WEBVTT - China Saber-Rattling Likely, As Trade Tensions Escalate 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl Podcast. I'm Paul swing you. 0:00:05.360 --> 0:00:07.680 Along with my co host Lisa Brahma Waits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:24.000 at Bloomberg dot com. It's being taken by the market 0:00:24.160 --> 0:00:27.639 as an escalation of the trade war, and frankly a 0:00:27.720 --> 0:00:30.960 material escalation at that between the US and China. The 0:00:31.080 --> 0:00:34.400 question is how far will this go, what will be 0:00:34.440 --> 0:00:38.240 the retaliation by the United States, and what is China's goal? Here? 0:00:38.320 --> 0:00:40.239 Is the goal just not to even try to have 0:00:40.320 --> 0:00:42.960 a trade deal with the US? Joining US now? Matt Gerkin, 0:00:43.040 --> 0:00:47.280 geopolitical strategist for b c A Research in Montreal, joining 0:00:47.360 --> 0:00:50.960 US by phone. Matt, let's start there. Do you think 0:00:51.200 --> 0:00:56.440 that China's allowance permitting the U n to go above 0:00:56.640 --> 0:01:00.600 seven per dollar was a clear retaliatory sure to the 0:01:00.680 --> 0:01:05.440 United States saying we don't care anymore about preserving this 0:01:05.560 --> 0:01:07.720 level because you guys clearly don't want to make a 0:01:07.760 --> 0:01:12.240 deal with US. Hi. Yes, thanks to glad to be on. 0:01:12.480 --> 0:01:15.959 It's absolutely a retaliation. The six point nine level was 0:01:16.040 --> 0:01:18.600 the level at which Trump was inaugurated, and seven, of 0:01:18.640 --> 0:01:21.760 course is a psychological level as well for the markets, 0:01:21.800 --> 0:01:25.000 and it's been known within politics political circles as well. 0:01:25.480 --> 0:01:29.520 So they're clearly saying, look, you've gone to all Chinese 0:01:29.520 --> 0:01:32.679 exports to the US. Now we're going to retaliate in 0:01:32.680 --> 0:01:34.959 the easiest, clearest way for US. And of course it's 0:01:35.000 --> 0:01:37.880 also a way of stimulating their economy, which is hitting 0:01:38.120 --> 0:01:41.480 getting hit from this move. So, Matt, let's step back 0:01:41.480 --> 0:01:43.960 a little bit. What do you think the long game 0:01:44.319 --> 0:01:47.520 is for China? Because I'm sure that I think for 0:01:47.560 --> 0:01:49.400 a lot of investors that they just don't have a 0:01:49.400 --> 0:01:52.600 good handle on that. The long game for China is 0:01:52.640 --> 0:01:55.559 to first of all, try to divide the United States 0:01:55.640 --> 0:01:59.240 from the rest of the West UH, particularly Europe, which 0:01:59.280 --> 0:02:02.880 is the swing play are in this entire geopolitical conflict. UH. 0:02:02.920 --> 0:02:06.400 It is to continue to weaken the US by continuing 0:02:06.400 --> 0:02:10.200 the global status quo, which is one in which China 0:02:10.680 --> 0:02:14.720 is able to continue state oriented, mercantilist policies of its 0:02:14.760 --> 0:02:19.600 own while the US suffers from political division Internally and 0:02:20.000 --> 0:02:23.680 is in populism, etcetera, and is not able to focus 0:02:24.080 --> 0:02:30.000 a constant trated Western coalition against China and the US. 0:02:30.000 --> 0:02:32.680 How could the US potentially retaliate here? And what's the 0:02:32.680 --> 0:02:35.520 goal there? I think from the US point of view, 0:02:35.520 --> 0:02:38.080 there's there's two goals. Trump is very short term. Trump 0:02:38.160 --> 0:02:40.760 is of course thinking about the election. But what he's 0:02:40.840 --> 0:02:44.480 learned is that the market has climbed the wall of 0:02:44.480 --> 0:02:47.040 worry repeatedly on the tariffs, and the U s economy 0:02:47.120 --> 0:02:50.440 is held up pretty well, and that gives him room 0:02:50.520 --> 0:02:52.880 to pursue the trade war with China, where Americans are 0:02:52.919 --> 0:02:56.280 fairly skeptical. I mean, Americans do think China treats on 0:02:56.639 --> 0:02:59.840 cheats on trade, and Americans don't have a very favorable 0:03:00.080 --> 0:03:02.679 of China. But meanwhile, he's got to try to tamp 0:03:02.760 --> 0:03:06.280 down other crises, whether they be domestic or you know, 0:03:06.320 --> 0:03:08.600 trade conflicts with other countries. He'll try to wrap those 0:03:08.680 --> 0:03:11.600 up in order to keep the impact on markets somewhat 0:03:11.639 --> 0:03:14.720 controlled on his short term timeframe. Long term, of course, 0:03:14.720 --> 0:03:18.360 the US is worried about technological supremacy. So Matt the 0:03:18.639 --> 0:03:23.440 unilateral style of negotiating trade negotiation of President Trump. Here 0:03:23.760 --> 0:03:25.359 are you suggesting that as it relates to the US 0:03:25.400 --> 0:03:27.960 and China, that that's not the way to go, that 0:03:28.000 --> 0:03:30.000 it needs to be more of a bilateral kind of 0:03:30.000 --> 0:03:33.920 a more of a global type of negotiation. Well, I 0:03:33.919 --> 0:03:35.800 don't have an opinion on it, but as an analyst, 0:03:35.920 --> 0:03:38.120 I think it's it's pretty clear that the US would 0:03:38.160 --> 0:03:41.119 have greater influence over China if we had a unified 0:03:41.160 --> 0:03:46.560 coalition of the willing, where basically about nine percent of 0:03:46.640 --> 0:03:51.760 China's GDP would be exposed to potential trade impacts as 0:03:51.760 --> 0:03:54.000 opposed to today, which is, you know, about five percent 0:03:54.120 --> 0:03:58.360 or less. Because essentially the U s would be able 0:03:58.400 --> 0:04:01.840 to get Europe in Japan on the same page UH 0:04:01.880 --> 0:04:05.600 and then prosecute the trade practices and and the cyber 0:04:05.640 --> 0:04:08.560 practices that it's most concerned about, and China at that 0:04:08.600 --> 0:04:11.440 point would be forced to capitulate because the entirety of 0:04:11.480 --> 0:04:15.280 its export profile would be threatened. UM. That's not the 0:04:15.640 --> 0:04:17.960 course Trump has taken, and one of the reasons is 0:04:17.960 --> 0:04:20.000 because it takes a long time for the diplomacy with 0:04:20.040 --> 0:04:23.080 Europe and Japan. UH. Instead, he's chosen to lead from 0:04:23.080 --> 0:04:28.040 the front and to aggressively UH prosecute the trade issues 0:04:28.080 --> 0:04:31.040 with China, and this has been a paradigm shift, but 0:04:31.080 --> 0:04:32.640 I think it was one that was long and coming. 0:04:33.240 --> 0:04:35.359 So just give you a sense of the market reaction 0:04:35.440 --> 0:04:38.560 as backed down nearly three two point nine percent decline, 0:04:38.960 --> 0:04:41.960 SMP down two point three percent. Clearly markets are taking 0:04:42.000 --> 0:04:45.320 this as a negative sign when it comes to global growth. 0:04:45.680 --> 0:04:48.960 But just to take a bigger historical perspective, as you're 0:04:49.000 --> 0:04:51.960 so good at doing matt, you know, what is the 0:04:52.080 --> 0:04:56.000 chance that this tip for tat becomes something more and 0:04:56.200 --> 0:05:01.679 escalates into something that's potentially even uh military high chance. 0:05:01.720 --> 0:05:03.920 I mean, I think actually we'll see saber rattling in 0:05:03.960 --> 0:05:05.920 the immediate term. And the reason for that is that 0:05:06.360 --> 0:05:09.279 the breakdown in US China relations has been taking place 0:05:09.360 --> 0:05:13.120 since the financial crisis. We have clearly moved beyond the 0:05:13.160 --> 0:05:16.120 period from nine to two thousand and eight where we 0:05:16.240 --> 0:05:18.600 had this huge day tent between US and China, which 0:05:18.640 --> 0:05:22.400 was driven by the Cold War and China's industrialization. Now 0:05:22.640 --> 0:05:25.600 China is a near peer competitor to the United States, 0:05:26.000 --> 0:05:29.159 and as I mentioned, technologically, China is gaining on the 0:05:29.200 --> 0:05:31.880 US and threatening the US over the long run, which 0:05:32.160 --> 0:05:35.000 is the ultimate determiner of the power of nations. So 0:05:35.080 --> 0:05:39.599 the U S is strategically rotating to Asia Pacific, regardless 0:05:39.600 --> 0:05:43.120 of the administration or political party. And and China, of 0:05:43.160 --> 0:05:46.479 course is feeling the heat. They're feeling contained, and they've 0:05:46.520 --> 0:05:48.839 got a slowing economy now on a again on a 0:05:48.880 --> 0:05:53.160 secular level. Uh, and that's going to cause them to 0:05:53.240 --> 0:05:57.160 indulge in nationalism and uh. And these two things combined 0:05:57.720 --> 0:06:01.480 mean that these two countries will continue to see sanctions, caraffs. 0:06:01.960 --> 0:06:05.360 It's a persistent threat and saber rattling in the near 0:06:05.480 --> 0:06:08.920 seas of China. So, Matt, I think one of the 0:06:09.400 --> 0:06:12.919 issues that President Trump has introduced recently as the talks 0:06:12.960 --> 0:06:16.200 seem to have kind of broken down between US and China, 0:06:16.320 --> 0:06:19.640 is that maybe any type of meaningful negotiation will be 0:06:19.680 --> 0:06:24.280 pushed beyond the presidential election. Is that a reasonable view? 0:06:24.279 --> 0:06:28.320 And your in your thought, we have actually consistently argued 0:06:28.400 --> 0:06:31.040 that China's best play is to wait until after the election. 0:06:31.080 --> 0:06:32.919 It it just doesn't do them good to commit to 0:06:33.680 --> 0:06:38.680 publicly to irreversible structural reforms that could heighten domestic economic 0:06:38.760 --> 0:06:41.919 risks for China before even knowing the outcome of the 0:06:42.000 --> 0:06:45.520 US presidential election. So I think they're playing the long game, 0:06:45.839 --> 0:06:49.120 as is well known about China, but even specifically, Trump 0:06:49.160 --> 0:06:51.400 is playing a very short game and they're taking advantage 0:06:51.400 --> 0:06:53.760 of that. And it's one reason why the Trump administration 0:06:54.400 --> 0:06:58.320 has has become angry. But also, of course Trump has 0:06:58.360 --> 0:07:01.320 ammunition because, as I mentioned, the market, you know, it 0:07:01.360 --> 0:07:04.000 climbs the wall of worry with the tariffs thus far, 0:07:04.080 --> 0:07:06.080 and that gave him the ammunition to decide to go 0:07:06.160 --> 0:07:08.280 all the way. Now he has to try to do 0:07:08.360 --> 0:07:10.320 damage control and make sure he doesn't create a bear 0:07:10.440 --> 0:07:12.880 market which could lead to a recession and get him 0:07:12.920 --> 0:07:15.400 kicked out of office. Matt Gerkin, thank you so much 0:07:15.400 --> 0:07:18.640 for joining us. Matt's a geopolitical strategists at bc A 0:07:18.680 --> 0:07:22.760 research based on Montreal, Quebec, giving us some very valuable 0:07:22.800 --> 0:07:25.800 perspective on kind of the U. S. China negotiations, not 0:07:25.840 --> 0:07:27.320 just hear what we're seeing right now, but kind a 0:07:27.360 --> 0:07:30.720 little bit of a historical perspective and uh, just highlighting 0:07:30.920 --> 0:07:34.200 the risk to the market today and maybe even bigger 0:07:34.280 --> 0:07:51.160 risk going forward. Well. Trade negotiations are without question facing 0:07:51.280 --> 0:07:55.440 new obstacles as President Trump increases tariffs once again and 0:07:55.560 --> 0:07:59.119 the Chinese just allowing that you want to weaken below 0:07:59.160 --> 0:08:01.640 the seven to one level to get a sense of 0:08:01.640 --> 0:08:04.600 what that means for currencies going forward. We welcome Dr 0:08:04.640 --> 0:08:07.160 Win Thin. He's a global head of currency strategy at 0:08:07.160 --> 0:08:09.760 Brown Brothers Harriman in New York City joining us on 0:08:09.760 --> 0:08:12.760 the phone. So Dr Thin, thanks so much for joining us. 0:08:13.120 --> 0:08:16.640 Does it appear to you that the Chinese are weaponizing 0:08:17.000 --> 0:08:21.080 the one? Uh? You know, the break of the seven 0:08:21.160 --> 0:08:24.520 levels has always uh capture one attention. But I would 0:08:24.560 --> 0:08:28.080 just say that there's nothing magical about this level. Uh. 0:08:28.080 --> 0:08:30.240 The Chinese stories have come out in the past, and 0:08:30.240 --> 0:08:31.680 they have come out today and saying they will not 0:08:31.760 --> 0:08:34.000 weaponize the yawn, and I take them at the word 0:08:34.040 --> 0:08:37.120 they We saw the disaster that the two thousand and 0:08:37.160 --> 0:08:40.440 fifteen evaluation brought onto Chinese markets, so I think they 0:08:40.440 --> 0:08:42.840 will shy away from that. The one thing I would 0:08:42.840 --> 0:08:45.400 point out, and I read a nice correlation study using 0:08:45.760 --> 0:08:49.120 your function on your Bloomberg the correlation between c N 0:08:49.320 --> 0:08:52.080 y on shore you on and m S c I 0:08:52.360 --> 0:08:55.960 E m f X has a basket of e MC currencies. 0:08:56.240 --> 0:08:59.240 It's running my point eight two very very high correlation. 0:08:59.320 --> 0:09:02.200 So what that's it's basically the Chine of the ways 0:09:02.200 --> 0:09:05.520 are allowing you want to sort of reflect greater market 0:09:05.559 --> 0:09:07.720 forces trading with the rest of EM rather than being 0:09:08.080 --> 0:09:11.080 somewhat pegged. So okay, if you have the mixing paste 0:09:11.080 --> 0:09:13.600 it down half one and half percent, two percent, you know, 0:09:13.640 --> 0:09:16.199 the rest of em getting clovered. It's not it shouldn't 0:09:16.200 --> 0:09:18.640 be surprised that the U want is trading along with it. 0:09:19.120 --> 0:09:22.080 Certainly that's the case. However, I do have to push 0:09:22.120 --> 0:09:24.839 back a little bit because this the value or the 0:09:25.840 --> 0:09:28.240 weakening of the U N it is was not a 0:09:28.280 --> 0:09:32.760 gradual issue. This was the decline was the most since 0:09:32.800 --> 0:09:36.160 two thousand and fifteen for any single day. It was 0:09:36.200 --> 0:09:39.400 a huge plunge, and it was a shift in the 0:09:39.440 --> 0:09:44.240 pboc's rhetorics. So how do you sort of interpret that. Well, 0:09:44.280 --> 0:09:45.800 I have to say, look at the rest of EM. 0:09:45.800 --> 0:09:49.360 It's not like it's not happening. The vacuum, the emson 0:09:49.440 --> 0:09:53.280 selling off since Wednesday when the Fed delivered a lesstubblished 0:09:53.320 --> 0:09:57.520 than than expected cut. So you know, again, e M 0:09:57.559 --> 0:10:00.160 has been under incredible pressures, not just you want look 0:10:00.160 --> 0:10:03.160 at EM equities. It's pretty much the MSc i UH 0:10:03.360 --> 0:10:06.200 e M has pretty much given up over three quarters 0:10:06.240 --> 0:10:09.680 of this year's rally and getting back towards the January lows. 0:10:09.720 --> 0:10:12.280 So you know, again there's a lot of moving parts. 0:10:12.280 --> 0:10:15.160 I have sympathy what you're saying, but I really I 0:10:15.160 --> 0:10:16.880 guess I'm trying to be a sort of note of 0:10:16.920 --> 0:10:21.120 caution saying, Look, the Chinese responding in other ways. They've 0:10:21.280 --> 0:10:24.679 for instance, there's reports that they've told the state importers 0:10:24.679 --> 0:10:27.960 to stop buying US agricultural goods. Uh. And we know 0:10:28.080 --> 0:10:31.360 that this trade truce was really not laughing very long, 0:10:31.480 --> 0:10:34.800 So uh, what's happening? I think what the authorities are 0:10:34.800 --> 0:10:37.080 trying to do in China is they're separating the effects 0:10:37.679 --> 0:10:40.880 from the trade. I really do believe that that. Um, 0:10:41.040 --> 0:10:42.880 they don't want to let the genie out of bottle. 0:10:42.960 --> 0:10:45.559 We we saw what happened back into downs between massive 0:10:45.559 --> 0:10:50.240 capital outflows out of China, very destabilizing, UM when they devalued. 0:10:50.320 --> 0:10:51.959 I don't think they want to go down that road again. 0:10:52.280 --> 0:10:55.319 So dr then, is there any sense of where the 0:10:55.480 --> 0:10:59.000 Uuan could go? Here? I mean, we're in very uncharted territory. 0:10:59.000 --> 0:11:01.320 It's been a you know a long time since we've 0:11:01.360 --> 0:11:03.640 seen this thing get off the seven peg. Any sense 0:11:03.640 --> 0:11:07.760 of where this could go? Sure? Uh? And I again, 0:11:07.760 --> 0:11:09.560 I'm gonna go take it from my lens of sort 0:11:09.559 --> 0:11:13.280 of the wider um e M. I'm very negative on 0:11:13.360 --> 0:11:17.599 him as long as he's trade pensions continue. Um. You know, 0:11:17.679 --> 0:11:21.079 EM is very very vulnerable, not not only the commodities 0:11:21.080 --> 0:11:23.559 but also the Asian exporters in the China supply chain. 0:11:23.600 --> 0:11:25.960 So I'm very very negative EM. And because I'm negative 0:11:25.960 --> 0:11:29.200 on EM effects given that point eight to correlation, I'm 0:11:29.240 --> 0:11:32.360 also very negative on on nuance. So I think it'll 0:11:32.400 --> 0:11:35.720 have a seven handle and we'll go up towards seven 0:11:35.720 --> 0:11:38.240 and a half. Um. Again, there's nothing magical about the 0:11:38.240 --> 0:11:41.560 seven level. It's it's it's psychologically it may be important, 0:11:41.600 --> 0:11:45.920 but um, you know, basically the stories of have pledged 0:11:45.960 --> 0:11:50.160 to allow greater market forces for the exchange way, and 0:11:50.240 --> 0:11:52.880 ironically that's what they're doing, and ironically that's what the 0:11:52.960 --> 0:11:55.320 US is probably going to complain about. Now. You know, 0:11:55.320 --> 0:11:59.480 we've always had Mr Trump, I think, tweet about currency manipulation, etcetera. 0:11:59.520 --> 0:12:03.760 But and yes, exactly again, I say, look, this is 0:12:03.880 --> 0:12:06.520 it's not manipulating. This is this is this the market work. 0:12:06.600 --> 0:12:09.679 This is the markets being very negulenting him. This is 0:12:09.720 --> 0:12:12.040 actually a really good point in. Jonathan Farrow was going 0:12:12.080 --> 0:12:14.800 on about it this morning about how this is not 0:12:14.920 --> 0:12:18.959 as assarily China devaluing the UN and is allowing the 0:12:19.080 --> 0:12:23.120 UN to just sort of fluctuate and exist within its 0:12:23.160 --> 0:12:26.400 market forces. So, uh, the fact that you're reiterating that 0:12:26.559 --> 0:12:30.160 is an important and powerful point I am wondering going forward. 0:12:30.200 --> 0:12:32.559 I remember once upon a time people used to talk 0:12:32.559 --> 0:12:35.280 about central banks and sort of the reaction function there, 0:12:35.280 --> 0:12:38.719 and certainly even President Trump saying, uh, you know, as 0:12:38.760 --> 0:12:41.760 anyone look at currency manipulation, Hey is the Fed watching? 0:12:42.240 --> 0:12:44.960 Do you think that this will induce the Fed two 0:12:45.040 --> 0:12:48.360 cut rates further in order to weaken the dollar or 0:12:48.440 --> 0:12:52.920 for example, the e c B as well. Well, that's 0:12:52.960 --> 0:12:55.319 a very good question, and let me take this two 0:12:55.360 --> 0:13:01.480 things separately. Um said, Uh, it runs monetary policy for 0:13:01.520 --> 0:13:04.360 the for the U. S. Economy, but it's it's been 0:13:04.400 --> 0:13:07.480 taking on a greater focus on quote unquote international and 0:13:07.559 --> 0:13:10.439 global factors. We know that, you know, twenty years ago 0:13:11.400 --> 0:13:13.920 global factor would barely get mentioned, but it's obviously clear 0:13:13.920 --> 0:13:17.160 and they started under yelling that that international and global 0:13:17.200 --> 0:13:20.520 conditions are very big important part of the fans reaction function. 0:13:20.559 --> 0:13:23.560 Now Mr Power setted himself yet last week he said, look, 0:13:23.559 --> 0:13:26.280 we're the biggest thing that we are uncertain about is 0:13:26.280 --> 0:13:27.880 is the trade war. We don't know how to deal 0:13:27.880 --> 0:13:29.560 with this. This is a very uncharted territory. And he 0:13:29.559 --> 0:13:31.840 admitted that. And I think that's that's said. I would 0:13:31.840 --> 0:13:33.800 admit the same thing for US analysts. That's it's it's 0:13:33.800 --> 0:13:36.559 hard to analyze what the dollar it should be doing 0:13:36.600 --> 0:13:41.160 within this context. That said, the Mr Power gave him 0:13:41.160 --> 0:13:44.280 once uh by cutting race and he was I thought 0:13:44.679 --> 0:13:46.599 on target when he said, look, let's see how the 0:13:46.679 --> 0:13:50.880 data come in. UM. Think the markets, your your w 0:13:51.000 --> 0:13:54.640 I r P page is showing chance of a cut 0:13:54.720 --> 0:13:58.120 in September. UM, and I think that overstates the case. 0:13:58.120 --> 0:13:59.640 I also think I would also point out that the 0:13:59.679 --> 0:14:01.839 fret in the futures market is pricing in three more 0:14:01.880 --> 0:14:04.719 cuts now by the end of the year. Uh. That 0:14:04.840 --> 0:14:07.440 to me is like a recession those settings. I don't 0:14:07.440 --> 0:14:10.640 think we're there yet. Obviously, recession risk has risen, but 0:14:10.800 --> 0:14:14.079 I don't think the Fed is is panicking yet. Um. 0:14:14.200 --> 0:14:16.040 Then you know you over the whole candle worms is 0:14:16.280 --> 0:14:18.720 are they giving into the try Mr Trump and Trump 0:14:18.760 --> 0:14:21.720 doing this on purpose? It's it's really crazy. Um. Yeah, 0:14:21.720 --> 0:14:23.360 there's a lot of a lot of angles here that 0:14:23.680 --> 0:14:25.960 everybody needs to try to get a hand along. Uh. 0:14:26.080 --> 0:14:28.120 Dr Winton, thanks so much. We're gonna have to leave 0:14:28.120 --> 0:14:31.040 it there. Dr Winton, Global head of Currency Strategy of 0:14:31.080 --> 0:14:34.360 Brown Brothers Harriman in New York City, joining us on 0:14:34.400 --> 0:14:54.640 the phone. Well, according to our next guest, the connection 0:14:54.680 --> 0:14:58.080 between Trump and uncertainty and financial market angst has become 0:14:58.360 --> 0:15:03.200 very clear, oddly, making trunks digital communications a leading economic indicator. 0:15:03.600 --> 0:15:06.040 To get the latest, Let's welcome our next guest, Ben Brightholds. 0:15:06.160 --> 0:15:09.360 Ben is chief data scientists for Arbor Research and Trading 0:15:09.440 --> 0:15:13.360 based in Chicago, Illinois. Ben, thanks so much for joining us. So, 0:15:13.400 --> 0:15:17.040 as you point out, Trump's tweets clearly impact the markets. 0:15:17.080 --> 0:15:19.040 Can just give us a sense of kind of what 0:15:19.120 --> 0:15:22.280 you think the relationship is and maybe how investors are 0:15:22.360 --> 0:15:26.880 are using this data. Yes, so what we're doing here 0:15:26.960 --> 0:15:29.760 is some you know, some fancy natural language processing of 0:15:29.760 --> 0:15:32.960 Trump's tweets that initially started out as really me having 0:15:33.080 --> 0:15:35.840 fun with the data about a year ago or so. 0:15:36.000 --> 0:15:40.080 But ever since his uncertainty level measured via his tweets 0:15:40.080 --> 0:15:43.040 and the natural language processing and sentiment became so negative, 0:15:43.080 --> 0:15:46.480 we saw it start to actually impact not only what 0:15:46.680 --> 0:15:50.320 consumers and businesses are concerned about, but also Marcus now 0:15:50.360 --> 0:15:52.880 for the first time starting around May of this year, 0:15:53.280 --> 0:15:58.000 and we saw a heightened connection really between the rise 0:15:58.080 --> 0:16:01.720 and uncertainty across numerous topic be a trade, financial markets, 0:16:01.720 --> 0:16:05.160 and now currencies. And what happened a week to two 0:16:05.200 --> 0:16:10.520 weeks later and be it the SMP five or one 0:16:10.520 --> 0:16:12.920 of the tightest connections really is to the short end 0:16:13.000 --> 0:16:16.440 of the treasury curve and really rate hype timing. Uh. 0:16:16.440 --> 0:16:20.520 And with that heightened correlation, it's it's really made Trump's 0:16:20.600 --> 0:16:24.720 digital communications an important leading indicator. And if I were 0:16:24.720 --> 0:16:28.120 to rate it, it would be from impacting most really 0:16:28.200 --> 0:16:31.680 treasuries at the moment, and um, now it's finally starting 0:16:31.720 --> 0:16:35.080 to bleed into risk as then I love the image 0:16:35.240 --> 0:16:38.200 of you at your computer, like ha ha ha. Wouldn't 0:16:38.240 --> 0:16:40.480 this be fun to enter these words into a little 0:16:40.520 --> 0:16:43.040 system and see what it. You know, it shoots out 0:16:43.120 --> 0:16:46.480 bad or it shoots out you know, negative sentiment, and 0:16:46.520 --> 0:16:49.800 then you know, you realize that it actually was Wow, 0:16:49.920 --> 0:16:53.400 actually a real indicator. So I'm wondering with respect to 0:16:53.480 --> 0:16:57.640 its indications, how forward looking is it? So what we 0:16:57.840 --> 0:17:00.800 found looking at cross correlations, which is just fancy for 0:17:00.920 --> 0:17:04.119 moving around the window. And the lag or lead is 0:17:04.240 --> 0:17:08.320 about a one to two week lead time with measuring 0:17:08.320 --> 0:17:11.879 the uncertainty, and we do that by numerous different different topics. 0:17:11.920 --> 0:17:14.560 So we look at things like the so called witch 0:17:14.600 --> 0:17:17.119 hunt that's used a lot, and things like you know, 0:17:17.160 --> 0:17:19.439 talks about democrats, and we remove a lot of that 0:17:19.480 --> 0:17:22.560 try to getting down to the really what is important 0:17:22.560 --> 0:17:25.399 from an economic standpoint, so the overall economy, the federal 0:17:25.440 --> 0:17:30.280 reserve currencies, financial markets, and so on, and that grouping 0:17:30.840 --> 0:17:33.119 has about a one a two week lead time on 0:17:33.520 --> 0:17:36.760 most importantly rate hug timing short under the Treasury curve. 0:17:36.840 --> 0:17:39.639 And now we're starting to see the same thing within 0:17:39.960 --> 0:17:42.760 SMP five hundred and and the VIX. So I think 0:17:42.760 --> 0:17:46.239 it's been a slow move, whereas in May of this 0:17:46.320 --> 0:17:49.160 year where we got this big burst in negative sentiment 0:17:49.240 --> 0:17:54.160 from Trump's tweets that started to impact mostly the Treasury curve. 0:17:54.400 --> 0:17:58.520 And but that is now finally as businesses are indicating 0:17:58.560 --> 0:18:02.879 that they are getting um hurt un evidence by s 0:18:03.040 --> 0:18:05.880 M I s M non Manufacturing this this morning, as 0:18:05.920 --> 0:18:10.080 well as numerous other surveys UM via the different regional 0:18:10.080 --> 0:18:13.960 Fed surveys that is finally starting to really deteriorate and 0:18:14.000 --> 0:18:16.600 show that it could end up hitting the real economy. 0:18:16.680 --> 0:18:19.440 And the problem is economic data in the US has 0:18:19.480 --> 0:18:22.919 been coming in below average, and everyone's been hopeful for 0:18:23.000 --> 0:18:26.960 this rebound, but I think this added uncertainty is is 0:18:27.000 --> 0:18:31.840 really starting to wear on investors minds. It's interesting here Bloomberg. 0:18:31.840 --> 0:18:33.840 I mean, even on the Bloomberg terminal, you can type 0:18:33.840 --> 0:18:35.399 in tweets by Trump and now I'll give you a 0:18:35.400 --> 0:18:37.640 listing of all the tweets, and or you can set 0:18:37.720 --> 0:18:39.920 up an alert to have any time the president tweets, 0:18:39.920 --> 0:18:42.600 you can get a message or an ib So investors 0:18:42.680 --> 0:18:45.800 clearly looking for this information. Ben, have you gotten a 0:18:45.920 --> 0:18:49.919 sense of maybe how investors are in fact using some 0:18:50.080 --> 0:18:55.520 of the Trump tweets into their investment process. Yeah, so 0:18:55.560 --> 0:18:57.600 that's I mean, that's what we do UM here at 0:18:57.640 --> 0:18:59.840 Arbor Research and Trading has helped provide a lot of 0:18:59.840 --> 0:19:02.760 this content and data. And what we found is that 0:19:02.800 --> 0:19:04.840 there are those that are in putting this into their 0:19:04.880 --> 0:19:09.200 own be at modeling capabilities or models that that kick 0:19:09.240 --> 0:19:12.840 out their actual trading signals or ideas and then also 0:19:12.880 --> 0:19:15.720 subject to you know, from a subjective standpoint in terms 0:19:15.720 --> 0:19:19.640 of gauging risk that is now arising in this market. 0:19:19.800 --> 0:19:22.760 They're pulling this information and just like we aren't connecting 0:19:22.800 --> 0:19:26.440 it to be at volatility like the VIX or volatility 0:19:26.440 --> 0:19:29.000 of treasuries and so on in order to get to 0:19:29.040 --> 0:19:32.199 gauge for how much that is actually impacting the market. So, 0:19:32.400 --> 0:19:36.040 case in point, the US tenure note yield is down 0:19:36.160 --> 0:19:39.560 to one seventy six, about twenty six basis points on 0:19:39.600 --> 0:19:42.960 a month of a month basis, looking back about a month, 0:19:43.040 --> 0:19:45.679 and we can attribute about sixteen basis points of that 0:19:45.720 --> 0:19:48.960 twenty six basis point drop to this Trump and uncertainty 0:19:49.280 --> 0:19:52.080 via just some simple modeling of taking all this uncertainty 0:19:52.080 --> 0:19:55.959 measures and connecting it with major economic data releases. And 0:19:56.040 --> 0:19:58.200 so it is having an impact and I think being 0:19:58.240 --> 0:20:01.000 able to gauge how much it is impacting markets and 0:20:01.040 --> 0:20:03.400 then what that lead time is um You know, it's 0:20:03.400 --> 0:20:06.120 important for investors, and we're seeing that because the equity 0:20:06.160 --> 0:20:08.400 markets for the first time in a long time are 0:20:08.400 --> 0:20:12.000 finally being impacted by by this so called Trumpian uncertainty. 0:20:12.160 --> 0:20:16.879 So what exactly does a data word processing function look like? 0:20:17.000 --> 0:20:20.720 What's it looking for? Has it? Has it? Great things? Sure. 0:20:20.760 --> 0:20:23.760 So what it does is within natural language processing, the 0:20:23.840 --> 0:20:27.240 key is a dictionary or you know, so called a lexicon, 0:20:27.840 --> 0:20:31.119 and what you know is a practitioner here. What we 0:20:31.160 --> 0:20:33.359 need to do is go out and find those words 0:20:33.400 --> 0:20:36.480 that have the meaning that you think they do um 0:20:36.720 --> 0:20:39.440 and contextually. So what we do is work with a 0:20:39.520 --> 0:20:43.120 variation of something called the law Law Frun McDonald lexicon, 0:20:43.200 --> 0:20:45.920 which is very financial based, meaning that will have low 0:20:46.000 --> 0:20:49.679 misclassification rates in picking up words, for example, that are 0:20:50.240 --> 0:20:53.760 mean uncertainty um, and they really do mean uncertainty in 0:20:53.800 --> 0:20:56.199 the financial standpoint. So that can be simple things like 0:20:56.240 --> 0:21:01.400 picking up on words of uncertain confusion, unproductable, and words 0:21:01.520 --> 0:21:06.640 like this, and then basically scoring them um on their 0:21:06.680 --> 0:21:10.240 frequency that as they exist, and then contextually how they 0:21:10.280 --> 0:21:13.840 exist within a given statement, be it a um, you know, 0:21:13.840 --> 0:21:17.840 a paragraph, or even just an individual you know, set comment. 0:21:18.200 --> 0:21:21.199 So those get summed up um with each day or 0:21:21.240 --> 0:21:24.399 each tweet, and then we're looking essentially at that aggregate 0:21:24.600 --> 0:21:26.840 to get a flavor for how much uncertainty or if 0:21:26.880 --> 0:21:29.680 it's a sentiment, we're looking for how negative or positive 0:21:29.720 --> 0:21:34.520 it is is Trump or whoever. We're measuring using words 0:21:34.560 --> 0:21:38.199 that are favorable or unfavorable towards their target of what 0:21:38.240 --> 0:21:40.919 they're talking about. And again that's all summed up with 0:21:41.320 --> 0:21:44.119 a kind of a simple scoring mechanism to get to 0:21:44.160 --> 0:21:47.280 an aggregate number to then measure quantitatively so we can 0:21:47.359 --> 0:21:49.440 use this information. Ben bright Holds, thank you so much 0:21:49.440 --> 0:21:51.680 for being with us. Really appreciate it. Ben bright Holds 0:21:51.800 --> 0:21:55.200 is a data scientist, chief data scientist at Harbor Research 0:21:55.280 --> 0:21:58.879 and treading talking about how not only does President Trump tweet, 0:21:58.920 --> 0:22:00.960 but now you can measure it and put it into 0:22:01.000 --> 0:22:04.119 your algorithm and trade off it, which is sort of, uh, 0:22:04.480 --> 0:22:07.399 you know, this is something that people have increasingly been doing, 0:22:07.720 --> 0:22:09.760 and the question is just what does it actually indicate. 0:22:09.760 --> 0:22:11.959 The idea that it's got a pretty close correlation with 0:22:12.080 --> 0:22:17.240 rates shouldn't necessarily be entirely surprising given how trained his 0:22:17.280 --> 0:22:35.320