Speaker 1: Bloomberg Audio Studios, podcasts, radio news. What a day, Haunty,
Speaker 1: what a day?
Speaker 2: Another day, another crazy day. I don't know. I'm I'm
Speaker 2: I'm getting a little tired. Is tired of the words?
Speaker 1: I'm not, I'm exhilarated. I am not getting tired. I
Speaker 1: think this is why we get up in the morning.
Speaker 1: But as we are talking right now, which is April third,
Speaker 1: nas X down four point eight percent.
Speaker 2: Yeah, obviously this is all because of Liberation Day and
Speaker 2: Donald Trump announcing his new reciprocal tariffs, which turned out
Speaker 2: to be a lot worse than a lot of professional
Speaker 2: analysts and economists had been expecting.
Speaker 1: Yeah, I'm sure the market's just totally taken aback, Tom Orleck.
Speaker 1: How surprised were you by yesterday?
Speaker 3: We took him seriously, but not seriously.
Speaker 1: I did a dead lest.
Speaker 2: I'm both the most popular trader, most successful trader at Citadel.
Speaker 3: That is going viral.
Speaker 2: Uh barges.
Speaker 1: This isn't after school special, except.
Speaker 2: I've decided I'm going to base my entire personality going
Speaker 2: forward on campaigning for a strategic pork reserve in the US.
Speaker 3: Black goal.
Speaker 2: These are the important question. Is it robots taking over
Speaker 2: the world? No.
Speaker 1: I think that like in a couple of years, the
Speaker 1: AI will do a really good job of making the
Speaker 1: Odd Lots podcast. One day that person will have the
Speaker 1: mandate of heaven.
Speaker 2: How do I get more popular and successful?
Speaker 3: We do have the.
Speaker 2: You're listening to lots More where we catch up with
Speaker 2: friends about what's going on right now, because.
Speaker 1: Even when the Odd Lots is over, there's always lots.
Speaker 2: More And we really do have the perfect guest.
Speaker 3: So on the campaign trail, Trump was talking about sixty
Speaker 3: percent tariffs on China, twenty percent tariffs on everybody else,
Speaker 3: and I think the reaction from wool Street and the
Speaker 3: reaction from most in the economics profession will this is
Speaker 3: red meat for the campaign trail. This is not a
Speaker 3: serious proposal. The US economy, the global economy, the global
Speaker 3: trade system wouldn't be able to survive tariffs at this level.
Speaker 3: And now here we are on April third, one day
Speaker 3: after Liberation Day, and we've got tariffs at that level
Speaker 3: for China. If you add it up, tariffs may even
Speaker 3: be a bit higher than sixty percent. So it's a
Speaker 3: huge shock. And I think the question people are going
Speaker 3: to be asking is what's being liberated from what is
Speaker 3: the US being liberated from unfair trade practices from China
Speaker 3: and Europe? Or are US workers about to be liberated
Speaker 3: from their jobs and US investors liberated from their returns?
Speaker 2: Yeah, kind of two different outcomes there, Tom, you were
Speaker 2: at our Washington, DC event.
Speaker 3: You think, by the way, thank you.
Speaker 2: You gave this great presentation showing some of your favorite
Speaker 2: charts at the moment, and you kind of made the
Speaker 2: point that when it comes to trade, the US has
Speaker 2: some legitimate grievances. Can you kind of walk us through that,
Speaker 2: especially in relation to China? And then also if you
Speaker 2: think these tariffs are actually going to start alleviating some
Speaker 2: of those grievances.
Speaker 3: So I think it's interesting, Tracy, if we go back
Speaker 3: to the nineteen nineties, it was the kind of unipolar
Speaker 3: moment for the United States. Right the Soviet Union had collapsed,
Speaker 3: China was still an early stage of its development. Its
Speaker 3: GDP was a kind of tiny fraction of that of
Speaker 3: the United States, and so the argument for free markets
Speaker 3: really made a lot of sense. Let's have low tariff barriers.
Speaker 3: US firms are the most competitive firms in the world.
Speaker 3: They're going to be the biggest winners from low trade barriers,
Speaker 3: and guess what additional bonus if we trade with China.
Speaker 3: That's going to be a force for market reform in China,
Speaker 3: and maybe the whisper it quietly a force for democratic
Speaker 3: reform in China. That's not how things played out. Over
Speaker 3: the years that followed. China developed really quickly up to
Speaker 3: the point where it became a rival to the United
Speaker 3: States for that biggest economy in the world, biggest geopolitical
Speaker 3: power spot. And China didn't reform its economy, it didn't
Speaker 3: become more market based, and it certainly didn't reform its
Speaker 3: political system. And the US had a huge trade deficit,
Speaker 3: and a lot of that trade deficit was with China.
Speaker 3: So jobs were being lost, opportunities teas were being lost,
Speaker 3: and even worse, they were being lost to America's biggest
Speaker 3: geopolitical rival. And that just doesn't make a huge amount
Speaker 3: of sense. And I think the Trump team and Trump
Speaker 3: himself deserve a bunch of credit for calling that out
Speaker 3: back in twenty sixteen and saying, this isn't the deal
Speaker 3: we signed up for in the nineteen nineties, This isn't
Speaker 3: the deal we signed up for when we invited China
Speaker 3: into the wto something has to change. Question is, well,
Speaker 3: now we've got these sweeping tariffs, is this going to
Speaker 3: deliver the realignment which Trump wants or could there be
Speaker 3: a sort of significant adverse consequence for the United States.
Speaker 3: Could the United States end up just cutting itself off
Speaker 3: from the rest of the world and actually accelerating its
Speaker 3: own decline, its own fading as a global power, rather
Speaker 3: than restoring American greatness as President Trump intents.
Speaker 1: Well, right now, if you look at the market, it's
Speaker 1: clearly the latter and the tariffs are not just on China.
Speaker 1: They're on countries that many people would say are friends
Speaker 1: or allies, or countries that have not risen an industrial
Speaker 1: might at the expense of the United States.
Speaker 2: Narrow New Yeah Island in the South.
Speaker 1: You know, you started your answer by saying, when this
Speaker 1: was thrown out on the campaign trail, it was perceived
Speaker 1: that the global trading system could never survive something like this.
Speaker 1: We don't know. Maybe there will be renegotiations. So the
Speaker 1: White House is not giving that indication as of the
Speaker 1: time we're talking about this. They're not indicating that they're
Speaker 1: going to back trackers of the market. They're not saying
Speaker 1: this is the start of deal talks. Can the global
Speaker 1: trading system survive the level of tariffs that we see,
Speaker 1: assuming this is what's said.
Speaker 3: So it's a difficult question to answer because we just
Speaker 3: haven't seen such big tariffs introduced in recent history, so
Speaker 3: we don't have much data we can use to estimate
Speaker 3: the impact. That said, we're making best efforts. What we've
Speaker 3: done is we've taken a computable general equilibrium model of
Speaker 3: the global economy. Is the same model which some of
Speaker 3: the economists that the World Trade Organization use, and we've
Speaker 3: used it to estimate the impact of this tariff shock.
Speaker 3: And if we focus for a moment on the China
Speaker 3: piece of it, well, if you put sixty percent China
Speaker 3: tariffs into the model, it tells you that that pretty
Speaker 3: much wipes out US China trade. And that's pretty consequential, right,
Speaker 3: the world's two biggest economies, a Chinese economy, which is
Speaker 3: the home to major US supply chains for Apple and others.
Speaker 3: If those two economies just stop trading with each other,
Speaker 3: that's a huge, huge shock to the system. Thinking about
Speaker 3: the rest of the world, well, most places haven't been
Speaker 3: hit by such high tariffs, but still a pretty significant shock. Europe,
Speaker 3: for example, now facing twenty percent tariffs when they sell
Speaker 3: to the United States. If you plug that into the
Speaker 3: big model, well that tells you europe exports to the
Speaker 3: United States dropped by around fifty percent. So these are
Speaker 3: huge consequential negative shocks to the global trade system.
Speaker 2: When it comes to inflation, I mean, lots of economists
Speaker 2: right now are ratcheting up their inflation forecasts and ratcheting
Speaker 2: down their GDP forecast. To your point on inflation, how
Speaker 2: much of the ultimate results the increase in prices of
Speaker 2: imports into America. How much does that depend on companies
Speaker 2: absorbing the costs? And how do you go about trying
Speaker 2: to analyze that because it seems kind of, you know,
Speaker 2: a bit of a wild card.
Speaker 3: Yeah, I think it's a huge uncertainty. So if we
Speaker 3: think about Trump one and the trade war with China,
Speaker 3: back then, a couple of things happened. So firstly, we
Speaker 3: had dollar appreciation and that offset some of the impact
Speaker 3: of the tariffs. Secondly, we had transshipment, so China carried
Speaker 3: on selling to the United States, but the goods went
Speaker 3: through Vietnam or they went through Mexico, and that meant
Speaker 3: they dodged the tariffs. And thirdly, we had retailers absorbing
Speaker 3: some of the shock in lower margins rather than passing
Speaker 3: them on to consumers. So all of these things meant
Speaker 3: tariffs on China went up twenty five percent, but the
Speaker 3: US consumer didn't really feel the shock, and I think
Speaker 3: that maybe how the Trump administration are thinking about it
Speaker 3: this time around. This time around, though, I think there's
Speaker 3: going to be some pretty significant differences. So the first
Speaker 3: difference is, well, the economic textbooks tell us when you
Speaker 3: apply tariffs, the dollar should appreciate, but guess what, this
Speaker 3: time round, it is depreciating. So that isn't gonna offset
Speaker 3: tariffs shock on inflation. It's going to amplify the tariff
Speaker 3: shock on inflation. Secondly, this time round is not just China,
Speaker 3: it's everybody. Everybody's being hit with the shock at the
Speaker 3: same time. And that means that that transhipment strategy, sending
Speaker 3: goods via Mexico or Vietnam, that's not going to work.
Speaker 3: You're still going to get hit with tariffs. And then thirdly, well,
Speaker 3: if you're hitting everybody at the same time, can a
Speaker 3: Walmart or a target really absorb all of that in
Speaker 3: narrower margins or is it just going to have to
Speaker 3: start passing it on to the consumer. So the experience
Speaker 3: in the Trump term. Trump's first term was tariff shock,
Speaker 3: no impact on consumer prices in the United States. This
Speaker 3: time round, well, it's difficult to say. There's a lot
Speaker 3: of variables at work, but I think this is going
Speaker 3: to be a stagflationary shock, pretty significant hit to US growth,
Speaker 3: pretty significant boost to US inflation. And that's why we're
Speaker 3: seeing this fierce stock market sell off today and the
Speaker 3: US coming out worse than pretty much anybody else.
Speaker 1: So crazy, Yeah, especially when you look at US versus
Speaker 1: every other stock market and how much everyone how much
Speaker 1: more optimistic people are about the rest of the world.
Speaker 1: You know, there's this vision right that on the other
Speaker 1: side that there's pain now that we get to the
Speaker 1: other side, that there's this reindustrialization, and Trump talked about
Speaker 1: it yesterday. We're going to make great cars with us
Speaker 1: this state of the art manufacturer, We're going to build
Speaker 1: chips again, all this.
Speaker 2: The sunlit uplands manufacturing.
Speaker 1: What would have to happen for these tariffs to actually
Speaker 1: translate into or because like I'm fine with taking some
Speaker 1: short term pain to be like one of the most advanced,
Speaker 1: technologically prosperous countries on the I see all those propaganda
Speaker 1: videos out of China with the drones and the cars.
Speaker 1: I'm like, yeah, I want that here. I'm susceptible to
Speaker 1: that too. I want like all that stuff produced here.
Speaker 1: What would have to happen to go from today to
Speaker 1: that vision.
Speaker 3: Well, it's a tough one, Joe. So I think Trump
Speaker 3: will point to the pledges from Apple and TSMC and
Speaker 3: Nvidia and Hyundai and others to make massive investments in
Speaker 3: the United States and say, look, it's working. I made
Speaker 3: the tariff threat. Everyone's bringing their jobs and their factories
Speaker 3: back to the United States. I think it's probably a
Speaker 3: bit more complicated than that. Wages in the US are
Speaker 3: much higher than wages in China or Vietnam or Mexico.
Speaker 3: Infrastructure in the United States, well, there's not been a
Speaker 3: lot of investment in manufacturing infrastructure here over recent decades.
Speaker 3: Supply chains stretch across borders. If you're going to impose
Speaker 3: massive tariffs, actually makes it harder to manufacture in the
Speaker 3: United States because factories are going to have to pay
Speaker 3: that tariff to get crucial inputs and of course the
Speaker 3: uncertainty which Trump has introduced into the system, and which
Speaker 3: he sees is crucial to get deals done well. That
Speaker 3: uncertainty makes it harder to plan, makes it harder to
Speaker 3: make long term investment decisions, and that makes it harder
Speaker 3: to reshore manufacturing as well. So it's striking to me
Speaker 3: if you look at all of those companies which said
Speaker 3: we're making massive investments in the United States, Apple five
Speaker 3: hundred billion dollars, TSMC one hundred billion dollars. If you
Speaker 3: look at what happened to the share price of those
Speaker 3: companies on the day after the announcement, basically didn't move right,
Speaker 3: basically didn't move. And I think what that tells us
Speaker 3: is that markets investors are pretty skeptical. They see those announcements,
Speaker 3: perhaps as good government relations by those companies currying favor
Speaker 3: with the White House, rather than the big change in
Speaker 3: corporate strategy that we'd have to see if manufacturing was
Speaker 3: really going to come back to the US.
Speaker 2: Yeah, and on the topic of investment, there's no physical
Speaker 2: offset either. I mean, the administration is extending the tax cuts,
Speaker 2: that's basically the existing status quo. So it's not like
Speaker 2: the government is going to be funding a sudden roll
Speaker 2: out of investment to try to boost these industries. You
Speaker 2: mentioned stagflation earlier, Tom, what does the FED do in
Speaker 2: response to stagflation?
Speaker 3: So it's a tough one.
Speaker 1: Tracy keep saying that, how do we get it's going
Speaker 1: to be tough to keep going?
Speaker 3: A lot of tough ones in our future. You know,
Speaker 3: this is the biggest tariff hike that we've seen in
Speaker 3: the United States going back over the course of one
Speaker 3: hundred years, and it takes tariff to their highest level
Speaker 3: in one hundred years. So this is an absolutely enormous
Speaker 3: shock to the system. So I feel like somewhat justified.
Speaker 3: Are you are? So it's a tough one. And so
Speaker 3: if you're the FED, you see growth coming down, you
Speaker 3: see unemployment going up, you want to cut interest rates.
Speaker 3: But you see inflation rising because import prices are going up,
Speaker 3: and so you want to raise interest rates. So what's
Speaker 3: the impulse? What's the kind of the major impulse? Which
Speaker 3: one do you follow? Well, some of the messaging which
Speaker 3: we've been hearing from Chair Powell is that the tariff
Speaker 3: impact on inflation, well it could be transitory. If I
Speaker 3: was Chair Powell personally, I wouldn't be using the terb
Speaker 3: transitory anymore. I think you kind of use that one
Speaker 3: up in the post COVID shock. But there we are.
Speaker 3: There's the idea that the tariff impact on inflation is
Speaker 3: going to be transitory, and so what you have to
Speaker 3: respond to is the impact on growth, and so that
Speaker 3: would suggest the impulse for the FED is going to
Speaker 3: be more rate cuts. That said, there's a bunch of
Speaker 3: uncertainty out there. We don't know how big the growth
Speaker 3: shock's going to be, we don't know how big the
Speaker 3: inflation shock's going to be, don't know if inflation expectations
Speaker 3: are going to move. If we see inflation expectations staying high,
Speaker 3: well that will be a sign that the tariffshock and
Speaker 3: inflation isn't going to be transitory. And the FED is
Speaker 3: going to be tracking all of these things and weighing
Speaker 3: them in the balance.
Speaker 2: So we've established that it's tough. At a minimum, what
Speaker 2: are you looking out for in terms of economic indicators
Speaker 2: or I don't know, even corporate anecdotes to see which
Speaker 2: way things are going to go?
Speaker 3: So I think there's a few things we're going to
Speaker 3: be looking for in the days ahead. So the first
Speaker 3: one is going to be the retaliate or kaw tao
Speaker 3: choice for other countries. Right, do we see China and
Speaker 3: Europe and Japan saying, Okay, we don't want these tariffs.
Speaker 3: Tell us what you want and we'll give it to
Speaker 3: you and you can take the tariffs away. Or do
Speaker 3: we see them saying you give us tariffs, We're going
Speaker 3: to give you tariffs right back. And if it's that
Speaker 3: retaliation path, that's going to amplify the impact. Second thing
Speaker 3: I think we'll be looking for is whether the Trump
Speaker 3: administration just pivots because of the markets. Right, we've got
Speaker 3: the Nasdaq down more than four percent today. If that
Speaker 3: slide continues into the end of the week into next week,
Speaker 3: if we see a very significant and sustained market fall,
Speaker 3: it's possible, then we'll see that Trump put come into play.
Speaker 3: And then in terms of indicators we're going to be
Speaker 3: looking at well, of course, we're going to be tracking
Speaker 3: the important export numbers. Another important one to look at
Speaker 3: is going to be the import price data. That's going
Speaker 3: to tell us how much of this cost is being
Speaker 3: absorbed by foreign factories and how much of it is
Speaker 3: being passed through to US retailers. And potentially the US consumer.
Speaker 3: By the way, is also the US voter. And mid terms,
Speaker 3: well twenty twenty six not that far away, Tracy.
Speaker 1: Can I just say two things that yesterday. One is
Speaker 1: they knew this was gonna slam the market.
Speaker 2: Oh yeah, and they did it.
Speaker 1: Anyway, this is a really big deal to me because
Speaker 1: this is not usual on his American politics. Some might
Speaker 1: even look at that say I'm impressed, right, because you're like, well,
Speaker 1: for once we have a president who is not so
Speaker 1: obsessed with the market. I don't know, I'm just saying.
Speaker 2: In his speech he also talked about how much stock
Speaker 2: price is in his first term, which is you can't
Speaker 2: have it both ways.
Speaker 1: I thought that too, and then I just think it's man,
Speaker 1: we had this multiple years of really high inflation, and
Speaker 1: the first thing that the new president does is push
Speaker 1: up the price of anything. It's really funny.
Speaker 2: Tom. I have one more question for you. This is
Speaker 2: a very important one. It's a bit of a loaded question,
Speaker 2: but here goes. How much fun did you have at
Speaker 2: our Washington, DC event?
Speaker 3: Just an absolutely enormous of fun, Tracy. And my message
Speaker 3: to od Loots listeners is, if Joe and Tracy come
Speaker 3: to your time, snap up a ticket immediately. We didn't
Speaker 3: plan that.
Speaker 1: That was amazing. That was a perfect answer. Lots More
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