WEBVTT - Bloomberg Surveillance TV: May 19, 2025 0:00:00.080 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.600 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.440 --> 0:00:18.360 with Lisa Bromwitz and am Marie Hordern. Join us each 0:00:18.480 --> 0:00:21.360 day for insight from the best in markets, economics, and 0:00:21.400 --> 0:00:24.720 geopolitics from our global headquarters in New York City. We 0:00:24.760 --> 0:00:27.400 are live on Bloomberg Television weekday mornings from six to 0:00:27.480 --> 0:00:31.000 nine am Eastern. Subscribe to the podcast on Apple, Spotify 0:00:31.200 --> 0:00:33.479 or anywhere else you listen, and as always on the 0:00:33.479 --> 0:00:37.120 Bloomberg Terminal and the Bloomberg Business app. The White House 0:00:37.120 --> 0:00:39.519 putting the pressure on Walmart, the President writing over the 0:00:39.520 --> 0:00:42.519 weekend quote, Walmart should stop trying to blame tariffs as 0:00:42.520 --> 0:00:45.479 the reason for raising prices, Eat the tariffs and not 0:00:45.560 --> 0:00:49.800 charge valued customers anything. Neil Data of ronmac joint Us. 0:00:49.840 --> 0:00:51.800 Now for more, Neil, welcome to the program. Lots to 0:00:51.800 --> 0:00:54.080 get through. Let's start here. We know, by definition, the 0:00:54.120 --> 0:00:56.639 importer pace the tariff. How are the costs shared? That's 0:00:56.680 --> 0:00:58.640 the question. How do you think the cost will be 0:00:58.840 --> 0:01:00.480 distributed in the month to account? 0:01:02.040 --> 0:01:05.440 Well, I think the important thing here is the admission 0:01:05.560 --> 0:01:10.600 that obviously the exporter is not the one that's paying, right. 0:01:10.680 --> 0:01:13.760 I mean, that's an implicit subtext here. They're basically admitting 0:01:14.600 --> 0:01:18.800 that it's American companies and consumers that will end up 0:01:18.840 --> 0:01:21.360 eating the costs. So I think that's an important sort 0:01:21.400 --> 0:01:24.200 of admission biomission there. 0:01:25.720 --> 0:01:25.920 You know. 0:01:26.000 --> 0:01:26.679 Look, I mean I. 0:01:26.640 --> 0:01:30.360 Think some of it's going to get passed on to consumers, 0:01:31.160 --> 0:01:35.440 maybe half. I just you know, obviously, retail profit margins 0:01:35.480 --> 0:01:39.080 aren't especially high to begin with, so I think it's 0:01:39.120 --> 0:01:43.600 going to be challenging for a company like Walmart to 0:01:43.680 --> 0:01:48.960 not pass on at least some of the tariff burden. 0:01:49.440 --> 0:01:51.640 But keep in mind that, you know, the bigger issue 0:01:51.680 --> 0:01:53.880 is what that means down the line. I mean, if 0:01:53.920 --> 0:01:56.960 corporate profit margins get squeezed, ultimately, they're going to have 0:01:57.000 --> 0:02:00.760 to pay the piper somehow, and I mean consumers, and 0:02:00.800 --> 0:02:04.400 that might show up in the form of weaker hiring, 0:02:04.760 --> 0:02:09.639 weaker wage growth, and that's another sort of effect on 0:02:10.120 --> 0:02:11.360 consumption in and of itself. 0:02:11.400 --> 0:02:13.040 Hold on a second, Yal, this is actually a really 0:02:13.120 --> 0:02:15.680 important point, and there's a question about how much some 0:02:15.720 --> 0:02:18.560 of these retailers can increase prices where it becomes not 0:02:18.560 --> 0:02:22.239 necessarily inflationary, but disinflationary because it surprises demand. Are you 0:02:22.280 --> 0:02:25.720 seeing any evidence that that's actually happening, given that reports 0:02:25.720 --> 0:02:28.080 have been pretty mixed and dependent on just execution as 0:02:28.120 --> 0:02:28.960 much as anything else. 0:02:30.639 --> 0:02:33.280 Well, I think companies are going to find significant resistance 0:02:33.320 --> 0:02:35.720 in terms of, you know, trying to pass on the 0:02:35.800 --> 0:02:41.520 higher costs, because ultimately the inflationary story boils down to a. 0:02:41.440 --> 0:02:42.799 Household's budget constraint. 0:02:43.000 --> 0:02:45.959 And when you talk about tariffs, I mean whatever goes 0:02:46.000 --> 0:02:48.320 I mean, think about price and quantity, whatever goes into 0:02:48.360 --> 0:02:50.560 P is ultimately going to come out of Q. And 0:02:50.639 --> 0:02:53.400 so you know, look, I mean right now, nominal GDP 0:02:53.520 --> 0:02:55.760 growth is probably barely growing at four four and a 0:02:55.800 --> 0:02:57.600 half percent, if you can maybe talk me into that, 0:02:59.000 --> 0:03:01.040 So if you get a signify an increase in inflation, 0:03:01.080 --> 0:03:02.680 you're going to get a big drop in real growth. 0:03:02.680 --> 0:03:03.799 I mean it's as simple as that. 0:03:03.919 --> 0:03:06.640 So look, I mean, the household's budget constraint is getting worse, 0:03:06.800 --> 0:03:10.800 not better, and I think that you know that ultimately 0:03:10.880 --> 0:03:13.440 means that, you know, anything that's passed on to consumers 0:03:13.480 --> 0:03:15.440 will mean weaker real economic activity. 0:03:15.480 --> 0:03:18.320 We've gotten a pretty big consumer stimulus over the past 0:03:18.360 --> 0:03:21.600 month that's come in the form of significantly lower oil prices, 0:03:21.840 --> 0:03:24.000 and this is something that we've heard the administration talk 0:03:24.040 --> 0:03:25.760 about quite a bit, and I wonder how much that 0:03:25.840 --> 0:03:29.480 offsets some of the constraints on household budgets and actually 0:03:29.560 --> 0:03:34.560 allows more more money for retail, for retailers for goods, 0:03:34.560 --> 0:03:37.040 for things that might be more expensive due to the terraffs. 0:03:37.600 --> 0:03:40.200 Well, we I mean, we have seen a widening in spreads, right, 0:03:40.320 --> 0:03:43.040 So it's not like the drop in oil prices has 0:03:43.080 --> 0:03:46.560 translated sort of one for one to gasoline, so consumers 0:03:46.560 --> 0:03:49.920 haven't really felt the benefits. But no, look at some level, 0:03:49.960 --> 0:03:51.560 I mean, I agree with you that you know, the 0:03:51.640 --> 0:03:54.360 drop in crude oil prices is meaningful and the FETs 0:03:54.360 --> 0:03:56.640 should sort of take that into into their into account 0:03:56.640 --> 0:03:59.120 when they think about how they're you know, looking at 0:03:59.120 --> 0:04:02.920 interest rates policy setting, because you can't pick and choose 0:04:03.000 --> 0:04:05.600 which supply shock you want to pay attention to. On 0:04:05.640 --> 0:04:08.040 the one hand, you have a negative supply shock from terras, 0:04:08.200 --> 0:04:12.200 on the other hand, you have a positive supply shock 0:04:12.240 --> 0:04:13.320 from the energy markets. 0:04:14.040 --> 0:04:16.159 And you know, a. 0:04:15.760 --> 0:04:18.360 Typical rule of thumb I believe is a twenty percent 0:04:18.440 --> 0:04:21.480 drop and imprude prices takes about thirty to forty basis 0:04:21.520 --> 0:04:25.120 points off of headline inflation, so that'll provide a meaningful 0:04:25.560 --> 0:04:29.120 sort of tail into the disinflation story. And remember, oil 0:04:29.240 --> 0:04:32.039 doesn't matter a lot for you know, underlying inflations, but 0:04:32.120 --> 0:04:34.800 it does matter for sort of the monthly swings in 0:04:35.040 --> 0:04:38.440 headline prices. So I think it's something to keep in 0:04:38.440 --> 0:04:38.960 mind here. 0:04:39.160 --> 0:04:40.760 No, I want to get your take on what's going 0:04:40.800 --> 0:04:44.200 on in Congress. We have this big, beautiful bill slowly 0:04:44.279 --> 0:04:46.440 passing through the committee's potential is going to hit the 0:04:46.440 --> 0:04:49.080 House floor by the end of the week. You've always 0:04:49.120 --> 0:04:51.520 talked about the fact that this is just basically baked 0:04:51.520 --> 0:04:54.560 into the market because it's an extension of TCJA. But 0:04:54.680 --> 0:04:57.560 now potentially does this become a risk for financial markets? 0:05:00.000 --> 0:05:02.360 Well, I mean, I don't. I don't, I don't know. 0:05:02.440 --> 0:05:04.159 I mean I always talk to you about what's going 0:05:04.160 --> 0:05:06.039 on in DC. I don't really have many views on 0:05:06.080 --> 0:05:06.719 that myself. 0:05:07.600 --> 0:05:09.960 We have a view of what it means for financial markets. 0:05:10.360 --> 0:05:13.560 Well, I don't. I think basically what they're doing is 0:05:13.600 --> 0:05:17.960 removing ahead wind, not putting in much tailwind. And so yeah, 0:05:18.000 --> 0:05:21.599 I mean I don't think the uh. I guess my 0:05:21.680 --> 0:05:24.800 sense is is that there's not much new coming from 0:05:24.839 --> 0:05:27.400 this so if the bond market's keying off of the 0:05:27.440 --> 0:05:31.960 fiscal negotiations, it doesn't really make that much sense to me, 0:05:32.440 --> 0:05:33.720 you know. So I do think a lot of that 0:05:33.839 --> 0:05:36.680 was already baked and you're seeing, you know, yields go 0:05:36.760 --> 0:05:39.120 up globally. So I don't really think it's US fiscal 0:05:39.160 --> 0:05:42.080 that's driving what's going on in the back end of the. 0:05:42.080 --> 0:05:44.120 Treasury curve here, And then what do you think it is? Then? 0:05:44.640 --> 0:05:48.040 I just think that, you know, it's a that's a 0:05:48.040 --> 0:05:49.720 good that's a good question. I mean, I think there's 0:05:49.720 --> 0:05:53.280 some residual sort of you know, fading of recession risk. 0:05:54.839 --> 0:05:57.040 There's I mean, it's not just the US, right, I mean, 0:05:57.040 --> 0:05:59.080 it's also global in nature. I mean, you have a 0:05:59.120 --> 0:06:01.599 lot of countries kind of stepping up in terms of 0:06:01.600 --> 0:06:03.000 fiscal It's not just the US. 0:06:03.000 --> 0:06:04.200 You have it in Europe as well. 0:06:05.240 --> 0:06:07.320 But I think it's sort of it's a combination of 0:06:07.360 --> 0:06:09.960 economic resilience, you know, people kind of getting tired of 0:06:09.960 --> 0:06:13.159 betting on a recession that hasn't happened, and you know, 0:06:13.200 --> 0:06:13.960 I think it's a. 0:06:13.880 --> 0:06:15.800 Sort of global fiscal story. 0:06:16.000 --> 0:06:18.120 So, you know, the US story, I think by comparison 0:06:18.120 --> 0:06:20.960 to some of these other countries, there's not as much new. 0:06:20.839 --> 0:06:24.359 There, I think, as is the case for some of 0:06:24.360 --> 0:06:25.080 these other countries. 0:06:25.120 --> 0:06:27.600 We've been trying to sell thirty year treasuries to some 0:06:27.640 --> 0:06:29.360 people as are coming on the show to see who 0:06:29.440 --> 0:06:31.920 wants to buy them, and so far nobody has wanted 0:06:31.960 --> 0:06:33.880 to buy them, even those who believe in some of 0:06:33.920 --> 0:06:37.240 the resilience of the US economics story. So are you 0:06:37.279 --> 0:06:39.279 one of those who sees this as an opportunity to 0:06:39.400 --> 0:06:42.480 invest in the dynamism of long term interest rates? 0:06:44.400 --> 0:06:47.280 I mean, look, I mean, to me, there are too 0:06:47.320 --> 0:06:49.800 many things in the economy that don't work with interest 0:06:49.880 --> 0:06:52.919 rates up at these levels. Therefore interest rates will have 0:06:53.000 --> 0:06:55.880 to come down. So yeah, I mean I'd be buying 0:06:55.920 --> 0:06:56.560 duration here. 0:06:56.760 --> 0:06:58.680 I think it's sounds limitsing now. I think it's an 0:06:58.680 --> 0:07:01.480 important point. You believe it's so limiting that the laws 0:07:01.520 --> 0:07:04.839 of gravity still exists for the bond market. 0:07:05.920 --> 0:07:06.560 Absolutely. 0:07:06.640 --> 0:07:09.840 I mean, how long can you sustain a situation where Morgan, 0:07:09.920 --> 0:07:12.560 where interest rates are running above the rate of nominal GDP? 0:07:12.920 --> 0:07:14.160 That's I mean. 0:07:14.360 --> 0:07:16.640 And as you know, my economic outlook is generally more 0:07:16.640 --> 0:07:16.920 on the. 0:07:16.840 --> 0:07:18.320 Cautious side of the consensus. 0:07:18.360 --> 0:07:23.400 So I think if economic momentum is slowing down. Interest 0:07:23.480 --> 0:07:25.160 rates will come down as a result. 0:07:25.560 --> 0:07:28.840 No data, No appreciate your thoughts as always, buddy, no 0:07:29.000 --> 0:07:41.560 data there of Remaka, Let's extend the conversation with Janet 0:07:41.680 --> 0:07:44.080 Low of Stratetiga is a bad company. Jenet, welcome to 0:07:44.120 --> 0:07:47.000 the program. To events one event, one outcome. Let's talk 0:07:47.000 --> 0:07:49.960 about the event the US losing its final triple A 0:07:50.080 --> 0:07:53.640 credit rating, this one from Moody's and the outcome Treasury 0:07:53.680 --> 0:07:56.360 yields back through five percent on a thirty year bond. 0:07:56.360 --> 0:07:59.680 Did the fiscal hawks in Washington just get some extra fuel? 0:08:00.920 --> 0:08:01.080 Oh? 0:08:01.120 --> 0:08:01.720 Absolutely. 0:08:01.840 --> 0:08:05.640 This was definitely something that bolsters their argument. They had 0:08:05.720 --> 0:08:08.960 gone into this fight a haul along saying there needed 0:08:09.000 --> 0:08:11.240 to be much more significant budget cuts. They were the 0:08:11.280 --> 0:08:14.320 ones who were pushing for even larger budget cuts in 0:08:14.440 --> 0:08:17.680 order to have larger tax cuts in place. And they're 0:08:17.720 --> 0:08:23.320 still not satisfied with just overall where the fiscal situation is. Essentially, 0:08:23.360 --> 0:08:26.160 they're looking at the federal spending levels and seeing that 0:08:26.200 --> 0:08:29.280 it's essentially about still four percentage points higher than it 0:08:29.440 --> 0:08:32.520 was pre COVID in our long term average, and so 0:08:32.600 --> 0:08:34.880 that's something that they really want to tackle here. So 0:08:34.920 --> 0:08:38.720 the fact that you had on Friday morning, the members 0:08:38.760 --> 0:08:40.600 of the House Budget can made, the fiscal hawks on 0:08:40.640 --> 0:08:44.000 that committee voting no against this bill to send a 0:08:44.040 --> 0:08:46.760 signal that they wanted more significant cuts, they wanted to 0:08:46.880 --> 0:08:49.079 accelerate them. And then on top of that you get 0:08:49.120 --> 0:08:52.000 the Moodies downgrade in the afternoon. That really added some 0:08:52.120 --> 0:08:54.320 fuel to their argument to say that we need to 0:08:54.360 --> 0:08:57.120 do something even stronger because of the US fiscal situation. 0:08:57.400 --> 0:08:59.720 Did this up end Speaker Johnson's plan to get this 0:08:59.760 --> 0:09:01.040 all on by Memorial Day? 0:09:02.200 --> 0:09:03.199 I don't think so. 0:09:03.280 --> 0:09:06.400 I think that there is obviously some significant push here 0:09:06.480 --> 0:09:08.720 to get this done. This is part of Trump's agenda. 0:09:09.040 --> 0:09:11.559 He doesn't want this bill to get accomplished. There has 0:09:11.640 --> 0:09:15.240 to be some compromises because obviously the fiscal conservatives do 0:09:15.280 --> 0:09:17.920 not have a solid majority. They have to negotiate with 0:09:17.960 --> 0:09:21.640 the moderates to run this through on a Republican only basis, 0:09:21.920 --> 0:09:24.320 and failure means that if you would actually have to 0:09:24.360 --> 0:09:27.400 do a compromise with Democrats towards the end of the year, 0:09:27.440 --> 0:09:30.120 if you can't get it done through reconciliation, and that 0:09:30.160 --> 0:09:32.559 means that you would probably have higher spending levels and 0:09:32.679 --> 0:09:35.760 higher taxes, and that's something that the conservatives don't want well. 0:09:35.800 --> 0:09:37.839 To you and Jonathan's point, the fiscal hawks seem to 0:09:37.880 --> 0:09:40.440 have some fuel right now after what happened with the 0:09:40.480 --> 0:09:43.280 Moody's downgrade. Who else has leverage in this fight? 0:09:45.080 --> 0:09:47.160 Yes, I mean, obviously I think the moderates, do you 0:09:47.240 --> 0:09:49.680 still have leverage because they are not going to vote 0:09:49.679 --> 0:09:51.679 for things that are going to cost them their seats. 0:09:51.920 --> 0:09:55.400 They are obviously the majority makers in this Congress, and 0:09:55.440 --> 0:09:57.439 so that's going to be really important for them to 0:09:57.440 --> 0:10:00.200 not have significantly drastic cuts. So that's why I think, 0:10:00.240 --> 0:10:03.280 you know, having work requirements moved up to twenty twenty 0:10:03.280 --> 0:10:05.720 seven rather than immediately makes a little bit more sense. 0:10:06.000 --> 0:10:09.040 You also do have the Salt Caucus, so the blue. 0:10:08.760 --> 0:10:11.400 State Republicans who are pushing for a higher salt deduction, 0:10:11.760 --> 0:10:14.400 they believe that that's really important. So they're still going 0:10:14.440 --> 0:10:16.480 to be pushing to get their leverage in here. And 0:10:16.520 --> 0:10:18.880 then obviously we do need to watch the Senate as well. 0:10:18.920 --> 0:10:21.400 The Senate is saying that they're signaling that they're not 0:10:21.400 --> 0:10:23.800 happy with some of the provisions that the House is 0:10:23.840 --> 0:10:26.240 put forward, but the House also does have and the 0:10:26.240 --> 0:10:28.240 Senate does have to realize that the House has this 0:10:28.400 --> 0:10:31.400 very slow majority. There's not a lot of wiggle room 0:10:31.679 --> 0:10:34.440 to really make significant changes if you have to deal 0:10:34.480 --> 0:10:37.240 with these competing factions in the House caucus. Toe. 0:10:37.360 --> 0:10:39.319 I love a good deficit debate. It's a great thing 0:10:39.360 --> 0:10:41.320 to have. We discussed it all the time. Is there 0:10:41.440 --> 0:10:44.160 enough discussion about the growth side of this bill, how 0:10:44.240 --> 0:10:47.040 much it actually does boost growth and the other side 0:10:47.040 --> 0:10:49.720 of the balance sheet. It's crucial to keep the deficit 0:10:50.120 --> 0:10:51.880 in some sort of balance relative to GDP. 0:10:53.080 --> 0:10:54.920 Yeah, And I think this is a really important piece 0:10:55.000 --> 0:10:57.120 with the tax bill is we have two things that 0:10:57.160 --> 0:11:00.400 are happening. First, they did include more pro growth tax 0:11:00.440 --> 0:11:03.199 provisions in this bill, so they have foot media expensing 0:11:03.280 --> 0:11:06.320 for CAPBEX, for R and D and for structures again 0:11:06.360 --> 0:11:09.080 to kind of get more domestic manufacturing in the United 0:11:09.120 --> 0:11:12.400 States in the midst of this tariff war that we're 0:11:12.440 --> 0:11:15.360 essentially having. And in the same time too, the fact 0:11:15.400 --> 0:11:18.280 that we now have we had the significant tear of 0:11:18.320 --> 0:11:22.439 reduction on Chinese goods over the past week, so that 0:11:22.559 --> 0:11:24.480 also plays into this. So now we can have a 0:11:24.520 --> 0:11:27.240 tax bill that has more pro growth provisions in it 0:11:27.400 --> 0:11:31.079 that can actually help to sterilize the tariffs that are 0:11:31.080 --> 0:11:34.000 still in place. And that's important because we do have 0:11:34.120 --> 0:11:37.440 essentially a two trillion dollar consumption tax that's put into 0:11:37.480 --> 0:11:42.839 the economy. So having fiscal stimulus for consumers that will 0:11:42.920 --> 0:11:45.439 hit next taxis and is important. Plus you have these 0:11:45.440 --> 0:11:48.840 business investment incentives, and together we look at what we 0:11:48.920 --> 0:11:50.920 have this the current bill in front of us, we're 0:11:50.920 --> 0:11:52.920 looking at saying that that is going to increase or 0:11:52.920 --> 0:11:55.720 boost GDP by one percent, and that is a really 0:11:55.720 --> 0:11:57.439 important point to also keep in mind. 0:11:57.559 --> 0:11:59.920 How much does that offset the increases to the deficit 0:12:00.280 --> 0:12:02.640 on a sort of relative basis at a time where 0:12:02.640 --> 0:12:04.440 people are saying at the same time, growth is going 0:12:04.480 --> 0:12:06.680 to slow as a result of some of these tariffs. 0:12:07.840 --> 0:12:09.480 Yeah, I mean, so I think we still think that 0:12:09.520 --> 0:12:13.520 the deficit is on a improving trajectory. You do have 0:12:13.600 --> 0:12:16.680 tariff income coming into the US treasury that won't obviously 0:12:16.760 --> 0:12:18.960 count for this tax bill, but we are going to 0:12:18.960 --> 0:12:22.719 see some improvement in the deficit. Obviously, it's not significant 0:12:22.720 --> 0:12:26.080 for especially priscal conservatives, and so that's something that comes 0:12:26.080 --> 0:12:26.680 into play. 0:12:26.920 --> 0:12:28.280 But if we were looking at. 0:12:28.120 --> 0:12:31.240 The fact that maybe we would have significant tariffs in place, 0:12:31.280 --> 0:12:33.800 and maybe this tax bill would have been delayed that 0:12:33.840 --> 0:12:34.920 wouldn't have helped. 0:12:34.679 --> 0:12:37.319 To boost the US economy. It could have been worse situation. 0:12:37.600 --> 0:12:39.520 If you actually have some of these pro growth tax 0:12:39.559 --> 0:12:43.439 policies in place and they happen before the stronger tariffs hit, 0:12:43.720 --> 0:12:46.720 that actually provides boost to do the US economy and 0:12:46.760 --> 0:12:49.120 then actually can help with the growth over the long 0:12:49.200 --> 0:12:50.600 term and then help with the deficit. 0:12:50.920 --> 0:12:52.800 Jennet, just finally, just to wrap it up, do you 0:12:52.800 --> 0:12:56.120 thinem they get this done a wait today? 0:12:56.360 --> 0:12:58.719 I do. I do think that they will get this 0:12:59.679 --> 0:13:02.040 stead line is very strong in the House. Now. Maybe 0:13:02.080 --> 0:13:04.240 it's not done by Thursday, maybe it's done by Friday, 0:13:04.320 --> 0:13:06.439 or it gets pushed into that holiday weekend. But I 0:13:06.520 --> 0:13:09.040 do think there's a strong effort to get this done. 0:13:09.080 --> 0:13:11.560 And the fact that you had the Budget Committee meeting 0:13:11.559 --> 0:13:13.960 at ten o'clock at night on a Sunday is really 0:13:13.960 --> 0:13:16.200 important to show that they really do want to get 0:13:16.200 --> 0:13:20.880 momentum voting present obviously with them backing down to some 0:13:21.000 --> 0:13:22.679 extent to allow. 0:13:22.400 --> 0:13:23.400 The bill to move forward. 0:13:23.600 --> 0:13:25.199 And now they have a couple of days before they 0:13:25.240 --> 0:13:28.040 do that one am Rules Committee meeting on Wednesday. 0:13:28.200 --> 0:13:31.480 Jeannette, appreciate your time. Thank you. Janet Low there thost fatiguas, 0:13:41.160 --> 0:13:43.440 let's turn to markets. Bomb your tire across the curve 0:13:43.720 --> 0:13:46.719 the dollar weaker, equity is lower as Moody strips the 0:13:46.840 --> 0:13:49.200 US gouvernment of its top credit writing. Kathy John's are 0:13:49.240 --> 0:13:51.600 child swap writing. This is not a case of the 0:13:51.679 --> 0:13:54.080 US not having the capacity to pay the debt. It's 0:13:54.080 --> 0:13:57.200 the willingness to reduce the deficit that is the issue. 0:13:57.280 --> 0:13:59.800 Kathy joins us now for more. Kathy, welcome to the 0:14:00.440 --> 0:14:02.880 Just your initial reactions to the needs from Moodies over 0:14:02.960 --> 0:14:03.920 a weekend. 0:14:04.760 --> 0:14:06.360 Yeah, it really wasn't a big surprise. 0:14:06.440 --> 0:14:09.320 As you indicated earlier, they had them on negative watch. 0:14:09.400 --> 0:14:11.400 They're following s and p and pitch. 0:14:12.559 --> 0:14:17.520 As I watched the negotiations over the tax bill or 0:14:17.559 --> 0:14:20.040 the budget bill, I thought, oh, well, we're not getting 0:14:20.040 --> 0:14:23.720 anywhere we need to go to get our house in order. 0:14:23.880 --> 0:14:25.800 So not a big surprise. 0:14:26.760 --> 0:14:29.760 But it does bring forward all the issues that you've 0:14:29.800 --> 0:14:33.200 been talking about that we're not enough path to sustainability, 0:14:33.680 --> 0:14:37.200 something we need to address, but Congress doesn't seem willing 0:14:37.280 --> 0:14:37.840 to address. 0:14:37.960 --> 0:14:39.800 I feel like every couple of years we talk about 0:14:39.840 --> 0:14:42.640 the bond vigilantes grabbing their pitchforks and getting ready to 0:14:42.840 --> 0:14:44.720 go out there and pick it, and it never actually 0:14:44.840 --> 0:14:47.560 has any staying power because other people say, actually, well 0:14:47.600 --> 0:14:50.040 you don't want we love. How close are we to 0:14:50.080 --> 0:14:52.480 the bond vigilantes getting the upperhand and really shaping the 0:14:52.520 --> 0:14:53.120 narrative here. 0:14:54.440 --> 0:14:56.200 Yeah, I've never been a big fan of the bond 0:14:56.280 --> 0:14:58.960 vigilante story because I remember the eighties and it was 0:14:59.000 --> 0:15:01.960 more about inflation than it was about the budget. 0:15:02.400 --> 0:15:04.040 But that being said, in nineteen eighty. 0:15:03.880 --> 0:15:06.960 Five we've got sequestration, which which actually did help get 0:15:07.000 --> 0:15:08.240 the budget back in order. 0:15:09.120 --> 0:15:10.080 How close are we? 0:15:10.360 --> 0:15:12.280 You know, I don't think that we're looking at a 0:15:12.320 --> 0:15:15.560 stampede out of treasuries, but I do think that. 0:15:15.800 --> 0:15:18.240 When you combine the whole policy mix. 0:15:18.320 --> 0:15:22.320 We have tariffs, a lower dollar that goes with that, 0:15:23.640 --> 0:15:27.880 and this sort of deglobalization trend, then you get a 0:15:27.920 --> 0:15:33.800 steady march higher in long term yields because you're discouraging inflow. 0:15:33.400 --> 0:15:35.320 Of capital capital that we need. 0:15:35.880 --> 0:15:38.680 So I think that we just continue to see a 0:15:38.760 --> 0:15:42.080 steady climb in yields from here until something changes, either 0:15:42.160 --> 0:15:44.840 the economy gets a lot weaker and we look at 0:15:44.920 --> 0:15:49.080 more federy cuts, or we get some sort of you know, 0:15:49.240 --> 0:15:51.640 fiscal deal that actually makes. 0:15:51.400 --> 0:15:53.760 Sense, Kathy, when it comes to a fiscal deal that 0:15:53.840 --> 0:15:55.520 actually makes sense, what are you talking about? Is there 0:15:55.560 --> 0:15:57.960 anything you see right now on the policy proposals? 0:15:59.120 --> 0:15:59.280 Yeah? 0:15:59.320 --> 0:16:02.040 I mean I'm not a plicy analysts, but if I 0:16:02.320 --> 0:16:05.080 sat down with a spreadsheet today and said how do 0:16:05.160 --> 0:16:10.920 I get back to three percent deficit relative to GDP, 0:16:11.720 --> 0:16:15.880 I wouldn't be cutting taxes on everybody, and I would, 0:16:16.040 --> 0:16:18.120 you know, have to look hard at some of the 0:16:18.160 --> 0:16:19.320 spending that we're doing. 0:16:19.880 --> 0:16:22.720 But that's not what's going on. You know, now we're 0:16:22.760 --> 0:16:25.080 giving tax cuts, and on top of tax. 0:16:24.920 --> 0:16:29.960 Cuts and spending is maybe trimmed a little around the 0:16:30.080 --> 0:16:33.800 edges on Medicaid, but really all that does is on Medicaid, 0:16:33.880 --> 0:16:36.520 you're just going to limit access. You're not, they're already 0:16:36.560 --> 0:16:39.920 Medicaid spending to hospitals and to. 0:16:39.920 --> 0:16:42.160 Doctors is at a bare minimum level. 0:16:42.280 --> 0:16:46.280 So you're just limiting access to healthcare for part of 0:16:46.280 --> 0:16:49.080 the population. And yeah, maybe that gets you a little ways, 0:16:49.200 --> 0:16:52.320 but it's not going to the turn the dial. 0:16:52.200 --> 0:16:52.600 He Kathy. 0:16:52.640 --> 0:16:54.440 In the grund scheme of things, we're having this conversation 0:16:54.480 --> 0:16:57.360 when things are good, the hot dates is still okay, 0:16:57.800 --> 0:17:00.120 The hot date is still okay, and we will un 0:17:00.400 --> 0:17:03.320 budget deficits north of six percent. Through the previous administration, 0:17:03.440 --> 0:17:06.240 when the economy was an expansion in GDP was running 0:17:06.240 --> 0:17:08.720 at three percent. Kathy, how much confidence do you have 0:17:09.040 --> 0:17:11.200 that if we do indeed go into an economic dancer, 0:17:11.320 --> 0:17:15.000 the dispawn market rallies and yields full. 0:17:15.240 --> 0:17:17.200 Well, I think they'll fall, just not as much as 0:17:17.200 --> 0:17:19.920 they would otherwise if we didn't have such a heavy 0:17:19.960 --> 0:17:23.959 download and we weren't due pursuing these policies that are 0:17:24.000 --> 0:17:30.400 in conflict again, trying to get a weaker dollar, limiting trade, deglobalizing, 0:17:30.840 --> 0:17:33.840 all of that is going to be negative for getting 0:17:33.840 --> 0:17:37.880 the capital inflows. We need to attract buyers of our bonds, 0:17:38.119 --> 0:17:40.719 so we can cut rates, but we in line with 0:17:41.040 --> 0:17:42.760 slower growth and lower inflation. 0:17:42.920 --> 0:17:44.760 But they're not going to go back to levels that 0:17:44.840 --> 0:17:46.160 you might otherwise. 0:17:45.680 --> 0:17:48.880 Have thought given that, Kathy, does that limit the argument 0:17:49.000 --> 0:17:51.920 for bonds just as you talk to potential clients as 0:17:51.920 --> 0:17:55.320 a counter cyclical hedge the way that they have been traditionally. 0:17:56.680 --> 0:17:58.919 Yeah, you know, I was looking at the correlations between 0:17:58.960 --> 0:18:02.240 SO equities and over the weekend, and we had that 0:18:02.280 --> 0:18:05.639 big dislocation in April, and now we've gone back to 0:18:05.680 --> 0:18:09.640 a more normal out correlation. I think we may see 0:18:09.680 --> 0:18:12.199 more of those dislocations. So what does that mean is 0:18:12.240 --> 0:18:14.520 bonds don't provide as good a hedge as. 0:18:14.359 --> 0:18:15.040 They once did. 0:18:15.680 --> 0:18:20.040 But I think that it's going to be periodic dislocations 0:18:20.160 --> 0:18:25.679 rather than long term dislocation because eventually the policies will 0:18:25.720 --> 0:18:28.520 probably send the stock market lower and you'll need to 0:18:28.520 --> 0:18:30.560 be somewhere, and frankly, a four and a half to 0:18:30.640 --> 0:18:33.360 five percent treasure yield is not a bad place to sit. 0:18:34.280 --> 0:18:37.480 We've been just advocating staying shorter, you know, benchmark a 0:18:37.560 --> 0:18:40.640 shorter duration and up in credit quality because we're not 0:18:40.680 --> 0:18:43.400 willing to take a lot of duration risk in this environment. 0:18:43.680 --> 0:18:45.400 You're not alone, Kathy, that's for sure. 0:18:45.480 --> 0:18:45.760 Kathy. 0:18:45.800 --> 0:18:57.240 John's a child swabbing. We need to turn to the 0:18:57.280 --> 0:18:59.920 bond market. Christian Mammali of Lafat College with this to say, 0:19:00.240 --> 0:19:02.399 I still like bonds despite the recent pain, for the 0:19:02.440 --> 0:19:04.919 simple reason that I think inflation will not be as 0:19:05.000 --> 0:19:08.480 significant an issue as the markets expect. Kristna joins us 0:19:08.480 --> 0:19:10.320 now for more Christian, Welcome to the program, sir. Before 0:19:10.359 --> 0:19:13.960 we get to tarifs and inflation, downgrades. How relevant is 0:19:13.960 --> 0:19:17.600 that downgrade from Moody's ever at all? 0:19:17.720 --> 0:19:22.160 Well, so, I think your vestent is right on this kind. 0:19:22.240 --> 0:19:26.400 That is, the downgrade itself should have happened a while ago, 0:19:27.080 --> 0:19:31.359