, And Anna's talking about empty shelves

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Speaker 2: over the holidays.

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Speaker 1: What is that?

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Speaker 3: It's they're winning the War on Christmas. I don't know. Like, well,

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Speaker 3: on the plus side, I guess people have been complaining

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Speaker 3: about American consumerism for a very long time. So here

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Speaker 3: we go at exercise in austerity. Shall we leave it there?

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Speaker 2: Let's leave it there.

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Speaker 3: This has been another episode of the Authoughts podcast. I'm

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Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway.

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Speaker 2: And I'm Joe Wisenthal. You can follow me at The Stalwart.

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Speaker 2: Follow Anna Wong, She's at Anna Economist. Follow our producers

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Speaker 2: Carman Rodriguez at Kerman Armann, dash O Bennett at Dashbot

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Speaker 2: and kill Brooks at Kelbrooks. For our odd Laws content.

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Speaker 2: Go to Bloomberg dot com slash odd Lots, where we

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Speaker 2: have a daily newsletter and all of our episodes, and

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Speaker 2: you can chat with fellow listeners twenty four to seven.

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Speaker 2: What are you seeing out there in the real economy?

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Speaker 2: What niches are you aware of the way Tracy is

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Speaker 2: aware of artificial flowers? Chat with other listeners discord dot gg,

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Speaker 2: slash odlines.

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Speaker 3: If if you enjoy odd Lots, if you like it

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Speaker 3: when we talk about what economists are seeing when it

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Speaker 3: comes to the impact of tariffs, then please leave us

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Speaker 3: a positive review on your favorite podcast platform. And remember,

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