Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business App. Peter Ropenheimer of Goldman
Speaker 2: Sachs writing, it's possible the terriffs could hurt equity prices
Speaker 2: even if the US agrees on deals with key training partners.
Speaker 2: Peter joins us now for more. Peter, Welcome to the program, sir.
Speaker 2: Before we talk about the risk, let's talk about the price.
Speaker 2: The rally we've seen on both sides of the Atlantic,
Speaker 2: on the S and P and the eurostocks fifty of
Speaker 2: close to something like nine percent. Peter, when you break
Speaker 2: things down, let's just talk about breath. Compare and contrast
Speaker 2: the story in the States to the story you're witnessing
Speaker 2: in Europe.
Speaker 3: Well, very different story. At one level, it looks very similar.
Speaker 3: As you said, both markets are rising, but they're rising
Speaker 3: in different ways. The contributions are quite different. In the US,
Speaker 3: very much driven again by the power of the biggest
Speaker 3: tech stocks, which are really leading the market. As you say,
Speaker 3: smps are an all time high, the median stock is
Speaker 3: around twelve percent below it's fifty two week high, so
Speaker 3: very very concentrated, whereas in Europe, actually there's significant breadth,
Speaker 3: unusual breadth actually in the market, and you're seeing much
Speaker 3: much less concentration, although of course you are seeing and
Speaker 3: have seen stocks that are disappointing being very heavily punished,
Speaker 3: and that's happened on both sides of the Atlantic.
Speaker 2: So let's just pick up on the US TEK story
Speaker 2: and the narrow breadth that I've heard so much of
Speaker 2: that I'm sure you have as well. Whether it is
Speaker 2: necessarily unhealthy. If I think about the dominant risks of
Speaker 2: the moment, they're largely cyclical, they're related to trade, and
Speaker 2: in many ways some people might look at the US
Speaker 2: DOT market and say that's a source of stability, not
Speaker 2: necessarily downside risk. How would you counter that look?
Speaker 3: I think it's right that, you know, if we step
Speaker 3: back and think about economies which are still growing, albeit
Speaker 3: at a slower pace, certainly in the US, but interest
Speaker 3: rates coming down, that's broadly a supportive environment for risk assets.
Speaker 3: And the fact that in the US the tech heavy
Speaker 3: largest companies have been dominating the rally is a function
Speaker 3: of their very very powerful, continued profit growth. It's not
Speaker 3: been about speculation. It's really been about very very strong fundamentals,
Speaker 3: and there's nothing wrong with that. The only problem, of course,
Speaker 3: is that after you get an increasingly concentrated market, it
Speaker 3: becomes harder to diversify risks, at least domestically, and that's
Speaker 3: one of the reasons why we've been arguing that investors
Speaker 3: should take a more open mind mind a view of
Speaker 3: diversification geographically to improve risk adjusted returns.
Speaker 4: Well, Peter, where is the opportunities in Europe? Because I'm
Speaker 4: looking at the Bank of America fund manager survey out
Speaker 4: of Europe and they say European investors thirty five percent
Speaker 4: expect stronger European growth over the coming twelve months. But
Speaker 4: it was forty four percent last month. So isn't that
Speaker 4: European story actually starting to dwindle a little bit.
Speaker 3: Yeah, and we've seen that to some extent in the
Speaker 3: relative performance. Very much the first part of the year,
Speaker 3: Europe outperforming both in terms of underlying assets but also
Speaker 3: on a dollar adjusted basis. As the dollar weakened and
Speaker 3: that differences moderated to some extent. But I think it
Speaker 3: is right to say that from a very low base,
Speaker 3: European growth is improving somewhat. An important driver of that
Speaker 3: is the expansion of fiscal policy coming from Germany, and
Speaker 3: we do also have a couple of other themes that
Speaker 3: are encouraging intro particularly increased defense spending which is powering ahead,
Speaker 3: more infrastructure spending across Europe, and also some of the
Speaker 3: value areas of the market which are doing really very well,
Speaker 3: banks being a perfect example. And I would say that
Speaker 3: is another difference between Europe and the US. The US
Speaker 3: is still being driven by growth dominated themes, particularly related
Speaker 3: to technology, whereas in Europe and some other markets, value
Speaker 3: is actually outperforming.
Speaker 4: The risk of tariffs, though still exist, and the team
Speaker 4: at Goldman Sachs had a no doubt about how the
Speaker 4: impact has yet to hit consumer prices. When it comes
Speaker 4: to tariffs, that hit is just getting started, what can
Speaker 4: this mean for Europe and some European corporate names.
Speaker 3: Well, I think that it does complicate the picture because
Speaker 3: we haven't yet seen the full effect of tariffs on
Speaker 3: either side of the Atlantic, and it is likely to
Speaker 3: weigh on consumer confidence to some extent and the ability
Speaker 3: for consumers to continue to drive economic growth, and we're
Speaker 3: already seeing some evidence of that slowing, particularly in the US,
Speaker 3: and alongside it some weakness in the labor market. The offset,
Speaker 3: I think is that you will see lower rates, at
Speaker 3: least in the US. We think for the ECB they're
Speaker 3: done for now. They've already cut rates more aggressively, and
Speaker 3: I think there's less room for that to continue given
Speaker 3: that we're going to see some effect of tariff still
Speaker 3: yet to come through.
Speaker 2: You mentioned the rally we've seen in US tag validated
Speaker 2: by the earnings. The earnings have been really powerful. I
Speaker 2: believe you said the same thing for the banks and
Speaker 2: the run up we've seen in Europe. This rally of
Speaker 2: more than forty percent for European banks so far year today,
Speaker 2: has it been justified also by the earnings we've seen
Speaker 2: so far and the outlook coming from the c suite.
Speaker 3: Yeah, very much so, and we have to emphasize that
Speaker 3: this is a huge turnaround from the trend that we
Speaker 3: saw really for a decade after the financial crisis, where
Speaker 3: banks came under huge pressure, particularly in Europe. They had
Speaker 3: to delever, raise capital, cut dividends, and although they were
Speaker 3: cheap in terms of multiple they kept on underperforming. But
Speaker 3: we've seen a dramatic change in circumstances. Now they have
Speaker 3: strong balance sheets. You mentioned earlier that the credit cycle
Speaker 3: is benign, and more confidence in the economy means less
Speaker 3: risk of loan losses and credit losses and provisionings for
Speaker 3: the banks. And we have steeper yield curves which are
Speaker 3: very supportive of their profits. So in Europe, the very
Speaker 3: powerful returns that we've been seeing in banks is justified
Speaker 3: by very strong fundamentals, just as the technology companies have
Speaker 3: been supported by fundamentals in the US.
Speaker 2: Can we just touch on the rates back drub for Europe?
Speaker 2: For a long long time they complained about negative interest rates.
Speaker 2: We got away from that. Now it feels like rates
Speaker 2: are started to come back down again, Peter. And maybe
Speaker 2: they don't stop at two, perhaps they don't stop at one.
Speaker 2: How important is the rate outlook? For the long story
Speaker 2: on bags.
Speaker 3: I think the most critical factor is going to be growth.
Speaker 3: If we avoid recession, that would be our central view,
Speaker 3: then the risk of a provisioning cycle that could be
Speaker 3: damaging for earnings is moderated. Of course, what's been very
Speaker 3: helpful for the banks, and this has been true in
Speaker 3: many regions, particularly in Europe, is that yel coves have steepened.
Speaker 3: We've seen already a lot of progress on short rate
Speaker 3: cutting by the UCB, but long rates have been edging up,
Speaker 3: partly driven by growing deficits and spending, particularly in Germany,
Speaker 3: and that spread has been very helpful for banks. It
Speaker 3: may moderate a little bit moving forwards, but I think
Speaker 3: if we continue to get economic growth, the outlook is
Speaker 3: still reasonably benign for the banking sector in Europe.
Speaker 2: Peter Rockenheimer of Goma SAX Peter, I appreciate your time
Speaker 2: joining us Now is the former Boston Fed president Eric Rosengrant.
Speaker 2: Welcome back to the program, Sir, some healthy debate at
Speaker 2: the feder Reserve. Let's call it what it is. It
Speaker 2: is healthy. Do you think September is too early to
Speaker 2: settle the debate?
Speaker 5: I think it depends on how the data comes in
Speaker 5: we have two CPI reports, one PCE report, and one
Speaker 5: employment report. Data can be pretty noisy, so I think
Speaker 5: we need to see what things look like as we
Speaker 5: get into September. But I agree that if the CPI
Speaker 5: and PCE are reasonably well restrained and the labor market
Speaker 5: looks sweet, then it would be appropriate to ease rates. However,
Speaker 5: it's also quite possible that we'll see a slowly increasing
Speaker 5: inflation rate. I'm expecting the CPI will probably be the
Speaker 5: core cpi'll be above three percent when it comes out tomorrow,
Speaker 5: and if we start seeing numbers that look higher than
Speaker 5: the market's expecting, sentiment can change pretty quickly. So I
Speaker 5: think it's a little too soon to call September. I
Speaker 5: think the Fed was acting appropriately when it wanted to
Speaker 5: wait and see, because right now, while the payroll employment
Speaker 5: was week, the unemployment rate was four point two percent,
Speaker 5: and the labor market has had a labor supply shock,
Speaker 5: So you probably want to focus a little bit more
Speaker 5: on the unemployment rate than the payroll employment numbers.
Speaker 2: Eric, as you look at the dual mandate at the moment,
Speaker 2: and this really speaks to the divide of the Federal Reserve,
Speaker 2: there are some individuals who want to focus on the
Speaker 2: employment side of the mandate, others who still want to
Speaker 2: focus on the price stability side of the mandate. Can
Speaker 2: you share with us your experience. Did you prioritize one
Speaker 2: side over the other? Are they created equally.
Speaker 5: So everybody can vote? And way I mean it's you're
Speaker 5: not given the waiting function, so each person can kind
Speaker 5: of choose for themselves what they think is most important
Speaker 5: at the time. But the framework document actually talks about
Speaker 5: what you should do when both elements of the mandate
Speaker 5: are not where you want it. And in that document
Speaker 5: it argues that you should look at how far away
Speaker 5: you are from where you want to be and how
Speaker 5: long it'll take to get there. So on inflation, if
Speaker 5: you look at the core PCE, we're at two point
Speaker 5: eight percent, and most people think it's going to take
Speaker 5: quite some time for us to get back to two percent.
Speaker 5: If you look at the unemployment rate, we're right at
Speaker 5: four point two percent. So despite the weak labor supply
Speaker 5: that's been happening, the labor market doesn't look to be
Speaker 5: in that much trouble. You don't see initial claims rising rapidly.
Speaker 5: So while I know a number of participants at the
Speaker 5: FMC are talking about concern about the employment mandate. It
Speaker 5: actually is exactly where they forecast they want it to be,
Speaker 5: which is at full employment.
Speaker 4: Basically, what you outline there says that the Fed shouldn't
Speaker 4: be cutting just yet. So is there a bias to
Speaker 4: a weakening labor market?
Speaker 5: So it depends on a forecast, and I would say
Speaker 5: private sector economists do not see a rapidly rising unemployment
Speaker 5: rate and do not see an elevated risk of seeing
Speaker 5: a risk session. So I would think the rhetoric around
Speaker 5: the labor market would be more consistent if the private
Speaker 5: sector was seeing more evidence in the data that the
Speaker 5: unemployment rate looked like it was going to rise, that
Speaker 5: initial claims was going to rise. So I think at
Speaker 5: this case, at this time, it's a little bit odd
Speaker 5: to overweight the employment part of the dual mandate.
Speaker 2: Eric, Can we just sit on the data and I
Speaker 2: want to avoid the politics. Don't worry about that not
Speaker 2: going to include you in any of that whatsoever. We're
Speaker 2: always dependent on the data, and there's been a question
Speaker 2: for a long long time about how dependable the data
Speaker 2: actually is, particularly the labor market data prone to very
Speaker 2: large revisions. We saw that last year, We've seen it
Speaker 2: many times in the past as well. Eric, how did
Speaker 2: you manage that situation? Were you less sensitive to incoming
Speaker 2: monthly reads and knowing that at some point in the
Speaker 2: future they would be revised, How did you approach it?
Speaker 5: So if you focus on a forecast month to month,
Speaker 5: doesn't matter nearly as much as where you expect things
Speaker 5: to go over time. And as you point out, the
Speaker 5: labor market data, particularly the payroll numbers, can be pretty jumpy.
Speaker 5: And the reason for that is not because anybody's manipulating it.
Speaker 5: It's because they do a survey and if people don't
Speaker 5: fill out their survey forms on time, then in the
Speaker 5: revision they pick up the additional surveys and so depending
Speaker 5: on what the response rate is, and the response rate
Speaker 5: has been going down on many US government surveys, it
Speaker 5: becomes less accurate and the revisions can be larger as
Speaker 5: they get additional data. So you never should put too
Speaker 5: much weight on any one data point. You're really looking
Speaker 5: for a trend you're not actually looking for. While Wall
Speaker 5: Street focuses on beating expectations and having a number, comparing
Speaker 5: the current number to what they expected, the central bankers
Speaker 5: should really be worried more about long term trends. So
Speaker 5: long term trends don't get affected as much by a
Speaker 5: single data point, so you should smooth through most of
Speaker 5: that data, and that's what most forecasts end up doing.
Speaker 4: Do you think there's concern though, that now the US
Speaker 4: data is no longer considered the gold standard given the
Speaker 4: fact that the President ousted the commissioner of the BLS.
Speaker 5: Well, it depends on who he gets who replaces at
Speaker 5: the BLS, but it would be very disturbing if you
Speaker 5: didn't have reliance on the data, and the US not
Speaker 5: just the BLS data, but the GDP data, the inflation data.
Speaker 5: All that data is critical to making good policy choices.
Speaker 5: And if that data is manipulated in some way so
Speaker 5: that you can't rely on it, it becomes very problematic
Speaker 5: for policy. And while the initial changes are probably not
Speaker 5: going to be that noticeable, over time it can create
Speaker 5: havoc and I think you see examples of that or
Speaker 5: the Wall Street Journal did an article on what happened
Speaker 5: in Argentina when they started manipulating the data. China has
Speaker 5: been famous for dropping series that didn't work in the
Speaker 5: way they were hoping so. For example, youth unemployment is
Speaker 5: not reported anymore on a consistent basis, but you see
Speaker 5: young people coming to the United States because they can't
Speaker 5: get jobs in China. So you can conceal to some
Speaker 5: extent data and for months to month you can get
Speaker 5: slightly better numbers, but over time, if you're manipulating, the
Speaker 5: data becomes obvious to the public.
Speaker 4: Eric the President's nomination to fill Governor Coogler seat Stephen Myron,
Speaker 4: is an individual that is already working with him as
Speaker 4: one of his economists the head of the CEA. Less
Speaker 4: than a year ago, Myron was against cuts at the FED.
Speaker 4: Does he look purely political now, potentially to his new
Speaker 4: colleagues at the FOMC.
Speaker 5: I think there is a consistency problem. He has traditionally
Speaker 5: been somebody very concerned about the inflation part of the mandate,
Speaker 5: and so his newfound interest in the labor market and
Speaker 5: the ne to lower interest rates looks somewhat out of
Speaker 5: character from what he was concerned about. Over time, he's
Speaker 5: written about being concerned that there's too much politics of
Speaker 5: the FED. He obviously has been a strong proponent of
Speaker 5: this administration's policies and seems to be a proponent of
Speaker 5: lowering interest rates, which has been advocated by the administration.
Speaker 5: So if what you're looking for is an independent FED,
Speaker 5: he probably is not the perfect choice to ratify an
Speaker 5: independent FED.
Speaker 2: Eric I appreciate your opinion. Thank you, sir, the former
Speaker 2: Poston FED president Eric Riisenkrant Henry to try to fight
Speaker 2: a pound it joined us. Now for more, Henrietta, can
Speaker 2: you think of another example of something like this plank
Speaker 2: out in your lifetime?
Speaker 6: Certainly not at BIS.
Speaker 1: Wendy points it out exactly, there's not another example like this.
Speaker 1: I think the most interesting way to look at this
Speaker 1: is to see the President sort of expanding out beyond
Speaker 1: something that was a very real concern for him on Friday,
Speaker 1: if you followed his truth social posts, it was very
Speaker 1: much about these court cases that are pending around the
Speaker 1: AEPA tariffs. So if the President is going to be
Speaker 1: stripped of his authority to impose taris via EPA, is
Speaker 1: he giving himself some sort of additional leverage point with
Speaker 1: export controls and selling them to effectively the basic way
Speaker 1: of just getting trade flowing and having some sort of
Speaker 1: card to play with China.
Speaker 6: I think that's an interesting angle to think about.
Speaker 1: I think the AIPA court case story is the most
Speaker 1: critical here, and the President obviously was focused on that
Speaker 1: on Friday, and then this announcement makes sense in that context.
Speaker 4: Henrieta, If you're in a C suite of a massive
Speaker 4: American company and you see what's playing out right now
Speaker 4: with Nvidia and AMD, is this a new risk that
Speaker 4: you need to contend with that potentially if you want
Speaker 4: to export your products to outside of the United States,
Speaker 4: you might have to pay the US government.
Speaker 1: I think it's completely stands to reason, and every single
Speaker 1: one of these trade deals has some sort of pay
Speaker 1: mint component. And what happens is we get these original
Speaker 1: announcements and then they get materially walked back. So this
Speaker 1: one's pretty cut and dry fifteen percent in the event
Speaker 1: that that's where it lands. But think about the Japan deal,
Speaker 1: for example, the White House set that's five hundred and
Speaker 1: fifty billion dollars worth of investment that's going to flow
Speaker 1: to the United States.
Speaker 6: We get ninety percent of.
Speaker 1: The returns, But the reality is that only eleven billion
Speaker 1: dollars of that five hundred billion that Japan committed to
Speaker 1: is going to come from the Japan bank. Everything else
Speaker 1: is going to come from private sector that you have
Speaker 1: no control over. So there are these big numbers floated
Speaker 1: and then they're almost always revised. Another example, to give
Speaker 1: you another one down would be the gold tariffs that
Speaker 1: are happening right now. This sort of rampant confusion before
Speaker 1: there's an ultimate clarity is really the prevailing theme of
Speaker 1: this administration.
Speaker 4: Okay, but when you're talking about pay components, when it
Speaker 4: comes to other trade negotiators, it's about investing in the
Speaker 4: United States. That means money and jobs, jobs for Americans
Speaker 4: coming into the United States. This is purely about just
Speaker 4: paying some of your profit streams for chips that at
Speaker 4: one point you are already sending to China to the
Speaker 4: US government. How is this in line what the Trump
Speaker 4: administration and the campaign ran on.
Speaker 6: Well, it's definitely not consistent at all.
Speaker 1: Either there was a national security threat exposed to these
Speaker 1: chip sales, which is something that we've been dealing with
Speaker 1: for at least a decade, or you can just pay
Speaker 1: your way around it and it's no longer a national
Speaker 1: security threat. They are two mutually exclusive developments. And I
Speaker 1: think again it goes back to the president needing more
Speaker 1: chips in the China negotiations, because, for example, the export
Speaker 1: of US soy and agriculture.
Speaker 6: Goods is down fifteen fifty percent.
Speaker 1: In just the last six months, dropped from like eleven
Speaker 1: and a half billion dollars worth of sales to five
Speaker 1: and a half. The president needs more ammunition, and if
Speaker 1: he can somehow create a reliance, which is what we've
Speaker 1: heard from the Nvidia CEO on US chip sales, then
Speaker 1: that gives some additional leverage perhaps down the line, but
Speaker 1: it's definitely mutually exclusive to the national security argument.
Speaker 2: How much leverage do they have right now Handwritter, I
Speaker 2: think that's worth exploring. If you look at the Chinese
Speaker 2: export numbers, they seem to be doing okay. The export
Speaker 2: numbers are up, the exports to just go into other places.
Speaker 2: Is this important to them in the same way it
Speaker 2: was maybe six months ago, maybe several years ago, four
Speaker 2: or five years ago.
Speaker 6: Yeah.
Speaker 1: Absolutely, And this is what you always have heard from
Speaker 1: China very consistently.
Speaker 6: The United States is a bully, come do business with us.
Speaker 1: We're seeing it operate in Africa right now and the
Speaker 1: EU and other nations in the Southeast Asian region.
Speaker 6: And one of the things to.
Speaker 1: Be mindful of as we get into this is that
Speaker 1: the president has threatened one hundred and forty five percent
Speaker 1: tires eighty percent would be the rate that goes into
Speaker 1: effect on August twelfth, that they don't reach a detant.
Speaker 1: But China plainly has the president in a corner around
Speaker 1: magnets and rare earths that debilitate the automate and defense.
Speaker 6: Sectors win one fell swoop.
Speaker 1: So the reason that the ninety day pause is the
Speaker 1: base case on the street is because the president threatened
Speaker 1: too much and he's not going to get it.
Speaker 6: We don't have the capacity for that.
Speaker 1: Goldman's coming out with you sixty seven percent inflation hike
Speaker 1: to the US consumer and prime prices being passed on.
Speaker 6: We do not have that ability right now.
Speaker 1: It's the same reason not to go to too many places,
Speaker 1: the same reason you're not saying the Russia sanctions go
Speaker 1: into effect. You cannot mess with oil and gas prices
Speaker 1: when we have this risk of inflation coming.
Speaker 2: What would be helpful is if the Europeans another trade
Speaker 2: pound has gone on side with the United States to
Speaker 2: put the pressure on China's for the pressure on another
Speaker 2: trade pond. And do you see those pieces coming together
Speaker 2: anytime soon, I.
Speaker 6: Don't, And think about what we have pending.
Speaker 1: You've got Section two thirty two, pharmaceutical tires, automobiles, automobile parts,
Speaker 1: semiconductor chips, all those outstanding components. And the EU is
Speaker 1: not at all thrilled with the deal that was reached
Speaker 1: a couple weeks back with the United States.
Speaker 6: So that block is fractured to.
Speaker 1: The point where we don't even have legally binding texts,
Speaker 1: and we might not for months now. I don't see
Speaker 1: that coming around. We don't have Canada even, you know,
Speaker 1: so I think we're quite a ways away.
Speaker 4: What kind of way does the US have when it
Speaker 4: goes to Brussels and say, really put the screws to China,
Speaker 4: given the fact that now the United States is saying, well,
Speaker 4: actually we'll send some chips that we thought were national
Speaker 4: security concerned, but you just have to give us some
Speaker 4: of the profit.
Speaker 1: You know, this is really the underlining issue that all
Speaker 1: of our trading partners has had. Who is the ultimate decider?
Speaker 1: Where is the line in the sand?
Speaker 6: What are we even negotiating?
Speaker 1: And that's been a consistent theme that we've seen from
Speaker 1: Japan and Korea and the EU is what is it
Speaker 1: that we can offer, What can we commit to and
Speaker 1: write into legally binding text on our end that we
Speaker 1: can then go and operate with around the world. And
Speaker 1: that's not something that they have any ability to even
Speaker 1: get in the room in a timely manner to have
Speaker 1: that conversation. And there are so many outstanding issues, and
Speaker 1: I would just say one more time here, the market
Speaker 1: is not a the inflation is not a one and
Speaker 1: done situation. We're still going to get lumber TIFFs on
Speaker 1: Canada on top of the ones that the President put
Speaker 1: into effect on Friday. We still have outstanding sectoral tire
Speaker 1: risks with all of these major trading partners from Switzerland
Speaker 1: to Ireland. There's no certainty here and I don't have
Speaker 1: any reason to think that that would end in the
Speaker 1: next three years.
Speaker 2: Just briefly, how much money is coming in in the meantime, Henritta,
Speaker 2: Just how much we take it in month on month
Speaker 2: of the moment.
Speaker 1: I think last I saw it was twenty seven billion
Speaker 1: dollars a month. So ultimately, this is a two point
Speaker 1: seven trillion dollar revenue raiser that the United States consumer
Speaker 1: pays for, and the inflation numbers are going to get compounded,
Speaker 1: because again this is not a one and done event.
Speaker 1: Tariffs have increased at least a dozen times just in
Speaker 1: the last six months, and there are at nine on
Speaker 1: the horizon just in the sectoral tires, without even getting
Speaker 1: into three oh ones on Brazil or the AEPA tariffs
Speaker 1: and whether or not those can be maintained, and then
Speaker 1: we're going to throw export control restrictions on top.
Speaker 6: There's a long way.
Speaker 2: To god Trice if I'd have found us, henretta thank
Speaker 2: you and place to side. The man himself joins us.
Speaker 2: Now for more, Ryan, welcome to the program sir. Just
Speaker 2: describe if you can, the activity that you've seen over
Speaker 2: the past few months, the rush to secure air freight,
Speaker 2: all kinds of things. Ryan, what are you seeing?
Speaker 6: Yeah, thanks for having me on.
Speaker 7: Well, it's been crazy volatile ever since the Liberation Day
Speaker 7: tariffs were announced. You had immediately after that, you had
Speaker 7: a sixty percent decline in ocean freight bookings from China
Speaker 7: to the US that lasted about five weeks, so just
Speaker 7: a massive decline of freight coming out of China.
Speaker 6: You then had, once.
Speaker 7: The terrorists were relaxed, the surge to eighty percent above
Speaker 7: the pre tariff level of volumes. That's what I was
Speaker 7: describing in that tweet, And now now this I think
Speaker 7: that was from a couple of weeks ago, because things
Speaker 7: have been settling in and now we're seeing the real
Speaker 7: effective terariffs, which is people shipping left stuff. Prices devotion
Speaker 7: freight are coming way down back to you know, we're
Speaker 7: probably over the next few weeks going to see prices
Speaker 7: back to levels that we saw we haven't seen since
Speaker 7: after the pandemic in like twenty twenty three, when prices
Speaker 7: were quite low. So I don't know if you call
Speaker 7: that normalizing or just like doing what you would predict,
Speaker 7: which is tariff should lead to less freight, which should
Speaker 7: lead to lower prices, and it's not great for companies
Speaker 7: involved in the business.
Speaker 4: Geographically, Ryan, what ports are dealing with really soft demand.
Speaker 7: I assume that it's pretty evenly distributed across all the ports.
Speaker 7: I don't think there's a trend by poor It's actually
Speaker 7: one thing that has happened here is the airports because
Speaker 7: when the tariffs are announced with such short deadlines, you
Speaker 7: see this huge rush to ship air freight in and
Speaker 7: that sort of ended last a couple of days ago.
Speaker 7: At the end of last week when the new tariffs
Speaker 7: took effect, but in the prior two or three weeks
Speaker 7: to that, there was this huge switch between from ocean
Speaker 7: freight to air freight. So because I met one customer
Speaker 7: said they saved two million dollars by switching four containers
Speaker 7: from ocean freight to air freight, just by beating the tariffs,
Speaker 7: we seem.
Speaker 4: This administry should really try to go after transhipment. How
Speaker 4: is that affecting the supply chains and what you're tracking.
Speaker 7: Yeah, this new transhipment rule is quite interesting. So like
Speaker 7: basically what they've said is that if you have a
Speaker 7: one duty rate, which is around twenty percent or goods
Speaker 7: from for example, Vietnam, but if the goods are determined
Speaker 7: to be transshipped from another country through Vietnam, then the
Speaker 7: duty rate is much higher. This is a very strange
Speaker 7: policy because historically an all precedent of country of origin rules,
Speaker 7: then the Vietnam has nothing to do with the duty rate.
Speaker 7: If they're tranship for Vietnam, the duty rate is still China.
Speaker 7: China's duty rate is not Vietnam. So it's quite a
Speaker 7: confusing rule from those in the industry. What we're basically saying, is, hey,
Speaker 7: in addition to going to jail for committing customs fraud,
Speaker 7: you're also going to have to pay a higher duty rates.
Speaker 7: I mean, I guess it's effective, but it's very strange policy.
Speaker 4: But have you actually seen it work when you're tracking
Speaker 4: all of this cargo?
Speaker 7: No, it's not, I mean, because it's a sort of
Speaker 7: a nonsense. It's basically saying, hey, if you're committing fraud
Speaker 7: and then you have to pay a higher duty rate, well,
Speaker 7: I mean the fraud the penalties were already much worse
Speaker 7: for committing fraud than a higher duty rates. So now
Speaker 7: we haven't seen anything like change because of it.
Speaker 2: Right, How creative are people getting? What kind of mitigation strategies?
Speaker 2: How are they introducing? What are you suggesting? What are
Speaker 2: you advocating for?
Speaker 7: Yeah, I mean, first I'm advocating is don't do anything illegal.
Speaker 7: And there's a lot of incentive to break the rules
Speaker 7: now because you know and you do see people who
Speaker 7: are who are breaking the rules now. For example, if
Speaker 7: you import goods from China and the Chinese company serves
Speaker 7: as the importer, and all you do is the American
Speaker 7: company that used to import them, and now you're just saying, hey,
Speaker 7: I buy them in America. The Chinese company imported them
Speaker 7: and they happened to cheat on the customs duties. That's
Speaker 7: not my fault. Well, guess what customs will hold you liable.
Speaker 7: That's not a loophole that you can get out of
Speaker 7: so easily as that's what's legal. And what we're vising
Speaker 7: people to do is look very closely at three things.
Speaker 7: One is the valuation of the goods, two is the
Speaker 7: country of origin, and three is the classification. Now all
Speaker 7: of these seem like black and white, but they're not.
Speaker 7: This is the law, this is regulation, and therefore there's
Speaker 7: a lot of room for expertise to come in and
Speaker 7: identify what is the gray area and what is the
Speaker 7: legal grayer. How do you say on the right side
Speaker 7: of that legal area, And some of it's not grey,
Speaker 7: it's just like sophisticated so on valuation. If you provided
Speaker 7: capex assistance to your factory, or there's other rules that
Speaker 7: you can say, how that lowered the value of the goods,
Speaker 7: you would pay less triff. You got to do it legally, though,
Speaker 7: make sure you have an expert on the country of origin.
Speaker 7: Similar things, how do you classify this, How do you
Speaker 7: qualify this as being the country of origin that has
Speaker 7: the lower duty rate. There's a lot of sophistication in
Speaker 7: that as well, saying hey, did you apply enough new
Speaker 7: value added either materials or labor in that other country
Speaker 7: to change the country of origin? Legal not committing fraud?
Speaker 7: And the third ist classification. It's illegal to change the
Speaker 7: classification of your goods in order to achieve a lower
Speaker 7: duty rate. But if the correct classification of your goods
Speaker 7: happens to have a lower duty rate, you win. So
Speaker 7: there's again a lot of work that needs to be
Speaker 7: done by sophisticated people who understand these rules that can
Speaker 7: help you out. Plus Forard as a team that does this,
Speaker 7: as too many other companies.
Speaker 2: Run, are you finding them more work just means more time?
Speaker 2: Is this slimming things down?
Speaker 7: Yeah, it's definitely increasing costs for everybody in myriad ways.
Speaker 7: I mean, even just if you want to bring goods
Speaker 7: to another country, transform them change their country of origin
Speaker 7: and lower their duty rate. I mean there's a lot
Speaker 7: of extra work, a lot of extra shipping time, labor processing.
Speaker 7: You've increased the cost plus the duties. So yeah, certainly
Speaker 7: this is not making trade more seamless, that's for sure.
Speaker 4: Ryan, Based on what you're seeing, is there anyone that
Speaker 4: thinks that the US and China won't extend this deadline
Speaker 4: of their agreement their truths that's up tomorrow.
Speaker 7: Yeah, I mean, I'm sure lots of people think they
Speaker 7: won't extend it, and some think they will. I haven't
Speaker 7: looked at what the prediction markets are saying on this,
Speaker 7: and this administration is sort of inscrutable from my perspective,
Speaker 7: I don't really make a lot of predictions on that.
Speaker 4: So well, are people floading and rushing before tomorrow from
Speaker 4: China or no?
Speaker 7: I mean at this point too late, so they were
Speaker 7: people were moving stuff in, but no, I didn't see
Speaker 7: a lot of frontloading on the China one. Yeah, fair enough.
Speaker 7: From the behavior of the actual actors in the market,
Speaker 7: it seems like they think you don't get extended run.
Speaker 2: I appreciate your time and you're insights super valuable. As always,
Speaker 2: Thank you, Ryan Peterson. There the flex for CEO. This
Speaker 2: is the Bloomberg Surveillance podcast, bringing you the best in markets, economics,
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