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
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: anywhere else you listen, and as always, on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. The US and China
Speaker 2: agreeing to a ninety day calling golf period, the US
Speaker 2: reducing its levies on Chinese imports from one hundred and
Speaker 2: forty five percent to thirty while China cuts duties on
Speaker 2: US goods from one hundred and twenty five percent to ten.
Speaker 2: Joining us now to discuss the Treasury Secretary Scott Beson,
Speaker 2: a driving force behind trade soalks in Geneva over the weekend.
Speaker 2: Mister Secretary, Welcome back to Bloomberg Surveillance, Sir.
Speaker 3: It's good to see you.
Speaker 4: Good afternoon from Geneva.
Speaker 2: Jonathan WRT to catch up. As always, let's get into
Speaker 2: these talks over the weekend. One standout line for me
Speaker 2: and for many others was the line that the differences
Speaker 2: between the two sides weren't as large as we thought
Speaker 2: they would be. What were those differences, sir, and why
Speaker 2: were they smaller than you expected?
Speaker 1: Well, I think Jonathan, what's important to know is for
Speaker 1: the tariff program, we had a plan, we had a process,
Speaker 1: but we did not have a mechanism for engaging with
Speaker 1: the Chinese. So China was the only country who escalated
Speaker 1: their terriffs in response to our reciprocal tarot level. So
Speaker 1: that resulted in an unfortunate escalation. So we now have
Speaker 1: a mechanism to deal with that. Neither side wants a
Speaker 1: generalized the coupling. The US is going to do a
Speaker 1: strategic dec coupling in terms of the items that we
Speaker 1: discovered during COVID were a national security interest, whether it's semiconductors, medicine, steel,
Speaker 1: So we still have a generalized terriffs on some of those,
Speaker 1: but both sides agreed we do not want a generalized decoupling.
Speaker 2: These things take time, as you know, sir, We've got
Speaker 2: ninety days now to work with. Last time around, it
Speaker 2: took eighteen months to reach an agreement on purchase agreements.
Speaker 2: I think you yourself have said in the past that
Speaker 2: it can take two to three years to have a
Speaker 2: full comprehensive trade agreement with the country. Between the US
Speaker 2: and China, What do you think is achievable, sir, over
Speaker 2: the next ninety days.
Speaker 4: Well, Jonathan, we're going to see.
Speaker 1: But what has to happen is it has to be
Speaker 1: fair for the American people. But in January twenty twenty,
Speaker 1: President Trump produced a template.
Speaker 4: We have an excellent.
Speaker 1: Trade agreement with China, and the Biden administration chows not
Speaker 1: to enforce it. The Chinese delegation basically told us that
Speaker 1: once President Biden came into office, they just ignored their obligations.
Speaker 1: So we all already have a large framework. The other
Speaker 1: thing to remember here, Jonathan, is that this is a
Speaker 1: pause down to ten percent. The April second level for
Speaker 1: China is thirty four percent, so we will be working
Speaker 1: to see where their final reciprocal number ends up. And
Speaker 1: the negotiations are a combination of tariffs, non tariff, trade barriers,
Speaker 1: currency manipulation, and subsidies of labor and capital.
Speaker 2: Just to build on that, as I listen to you,
Speaker 2: do you consider the new levels as a sailing or
Speaker 2: a flaw.
Speaker 4: Well, it's obvious.
Speaker 1: It's obviously a floor that they are now with everyone
Speaker 1: else who did not retaliate. So the levels have come
Speaker 1: down to the Paull's level, And what I would say
Speaker 1: is thirty four, which is their assigned April second level,
Speaker 1: would be a ceiling, which is what I went out
Speaker 1: and told people on April second, which is.
Speaker 4: Why I was surprised.
Speaker 1: Market participants panicked because we had kept we had kept
Speaker 1: the upside for every country and if they didn't retaliate,
Speaker 1: So this unfortunate turn of events happened because of retaliation.
Speaker 4: But now we have a.
Speaker 1: Process in place to avoid escalation like that.
Speaker 5: Again, Secretary Buston, just to build on that, are you
Speaker 5: saying that teriff rates will only go up from here
Speaker 5: if this really is a floor or of ten percent
Speaker 5: on the Chinese side and thirty percent on the US side.
Speaker 1: I'm not saying that they're going to go up, but
Speaker 1: it would be implausible that they would go below ten.
Speaker 5: One thing that you've been talking about is generalized to
Speaker 5: coupling as something that's not necessarily in the interest of
Speaker 5: either side, and either side wants that.
Speaker 6: What about a strategic to coupling.
Speaker 5: What is the appropriate rate of tariffs that could potentially
Speaker 5: cause some sort of strategic to coupling in the sectors
Speaker 5: that you are talking about.
Speaker 1: Well, look, the bringing back our strategic.
Speaker 4: Are important.
Speaker 1: Strategic industries can be a result of terrace, but it's
Speaker 1: also a result of national will. So this administration is
Speaker 1: running full speed to make sure that what we saw
Speaker 1: during COVID.
Speaker 4: Never happens again.
Speaker 1: So it's a combination of it can be terrorists, but
Speaker 1: again it is the administration moving as quickly as possible
Speaker 1: to make sure that we are self sufficient in the
Speaker 1: strategic industries.
Speaker 2: I think that's completely understandable from the United States side,
Speaker 2: and I want to miss the secretary whether the Chinese
Speaker 2: understood that. Did you get the sense they do understand
Speaker 2: that will be the road forward for the United States.
Speaker 1: Well, I think they understand that, and I think they
Speaker 1: understand that we are focused on fair trade, that this
Speaker 1: gigantic deficit that we have with them, that it didn't
Speaker 1: happen last year, it didn't happen there before, It's happened
Speaker 1: over decades, and that this happened half excuse me has
Speaker 1: to be remedied. The China shock gutted our manufacturing sector
Speaker 1: and we want.
Speaker 4: To bring that back.
Speaker 1: On the other side, Party chair, she has said that
Speaker 1: he would like to increase consumption, but to date the
Speaker 1: Chinese have just increased manufacturing. So we would like to
Speaker 1: see them increase consumption. We would like to see them
Speaker 1: open their market to American products. So there are two
Speaker 1: ways to rebalance. One is fewer Chinese goods in the
Speaker 1: US market. The other is more American goods in the
Speaker 1: Chinese market. And my guess is that the answer is
Speaker 1: somewhere in between.
Speaker 2: Some of this, of course, takes us back to the
Speaker 2: purchase agreements of the first term of the president.
Speaker 3: Is it different this time around?
Speaker 2: Is it as simple as just revisiting those purchase agreements
Speaker 2: or do you see additional sectors being targeted?
Speaker 1: Jonathan, I think everything's on the table. But the Phase
Speaker 1: one purchase agreements is a very good road map because
Speaker 1: I will point out that during twenty twenty China met
Speaker 1: their obligations under that agreement. It was only under President
Speaker 1: Biden where they neglected them. So we are getting we
Speaker 1: are starting there, and look, the world has changed, products
Speaker 1: have changed, product mix has changed, so I think everything's
Speaker 1: on the table, but the main thing here is we
Speaker 1: have to have a fair deal for the American people.
Speaker 1: And keep in mind too that we also have twenty
Speaker 1: percent fentanyl terras on, so we are at for twenty
Speaker 1: twenty five. We have put on thirty percent terraffs. They
Speaker 1: have put on ten. And my economic observation is that
Speaker 1: businesses just need time to calibrate that we saw approximately
Speaker 1: twenty percent terraiffs from President Trump's first term. Businesses calibrated,
Speaker 1: supply chains moved. We have seen twenty percent tariffs President
Speaker 1: Trump put on in February due to the fentanyl crisis.
Speaker 4: Calibration very little disruption.
Speaker 1: And now a ten percent additional tariff should mean very
Speaker 1: little disruption.
Speaker 6: Mister Secretary.
Speaker 5: A lot of people are wondering what caused the softening
Speaker 5: and tone, the reason for both sides to come together
Speaker 5: and be able to have this kind of negotiation and
Speaker 5: try to pass forward where there will be further negotiations
Speaker 5: in the near term. What's your interpretation of what caused
Speaker 5: both sides to come.
Speaker 6: To the table.
Speaker 1: Well, I think that the two levels on the reciprocal tariffs,
Speaker 1: when they both ratcheted up to one twenty five caused
Speaker 1: the equivalent of an embargo, and that wasn't good for
Speaker 1: either side. Where the depth is a country, so less
Speaker 1: bad for us. But I think there was the unintended
Speaker 1: consequence of this very fast ratchet, and so now both
Speaker 1: sides are at ten. We will be moving forward with
Speaker 1: a ninety date pause. And the important thing to remember
Speaker 1: is that we can always go back to the April
Speaker 1: second level. But my sense is we had very good
Speaker 1: discussions of my counterpart was the very firm, but very engaged,
Speaker 1: and I think we have set the stage for meaningful discussions.
Speaker 5: Mister secretary, is there already a scheduled date for Jijian
Speaker 5: paying and President Trump to meet in person at any
Speaker 5: point in the near term?
Speaker 6: Do you think that that is something in.
Speaker 5: The cards as part of these negotiations.
Speaker 1: I think that there would be a phone call before
Speaker 1: a meeting, and there's nothing on the calendar, but I
Speaker 1: could imagine that that could happen in the coming weeks
Speaker 1: or months.
Speaker 3: Coming into the meeting.
Speaker 2: As you know, the President put out a social media
Speaker 2: posts referred to as Scotty b. I won't go there,
Speaker 2: We'll keep using missus secretary, and he said you could
Speaker 2: go as low as eighty. Can you share with us
Speaker 2: how we went from say, eighty down to thirty.
Speaker 3: Where did that number come from?
Speaker 4: Sir?
Speaker 1: I think that in the President's mind, eighty was a
Speaker 1: number that did not cause an embargo, so we could
Speaker 1: still be at eighty and have trade flowing. But we
Speaker 1: were able to both the moved down by one hundred
Speaker 1: and fifteen percent. And Jonathan, I think the other important
Speaker 1: thing here is I think this is the first time
Speaker 1: that the Chinese have addressed one of the President's real priorities,
Speaker 1: which is ending this fentanyl crisis in the United States.
Speaker 1: So they brought their trade team, and they brought a
Speaker 1: vice Minister for State Security who met with our national
Speaker 1: security team. It was a separate and they had a
Speaker 1: very robust and detailed discussion on ways to stop the
Speaker 1: transport of precursor drugs from China to North America that
Speaker 1: ends up in the hands of the cartels that is
Speaker 1: then killing several hundred thousand Americans a year. So I'm
Speaker 1: very optimistic that President Trump we have solved part of
Speaker 1: the fentanyl crisis by securing the border, and I think
Speaker 1: this is the next step on that. So if over
Speaker 1: the coming months we were to see excellent engagement from
Speaker 1: the Chinese and solutions towards solving the fentanyl crisis. I
Speaker 1: think we could see some amount of the fentanyl tariffs
Speaker 1: perhaps come off, but that is going to take actions
Speaker 1: from them.
Speaker 3: What kind of action specifically, sir, Well, we.
Speaker 1: Can see where these precursor drugs that are coming from
Speaker 1: from at Treasury Financial Criminal Enforcement Network has very good
Speaker 1: visibility into international finance. We can see these Chinese companies
Speaker 1: that are selling the equipment for making the pills that
Speaker 1: transferring the precursor.
Speaker 4: Drugs to the cartels.
Speaker 1: US Treasury has declared the Mexican cartels foreign terrorist organizations,
Speaker 1: so working with Chinese leadership to stop this would be
Speaker 1: a very tangible symbol.
Speaker 4: In China.
Speaker 1: The narcotics distribution is punishable by death, and we're not
Speaker 1: pushing for that necessarily, but we are pushing for very
Speaker 1: very strict enforcement, similar to what they.
Speaker 4: Do at home.
Speaker 5: Mister Secretary, I imagine you're incredibly tired, and a lot
Speaker 5: of people are very excited to see you taking the
Speaker 5: lead in these discussions, certainly in the market. Are you
Speaker 5: going to be taking the lead going forward with other
Speaker 5: difficult negotiations around the world with different trading partners.
Speaker 1: I've been involved in most of the Asia negotiations. We
Speaker 1: had a very good negotiation with Or, We've had two
Speaker 1: rounds of negotiations with Japan. I've been involved with Korea.
Speaker 1: I've met with the Vietnam and excuse me, also Indonesia.
Speaker 1: So my focus has been on the Asia region thus far.
Speaker 1: And then the trade team had a great victory with
Speaker 1: the UK putting together the contours of the first trade deal.
Speaker 1: The other thing I want to say too is my
Speaker 1: partner here in Geneva. Ambassador Greer was an incredible asset.
Speaker 1: He has years of experience, a broad and deep knowledge
Speaker 1: of trading to goociation.
Speaker 4: Of the numbers and the nuance.
Speaker 1: And we would not be here today without Ambassador Career.
Speaker 2: Missus Secretary, just before you go, you've promised us a
Speaker 2: lot of time. We've used up most of it already.
Speaker 2: Just the final question, what does victory look like for
Speaker 2: you in six months time when we get to year end.
Speaker 2: And I know it's frustrated to you that we've only
Speaker 2: been talking about trade, that we haven't focused on the
Speaker 2: full policy platform. Where do you want to be by
Speaker 2: year Rent?
Speaker 1: Well, well, Johnathan, this administration is doing peace deal, trade deal,
Speaker 1: tax deal. I try to stay mostly, as you know,
Speaker 1: in my econ lane. So from that lane, victory to
Speaker 1: me looks like the three legged stool. That really are
Speaker 1: the three parts of our program really kicking in, So
Speaker 1: we will have most of the trade and tariffs settled.
Speaker 1: The tax bill is moving along very well, better than
Speaker 1: I could have imagined. Speaker Johnson, leader Thoon are doing
Speaker 1: an incredible job with President Trump's leadership.
Speaker 4: So we will have tax done.
Speaker 1: And then the final piece that is longer lagged, but
Speaker 1: perhaps the most important is deregulation and deregulation. We are
Speaker 1: deregulating across all industries every day. President Trump is committed
Speaker 1: to for every new regulation, ten comes off the books.
Speaker 1: And deregulations should start kicking in in the.
Speaker 4: Third and the fourth quarters.
Speaker 1: So tax, trade, and deregulation all coming together at the
Speaker 1: end of the year. I think it's going to be very,
Speaker 1: very powerful for President Trump's economic agenda.
Speaker 2: Mister Treasury Secretary scope Esson, we appreciate your time, sir
Speaker 2: from Geneva. Very generous with your time. Thanks for being
Speaker 2: with us right here. Merripandita. JP Morgan writ SINC. We
Speaker 2: do not want to be loaded into a false sense
Speaker 2: of security. While the volatility we saw in April may
Speaker 2: have been the high water mark, that doesn't mean volatility
Speaker 2: is behind us all together.
Speaker 4: MARYA.
Speaker 3: Johns is now for more American monic.
Speaker 6: Good morning.
Speaker 3: Have we put all the bad news behind us?
Speaker 6: Not necessarily.
Speaker 7: What we have to be mindful of is volatility in
Speaker 7: the nature of it, It comes and goes. And while
Speaker 7: we have another recalibration moment. We had April second announcement
Speaker 7: of tariffs, we had April ninth pause on tariffs. Now
Speaker 7: we have a big reduction for a period of time
Speaker 7: in the Chinese.
Speaker 6: Tariff rate, but there are still risks ahead.
Speaker 7: We have to continue to follow the ebb and flow
Speaker 7: of trade optimism, trade disappointment. And there's also a distinction
Speaker 7: here between when the market stops caring, but the economy
Speaker 7: is still going to care.
Speaker 6: Think about Brexit.
Speaker 7: You know, we're ten years on almost from Brexit and
Speaker 7: it's undoubtedly still an impact on the economy there, even
Speaker 7: though it's not showing up in.
Speaker 6: Markets on a day to day basis.
Speaker 7: So this is the squaring of the circle that we're
Speaker 7: going to have to go through over the next couple
Speaker 7: of years, because having a two percent average import goods
Speaker 7: tariff rate last year to something probably still in the
Speaker 7: double digits when all of the dust settles, is going
Speaker 7: to have that longer term pass to the economy. And
Speaker 7: that means where the economy and markets meet is around profitability.
Speaker 2: Before we get into the next company years, can we
Speaker 2: deal with the next couple of months, how will you
Speaker 2: digest the incoming information?
Speaker 3: What will you ignore? What will you choose to put
Speaker 3: some whites on?
Speaker 7: What I want to choose to put weight on the
Speaker 7: most is how our price is impacted, because, as I mentioned,
Speaker 7: the link between markets and the economy and the long
Speaker 7: run is going to be the profit picture here, and
Speaker 7: profits are really going to determine how well stocks can do,
Speaker 7: because ultimately we're already in an environment where evaluations are
Speaker 7: still compared to their long term averages twenty percent higher
Speaker 7: than they perhaps should be on an average basis, And
Speaker 7: so when we think about what underpins that, we have
Speaker 7: to see that profitability. Now we have to recalibrate a
Speaker 7: little bit around economic growth expectations. We were at a
Speaker 7: fifty to fifty recession probability coming into this. Perhaps now
Speaker 7: that is skewed towards slower growth as opposed to definitive
Speaker 7: mild recession. So in that case, still slowing growth means
Speaker 7: slowing profit growth. How do we continue to see profits
Speaker 7: playing out this year? What are the risks from tariffs
Speaker 7: while you have potential revenue slow down? How much you
Speaker 7: have potential pricing increases? How much gets passed on to
Speaker 7: an exhausted consumer versus how much get absorbed by historically
Speaker 7: very high margins. And then you think about even the
Speaker 7: structures within the S.
Speaker 6: And P five hundred.
Speaker 7: Could areas like the mag SVN be a saving grace
Speaker 7: this year as some of those areas are more resilient
Speaker 7: and we see yet another delay, And in terms of
Speaker 7: broadening out of profits, there are so many angles to
Speaker 7: this tariff and non tariff As we reconsider what this
Speaker 7: pause means.
Speaker 5: I can feel a bit of frustration, if not for you,
Speaker 5: for me. I was reading your notes and you were
Speaker 5: talking about a fifty to fifty recession call, and I
Speaker 5: was going to ask you about that. You already brought
Speaker 5: it up and said, probably it's skewed more against recession
Speaker 5: than for recession.
Speaker 6: But how do you switch your views so quickly?
Speaker 4: Right?
Speaker 5: I mean, we're going to see just a complete downgrade
Speaker 5: of the potential for recession, risk of cost Wall Street.
Speaker 7: If these new rates of terrorift stick, you have to
Speaker 7: think about scenarios, and certainly in this environment, extreme scenarios.
Speaker 7: What if tariffs come off altogether? What if we go
Speaker 7: right back to where we were April second? Where do
Speaker 7: we land in between? And clearly we're probably going to
Speaker 7: be somewhere in between, and that in between is so
Speaker 7: hard to figure out when we think, okay.
Speaker 6: Look at what's going on with yields.
Speaker 7: For example, you're seeing yields start to perk back up.
Speaker 7: If one of the factors that's been weighing on yields
Speaker 7: has been lower growth and all of a sudden that
Speaker 7: is potentially alleviated to some extent, then you have yields
Speaker 7: moving in a different direction here. I mean everything in
Speaker 7: the market, whether it's equities or fixed income, has been
Speaker 7: so sentiment driven this year. It's really hard to ground yourself.
Speaker 7: It's trade fears versus trade optimism, and you're switching back
Speaker 7: and forth. So we are trying to figure out where
Speaker 7: to ground ourselves in the in between state, which we're
Speaker 7: likely going to end up in.
Speaker 6: Where is that place?
Speaker 7: Is that gold Well, not necessarily, I mean when I
Speaker 7: think about portfolio position in a way, that's what's changed
Speaker 7: the least because of some of the starting points that
Speaker 7: we're dealing with. I mean, there's still definitely two sided
Speaker 7: risks to bond here when we think about maybe you
Speaker 7: don't see as so much that with growth slow down,
Speaker 7: so there's a lot in terms of term premium that
Speaker 7: could potentially be pushed up when we think about uncertainty.
Speaker 7: On the other hand, when you think about the basic
Speaker 7: dynamics of if we were to see on the AG
Speaker 7: bond index a one percent rise in rates certainly not
Speaker 7: what we expect, you'd be looking at a sell off
Speaker 7: of about one and a half percent over total return
Speaker 7: a year in your bond allocation.
Speaker 6: So you're still actually looking at someone of a contained
Speaker 6: impact there, and.
Speaker 7: Despite overall yields biased upwards, you've actually seen that most
Speaker 7: areas of the bond market have been positive. On the other hand,
Speaker 7: a one percent fall in rates not something we expect either,
Speaker 7: would give you about an eleven percent return given that
Speaker 7: income cushion, So being broadly diversified within fixed income has worked.
Speaker 7: I think it will continue to work, and on the
Speaker 7: equity side, you're still dealing with high starting valuations and growth.
Speaker 7: We want to make sure we're geared towards some of
Speaker 7: the areas that have been a bit more favorable. Whether
Speaker 7: it's value outperform in growth about six percent this year
Speaker 7: or international outperforming fourteen percent in dollar terms this year,
Speaker 7: none of that really changes despite the thirty percent, eighty percent,
Speaker 7: fifty percent terifreate.
Speaker 5: You're getting to something really important, something that John and
Speaker 5: I were discussing earlier this morning about how much structurally
Speaker 5: there has been a loss of dollar exceptionalism and a
Speaker 5: loss of haven status, and the shift to Europe has
Speaker 5: been something more sustainable and not just a knee jerk
Speaker 5: reaction that was a positioning squeeze. You're saying, on one hand,
Speaker 5: maybe a little, but not necessarily wholesale. When it comes
Speaker 5: to the loss of treasuries as a haven status, how
Speaker 5: do you sort of understand what.
Speaker 6: Has changed since April second?
Speaker 7: I think what has changed is certainly that uncertainty level,
Speaker 7: where when there is uncertain T people want to go
Speaker 7: to treasuries, and more recently, when there is uncertain T
Speaker 7: people don't. Because a lot of that uncertainty is emanating
Speaker 7: from the US. I think it's also just the compounding
Speaker 7: effect over time of having unsustainable debt and deficits, and
Speaker 7: that really starting to feed into the bond market given
Speaker 7: higher rates in the cost of servicing debt. Overall these
Speaker 7: things putting that upward pressure on yields, and I think
Speaker 7: that people are putting a microscope to some of those
Speaker 7: elements because it doesn't feel like we're in an environment
Speaker 7: where some of that direction of travel is going to
Speaker 7: be for a more grounded place.
Speaker 2: This comes to scarring. How much scarring will we say
Speaker 2: post I posecond infnably to secure some mighta dails in
Speaker 2: the common ways.
Speaker 6: There are some things you can't unsay.
Speaker 7: I think that's going to be the theme for the
Speaker 7: rest of the year, where even if you do come
Speaker 7: up with a number of trade deals or more likely
Speaker 7: frameworks for longer term deals, there's always that possibility that
Speaker 7: things can potentially come back around, and so there is
Speaker 7: that scarring there where if you're a business, you're seeing
Speaker 7: a lot of buybacks. Hey, what's the best use of
Speaker 7: my money right now? Let me just double down on
Speaker 7: my company. While prices have gone down as opposed to
Speaker 7: put forth money for future investments. So maybe it's less
Speaker 7: about people changing their plans but just putting their plans
Speaker 7: on hold, and in some ways over time that can
Speaker 7: be equally damaging hip.
Speaker 2: Moolk and asset management. Seth Conpenter of Molten Stanley joins
Speaker 2: us around the table. Well, Seth, good morning's you sir?
Speaker 2: H quit exercise.
Speaker 3: I'm okay.
Speaker 2: If the federals have knew what they knew this morning,
Speaker 2: what they've changed the statement and the way they did
Speaker 2: last Wednesday, I don't think.
Speaker 4: They would have.
Speaker 8: Look where are we right now. We're going to get
Speaker 8: a CPI report tomorrow and it's going to be pre
Speaker 8: teriff for the most part, maybe a little bit in autos,
Speaker 8: but essentially that's also going to be pre teriff, and
Speaker 8: they're going to want to look at that to see
Speaker 8: are they learning anything on inflation? And so what they
Speaker 8: said at the last meeting was there's uncertainty. There's uncertainty
Speaker 8: on the inflation side, there's uncertainty on the growth side.
Speaker 8: Just the news that we've gotten in the past twenty
Speaker 8: four hours change that. I'm not really convinced that it
Speaker 8: makes a massive difference, because the announcement was that terroiffs
Speaker 8: will come down from the peak still be above where
Speaker 8: they were at the beginning of the year. And I
Speaker 8: think we have seen a few times in the past
Speaker 8: few weeks, times where one announcement gets made and then
Speaker 8: it's reversed twenty four hours forty eight hours later. I'll
Speaker 8: believe this is real when I've seen it in place
Speaker 8: for a while and it actually starts to affect the
Speaker 8: trade flows.
Speaker 2: Your assessment of the risk though for inflation for growth,
Speaker 2: and they still still tilted to the downside for growth
Speaker 2: and tilted to the upside for inflation.
Speaker 3: See the risks unquestionably.
Speaker 8: So we do still, no matter how you slice it,
Speaker 8: have higher tariffs this year than we had coming into
Speaker 8: the year, and so that's got to push up inflation.
Speaker 4: Now.
Speaker 8: In twenty seventeen, twenty eighteen, twenty nineteen, I said, much
Speaker 8: like what you've heard from Powell, the inflation side of
Speaker 8: things from tariff's likely to be temporary. Might even use
Speaker 8: a word transitory if it hadn't become taboo. That's still
Speaker 8: very likely to be the case. However, now versus then,
Speaker 8: we have lived through years of higher inflation and it's
Speaker 8: not at all clear where businesses and household's minds are
Speaker 8: for how inflation dynamics get going. So I think there
Speaker 8: is still upside risk to inflation the downside. Businesses that plan,
Speaker 8: businesses that are going to undertake investment spending, businesses that
Speaker 8: are going to make hiring plans would like to have
Speaker 8: some certain and we have none of that. And again,
Speaker 8: just because there was a statement that there was a
Speaker 8: plan to make a plan to have a deal does
Speaker 8: not take away that uncertainty. So again the risk to
Speaker 8: the downside and growth I think is real and present danger.
Speaker 5: A number of guests have come on the show this
Speaker 5: morning and said that at the very least, it does
Speaker 5: make recession look more like a remote possibility rather than
Speaker 5: a fifty to fifty type of possibility.
Speaker 6: Do you agree with that?
Speaker 8: So I think it probably has to lower the probability
Speaker 8: remote seems a little bit optimistic. Again, how much of
Speaker 8: an effect does the overall uncertainty effect business spending? I
Speaker 8: think I know pretty clearly what the direction is. I
Speaker 8: don't think I have any conviction. I know exactly what
Speaker 8: the magnitude is, and so to be able to say
Speaker 8: it's going to slow things down a little bit, but
Speaker 8: not so much to tip us over.
Speaker 3: That's our baseline view.
Speaker 8: Don't get me wrong, I just don't know how you
Speaker 8: have conviction there to call it remote.
Speaker 6: It sort of raises a point of the Fez reaction function.
Speaker 5: It's something that's interesting when you look at FED fund's
Speaker 5: futures this morning, you're only seeing two rate cuts getting
Speaker 5: priced into the market four last week. It highlights this
Speaker 5: idea that without some sort of rapid deterioration akin to
Speaker 5: a recession, you're not going to see that rapid response
Speaker 5: from the FED that could be one hundred and twenty
Speaker 5: five basis points of ray cuts Like cities. Andrew Hollenhorst
Speaker 5: has called for, how much do you take signal versus
Speaker 5: noise from the market's reaction mane, would you agree with
Speaker 5: the current assessment?
Speaker 8: I would not. In fact, we've been far far, far
Speaker 8: out of alignment with the market pricing has been. We
Speaker 8: have said, even when even before this announcement about the
Speaker 8: possible de escalation on tariffs, we had said the market
Speaker 8: calling for three or maybe four ray cuts this year
Speaker 8: was overdone. We don't have any cuts in our forecast
Speaker 8: for this year. The market's coming towards us, which is
Speaker 8: always a comfortable place to be. But the Fed's got
Speaker 8: a really tricky challenge tariffs. Even if it's at a
Speaker 8: lower level of tariffs, they will push up inflation and
Speaker 8: that probably happens faster than any hit to growth that
Speaker 8: we're going to see in the hard data, which is
Speaker 8: where the FED is really living. And so what does
Speaker 8: that mean? They have to watch things come in and
Speaker 8: they can't take anything.
Speaker 2: Granted, we often cite you, you and Mike gapam because
Speaker 2: you are at zero zero cuts for twenty twenty five.
Speaker 8: Amos are both tall and good looking.
Speaker 2: Of course, that's it. That's why I do it. Andrew
Speaker 2: homhost a city, another toll and good looking gentlemen. It's
Speaker 2: a one hundred and twenty five faces points it cuts
Speaker 2: for twenty twenty five and we said repeatedly you can
Speaker 2: drive a truck through those estimates. They believe the labor
Speaker 2: market weekends in the coming months. What gives you the
Speaker 2: confidence that it won't.
Speaker 4: I think a few things.
Speaker 8: One, the US economy tends not to shift quite so dramatically.
Speaker 8: We do have a big slowdown in our forecast for
Speaker 8: the next several months. So I think that in that regard,
Speaker 8: it's likely to happen. But the first thing you need
Speaker 8: to see is businesses pull way back on the hiring
Speaker 8: and then you're likely to see businesses start the firing process.
Speaker 8: And you need both of those to happen first before
Speaker 8: the FED can go into a full fledged cutting cycle.
Speaker 8: Very difficult to see they get there to get that
Speaker 8: amount of cutting this year.
Speaker 3: Seth, it's going to see a nice to drop it by.
Speaker 2: Thank you the total and good looking Seth compenter the
Speaker 2: of Morgan Stanley russ Coastrict Blank Rock right in the following.
Speaker 2: These stabilization inequities and other risky assets makes sense based
Speaker 2: on a some progress in trade negotiations and b generally
Speaker 2: supportive economic data and earnings. R us Coastric of Blank
Speaker 2: Rock joins us now for more rus We've got this
Speaker 2: odd tug of war, this short term reaction to the
Speaker 2: progress we're making in trade talks, real progress between the
Speaker 2: US and China, and then long term just realizing the
Speaker 2: tarifs are higher now than they were at the start
Speaker 2: of the year, and that could be disruptive for growth
Speaker 2: in the future.
Speaker 3: How do you wait one versus the other.
Speaker 9: We'll good more on Jonathan.
Speaker 10: You know it's funny whatever you write two three days
Speaker 10: ago probably is still you know, given the piece to
Speaker 10: which headlines are coming out. But I think I think
Speaker 10: you're right. I think we are in a tug of war. Obviously,
Speaker 10: this morning we got some very good news. It reduces
Speaker 10: the risk that we're going to see a serious economic contraction.
Speaker 10: It reduces some of the uncertainty, It reduces some of
Speaker 10: that left tail.
Speaker 9: Having said that.
Speaker 10: We self to contend with a few things, one of
Speaker 10: which is they're still uncertainty, the second of which is
Speaker 10: how much did the previous disruption hurt economic activity, whether
Speaker 10: it was at the consumer level or at the corporate level.
Speaker 9: And third and again, valuations are not the best short
Speaker 9: term timing tool.
Speaker 10: Dealing with the fact that even with the pullback we
Speaker 10: had earlier in the year, SMP's back to trading the
Speaker 10: twenty one times future names. That's a big number given
Speaker 10: all the other things going on.
Speaker 9: So I do think it's a tug of war.
Speaker 10: I think we're still in a range, although that range
Speaker 10: is probably higher on the upside and lower on the
Speaker 10: downside than it was on Friday.
Speaker 5: Did we learn anything rosse that makes you materially change
Speaker 5: your allocation? Given some of the uncertainty that remains out there.
Speaker 10: I don't think we would change our allocation, and a
Speaker 10: lot of the themes we were thinking about on Friday
Speaker 10: are still in place.
Speaker 4: You know.
Speaker 10: One of the things that we were looking at that
Speaker 10: I do think is.
Speaker 9: Going to probably work in the back half of the year.
Speaker 10: We had that big rotation earlier in twenty twenty five,
Speaker 10: everyone piled into defensive parts of the market, whether we're staples, utilities.
Speaker 10: I don't think that was right, and that really made
Speaker 10: sense only if you expected a recession. They said, the
Speaker 10: odds of that are lower. We're probably going to muddle
Speaker 10: along with the economy. I do think some of the
Speaker 10: large megacap tech names that struggled earlier in the year
Speaker 10: can actually do well in an environment in which growth
Speaker 10: is okay, race are contained, and many of these big
Speaker 10: things that we're all talking about back in twenty twenty four,
Speaker 10: they're still very much in place. So that's one area
Speaker 10: of the market I do think is a place to
Speaker 10: be in the back half of the year.
Speaker 5: It looks like a lot of people agree with you, Russ,
Speaker 5: because it looks like we're entering something of a bull
Speaker 5: market in big tech, possibly up twenty percent from the
Speaker 5: truugh on April eighth. So you can see this kind
Speaker 5: of knee jerk reaction when you take a look at
Speaker 5: what's changed. What's not back to that pre April second
Speaker 5: relationship of markets.
Speaker 6: It's the dollar.
Speaker 5: The dollar is still not completely back to where it was.
Speaker 5: Raises a question has anything materially changed since Liberation Day?
Speaker 5: Given the fact that we are seeing a walking back
Speaker 5: of a lot of those terraffs, how much is the
Speaker 5: dollar fundamentally and structurally in a different place today than
Speaker 5: April second, even with some of the ratcheting back of tensions.
Speaker 10: Well, I think there's definitely more uncertainty, and you've got
Speaker 10: to ask the question, are we going to see some
Speaker 10: diversification out of dollar based assets from international investors?
Speaker 9: And I think that's still very much an open.
Speaker 10: Question, given the fact that trade is going to look
Speaker 10: different going forward than it did, you know, two, three, five,
Speaker 10: ten years ago. Having said that, you know, it's interesting
Speaker 10: there's been a lot of agonizing about the dollar, and
Speaker 10: I think that's right.
Speaker 9: But having said that, the dollar's basically.
Speaker 10: Been in a range mostly between about one hundred and
Speaker 10: one hundred and ten and the DXY. It was down
Speaker 10: with the loads around eleven twelve percent. We had seen
Speaker 10: similar pullbacks in the last five years even without these
Speaker 10: generational or potentially generational shifts in trade. So I think
Speaker 10: the outcome on the dollar is still very much a
Speaker 10: question mark. We may not know that for a period
Speaker 10: of time as we start to see how international investors
Speaker 10: are really are behaving.
Speaker 2: Russ in some ways is part of the same question,
Speaker 2: how to manage your exposure to US treasuries?
Speaker 3: What have you and the team done.
Speaker 2: Has anything changed for you guys over the past few weeks,
Speaker 2: and would it flipped back? Based on the discussions we
Speaker 2: had over the weekend.
Speaker 6: So, Jonathan's really interesting.
Speaker 10: Our our duration position has not changed much this year
Speaker 10: despite all of the volatility. We've been slightly underweight our
Speaker 10: benchmarking duration. Most of that is on the long end
Speaker 10: of the curve. As we've spoken about the past, we
Speaker 10: do like credit and I think that's still probably about right.
Speaker 10: We've seen that backup in yields this morning, so I
Speaker 10: think right, you know as of now that that positioning seems.
Speaker 9: To be about where we want to be. But it's
Speaker 9: worth keeping in mind.
Speaker 10: Even before we started talking about the dollar and we
Speaker 10: started talking about whether or not international investors would abandon
Speaker 10: the dollar. There were those concerns about supply, that concern
Speaker 10: about the deficit, about whether or not that was going
Speaker 10: to have some negative impact on the long end of
Speaker 10: the curve through the term premium. Those concerns are still there,
Speaker 10: so I do think while we are closer to benchmark,
Speaker 10: a little bit of an underweight on the long end
Speaker 10: probably still makes sense.
Speaker 2: Those concerns for us, as you know, a pretty durable
Speaker 2: they're not going anywhere. The big question was whether international
Speaker 2: investors would be willing to finance that deficil, or whether
Speaker 2: we would need one or the other or a combination
Speaker 2: of the two, which is a week at dollar or
Speaker 2: high bond yields. Do you think we settled some of
Speaker 2: those issues or do they remain as well?
Speaker 9: Well? I think they remain.
Speaker 10: I think it's certainly too early to declare all clear,
Speaker 10: and I think a little bit of caution, particularly given
Speaker 10: the fact that we do of their structural deficits are
Speaker 10: exactly right, and the term premium is not so high
Speaker 10: that you're being generously compensated to go out.
Speaker 9: On the curve and take that risk. The other point is,
Speaker 9: do you really need to know.
Speaker 4: Rick.
Speaker 9: Readers spoken about this on many occasions.
Speaker 10: If you have an environment where credit spreads are maybe
Speaker 10: not great, but the absolute yield you can generate on
Speaker 10: a high quality credit portfolio with six or seven percent,
Speaker 10: do you really need to take a risk going out.
Speaker 9: To ten year on the US Treasury? Maybe not.
Speaker 2: Hey, Russ, I appreciate your time. As always, it's going
Speaker 2: to be another busy week. Ross Coastrectare of black Rock. Russ,
Speaker 2: thank you. This is the Bloomberg Surveillance podcast, bringing you
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