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 am Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
Speaker 2: geopolitics from our global headquarters in New York City. We
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Speaker 2: or anywhere else you listen, and as always on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Mohammad al Owen
Speaker 2: of Queen's College, Cambridge, writing, the US has taken its
Speaker 2: economy and those of other countries on an uncomfortable journey
Speaker 2: to an uncertain destination. This will severely test the financial
Speaker 2: system and America's global standing. Muhammed joins us now for more. Mohammed,
Speaker 2: looking forward to spending the next two hours with you.
Speaker 2: Good morning, Good morning, Thank you John one. Your reaction
Speaker 2: to this headline here from the President in the last
Speaker 2: hour so add on Truth's social social media platform. The
Speaker 2: President following maybe some of the ECB commentary this morning,
Speaker 2: expectations that they'll reduce interest rates and complaining why isn't
Speaker 2: the Federal Reserve doing the same thing? And he ends
Speaker 2: this post with this line here, Mohammad Powell's termination cannot
Speaker 2: come fast enough. Now, the debate we've had around the
Speaker 2: table is how do you interpret that line. Is that
Speaker 2: someone waiting for the expiration of a term that takes
Speaker 2: place in May of next year, or someone who's thinking
Speaker 2: about doing things sooner.
Speaker 3: So only President Trump knows what that means. But it
Speaker 3: should come as no surprise. We know that President Trump
Speaker 3: has been frustrated at the absence of interest rate cuts.
Speaker 3: I suspect you got very angry when you heard Chair
Speaker 3: Powell yesterday. Chair Poal really put all the blame on tariffs,
Speaker 3: gave no possibility to the better outcome zero given zero possibility.
Speaker 3: And then there's one thing you have to remember. I
Speaker 3: know that the conventional wisdom is that this is an
Speaker 3: attack on the independence of the FED. There is another
Speaker 3: way of looking at this, which is this Fed has
Speaker 3: sacrificed people in the past. If you remember the president
Speaker 3: of the Dallas Fed, the president of the Boston FED.
Speaker 3: The vice chair was sacrificed ahead of Congress looking into
Speaker 3: allegations of insider trading if you remember, the potential side
Speaker 3: was sacrificed to protect the monetary policy side. And it
Speaker 3: wouldn't surprise me if President Trump is pushing on this,
Speaker 3: because there's a real question for Chair Pale should he
Speaker 3: step down to preserve the independence of the Fed, because
Speaker 3: otherwise the Federal will be the subject of a lot
Speaker 3: of attacks going.
Speaker 2: Forward if he did step down, with that call into
Speaker 2: question even more the independs of the Federal Reserve, what's
Speaker 2: the ultimate outcome here?
Speaker 3: So this is a judgment that has to be made,
Speaker 3: and has to be made by Chairpalell. There are credible candidates.
Speaker 3: Kevin Walsh, for example, The markets would be very comfortable
Speaker 3: with Kevin Walsh as the FED chair. He has tremendous experience,
Speaker 3: He understands the market, understands the economics, he has expertise.
Speaker 3: So you know, I could see a scenario in which
Speaker 3: what Secretary Bassett said before the election plays out, where
Speaker 3: they pre announce Kevin as the next chair, and then
Speaker 3: that puts tremendous pressure and then Chair Powell has to
Speaker 3: make a very difficult decision.
Speaker 4: Let's say that happens.
Speaker 2: And I know that's not your base case right now,
Speaker 2: you can tell us if it is, but it hasn't
Speaker 2: been before. Let's say it happens, though, how do you
Speaker 2: think the market would respond to that?
Speaker 3: So I think the market would look at Kevin Walsh
Speaker 3: and think he's a very credible FET chair, And I
Speaker 3: think the market would rather have a credible FET chair
Speaker 3: that's not in continuous conflict with the White House than
Speaker 3: being continuous conflict with God. The Harvard example gives you
Speaker 3: is an illustration of what can happen. You can suddenly
Speaker 3: have all sorts of other things questioned about the FED
Speaker 3: if it's in direct conflict with the White House.
Speaker 5: Isn't this conversation alone putting in question the independence of
Speaker 5: the FED? We're talking about scenario where we could basically
Speaker 5: get around the White House to placate the president.
Speaker 3: But we've seen that scenarios where they've gone around the
Speaker 3: Congress to placate the Congress. We've seen a situation where
Speaker 3: in the beginning they sacrifice the pretential side. Michael bo
Speaker 3: was a vice chair and he stepped down. So I
Speaker 3: don't think this is a much structural break, but I
Speaker 3: do think there's a very delicate judgment, and Marie here
Speaker 3: very delicate and I'm glad I don't have to make it.
Speaker 5: Well, it almost sounds like you agree with the president
Speaker 5: in this sense. His termination cannot come fast enough, meaning
Speaker 5: when Powell's out of the job, it cannot.
Speaker 4: Be soon enough.
Speaker 5: It sounds like you agree with that.
Speaker 3: So the word termination is a very strong word, right,
Speaker 3: that word, I must say. I looked at it and thought, wow,
Speaker 3: that's a really strong word. But we do know that
Speaker 3: in a year's time, Chairpal will step down. We know that,
Speaker 3: we know that he's not going for us. We know
Speaker 3: he's not going to get a third term, so that
Speaker 3: issue is out there. We also know the President is
Speaker 3: really frustrated about interest rates not being cut. And I
Speaker 3: go back yesterday's comments by Chair Powell, which he went
Speaker 3: well beyond what he've said in the past, were like
Speaker 3: a red rag to the White House.
Speaker 2: You've been critical of the Fellow Reserve before. You've referenced
Speaker 2: this address a couple of times. Now what stood out
Speaker 2: for you yesterday? Where do you think the Chairman went wrong?
Speaker 6: So?
Speaker 3: Actually, I think the Chairman yesterday was less political than
Speaker 3: he normally is. I do think that we all have
Speaker 3: to give the possibility of the good scenario. The market certainly.
Speaker 3: Does you heard me say the market is fifty to fifty.
Speaker 3: As to which of the two outcomes in the destination
Speaker 3: is going to play out. Is this going to be
Speaker 3: a Jimmy Carter moment with prolonged taxlation or is this
Speaker 3: going to be a Margaret Thatcher run a Wagan moment
Speaker 3: where you rewire not just the domestic economies, but to
Speaker 3: rewire a global economy.
Speaker 4: Isn't the fact?
Speaker 2: Yeah, basically acknowledging that by saying, we've got a way
Speaker 2: for more clarity before we can decide what we need
Speaker 2: to do.
Speaker 3: Yes, but he went much further. I mean, I have
Speaker 3: all that. He generally said, we have to wait for
Speaker 3: greater clarity, but he kept on pushing on the challenges
Speaker 3: to do a mandate. He kept on pushing that inflation
Speaker 3: may be persistent. He hasn't said that in the past.
Speaker 3: Two meetings ago, he reintroduced transitory. Two meetings ago he
Speaker 3: we introduced transitory when we talk about tariffs, and then
Speaker 3: last meeting he walked it back. And now he's gone
Speaker 3: one step further and made a very strong statement.
Speaker 2: So let's talk about the optimal outcome. What does it
Speaker 2: look like in the months to come.
Speaker 3: I think I am in the same vote that everybody
Speaker 3: else is saying. This is a really highly uncertain time.
Speaker 3: You know, I think this is an uncertain journey to
Speaker 3: an uncertain destination, and the market has been swinging one
Speaker 3: way and the other. You said it this morning, depending
Speaker 3: on the tariff news, it's either excitement or fear.
Speaker 5: Yesterday we did also here J. Powell talk out the
Speaker 5: Smoot Holly levies of the nineteen thirties, ninety five years ago,
Speaker 5: and he said there isn't a modern experience for how
Speaker 5: to think about this.
Speaker 4: Do you agree with him?
Speaker 5: Or can you draw some modern experiences to deal with
Speaker 5: this time right now?
Speaker 3: No, it's hard. I mean, by the way, that was
Speaker 3: a strong statement as well, something that he hasn't gone
Speaker 3: anywhere near before, and.
Speaker 5: That was the Faires Bueller scene I was alluding to earlier.
Speaker 3: Correct, and I remember that scene that he should have
Speaker 3: referred to in the movie. No, we haven't had this before.
Speaker 3: This is an attempt to rewire the global economy, and
Speaker 3: we haven't had this in an integrated globalized economy.
Speaker 5: Are you surprised by how different Powell sounds from Waller?
Speaker 3: Yes? I do. I'm surprised how different Wallers sounds from
Speaker 3: Waller a year ago.
Speaker 5: I think he's running.
Speaker 3: It's been quite a transformation. Let's put it this way.
Speaker 4: Do you know how he did do a good job yesterday?
Speaker 4: Ragged Raj Jahan.
Speaker 2: He was a great He was absolutely fantastic, and he
Speaker 2: asked this question I'm place he asked. They talked about
Speaker 2: the difference of a challenge to the cycle and the
Speaker 2: challenge to the system. And you and I've reflected on
Speaker 2: this too, the challenge to the system here, how are
Speaker 2: you thinking about that challenge at the moment.
Speaker 3: So first of all, let me say Rugu was great
Speaker 3: because not only did he keep the flow going, but
Speaker 3: for those who are not very familiar with economics, he
Speaker 3: explained why he was asking the questions, and he did
Speaker 3: really well. You know, we've put it slightly differently. Is
Speaker 3: that normally advanced economy live in cyclical space and developing
Speaker 3: countries live in structural space. Now suddenly we have advanced
Speaker 3: economies living in structural space. So the boundaries to the
Speaker 3: cyclical fluctuations are no longer holding, or they are much
Speaker 3: wider than there were before. So we have a whole
Speaker 3: range of potential outcome. I love the United earnings call
Speaker 3: when they came out with two scenarios, it's a bimodal world.
Speaker 3: MX today came out with a huge qualifier saying it's
Speaker 3: subject to the global macroeconomy. So companies are not only
Speaker 3: thinking internally about arrange of outcomes, they're expressing it in
Speaker 3: their earnings course.
Speaker 2: As allocators need to do the same exercise. They need
Speaker 2: to work out what the future looks like. And Rujan
Speaker 2: talked about a change in US philosophy. So in the
Speaker 2: post war system, as you know better than most, US
Speaker 2: assets are at the very heart of it. And the
Speaker 2: interpretation of this administration appears to be that their responsibilities
Speaker 2: are a net burden and not a net benefit, and
Speaker 2: they're trying to rebalance that. They look at the FX
Speaker 2: so called distortions, that's what Steven Myron called them, and
Speaker 2: they don't look at the benefits that come from this
Speaker 2: structural bid for US as sets that deliver lower interest
Speaker 2: rates than maybe that otherwise get what are the dangers
Speaker 2: of trying to rebalance that over the period of say
Speaker 2: three and a half years.
Speaker 3: So, whether it is the US, whether it is the
Speaker 3: UK with the EU, this integration does two things to
Speaker 3: your balance sheet. It increases the gains and increases the
Speaker 3: potential losses, so you now operate at a higher level
Speaker 3: of both. And if you don't manage the potential losses,
Speaker 3: then people will focus on that and forget about the gains.
Speaker 3: We sort o the UK with Brexit. So I think
Speaker 3: the more integrated economies come, the more you have to
Speaker 3: manage the downside risks. I say this because AI is
Speaker 3: really critical in this. We've got to manage the downside
Speaker 3: risk to exploit the enormous benefits that come from that mom.
Speaker 5: And you said, when you look at developing economies, it's
Speaker 5: structural and like the United States, we're cyclical. Is everyone
Speaker 5: just viewing this moment wrong? Should we be thinking about
Speaker 5: developing economy when looking at what is going on right
Speaker 5: now in US in terms of policy.
Speaker 3: Well, some have tried to make that parallel when saying
Speaker 3: it's highly unusual to see the US having higher interest
Speaker 3: rates and a weekend dollar. That happens in the developing
Speaker 3: world that doesn't happen in advanced economies. I think that's
Speaker 3: a step too far. I think what we're seeing is
Speaker 3: a portfolio reallocation from an overweight to the US to
Speaker 3: more balanced globally. That is what we're seeing, and I thought,
Speaker 3: wik reader yesterday on the show, what's great with that?
Speaker 2: So here's the latest this morning starts at heading for
Speaker 2: a week of losses is Chan Chan Pound pause freezing
Speaker 2: cold water over the so called fed pert joining us
Speaker 2: now to discuss as Jean Pavan of Black Rock Jean
Speaker 2: get to see you, sir, some reaction by the President
Speaker 2: of the United States earlier on this morning, which I'm
Speaker 2: sure you saw, complaining that the chairman had not cut
Speaker 2: interest rates unlike the ECP, which is set to do
Speaker 2: in about thirty minutes time, and saying at the end
Speaker 2: of his social media post this morning, the pals termination
Speaker 2: cannot come fast enough. If clients asked you about that
Speaker 2: line this morning, what will you tell them?
Speaker 6: Well, I spent a week in Europe last week, and
Speaker 6: I'm going to tell you that the discussion about like
Speaker 6: us asset then we should think about this environment is
Speaker 6: totally different than everything I've seen. And I think that
Speaker 6: kind of development in the context.
Speaker 7: That is already one that investors are.
Speaker 6: Shaky, I think will require had a bit of work
Speaker 6: to reassure. I think you know what I would say
Speaker 6: would fall back to I think there are immutable laws
Speaker 6: that i'd play here.
Speaker 7: We're going to be bumping into them.
Speaker 6: We need to be ready for some kios along the way,
Speaker 6: but we're going to be bumping into some pretty immutable laws,
Speaker 6: and I think that's what we need to get a
Speaker 6: handle on.
Speaker 2: We've said repeatedly on this program this morning that we'd
Speaker 2: like clarity from the White House what termination actually means.
Speaker 4: Does it mean the expiration of.
Speaker 2: The term may next year said to take place, or
Speaker 2: moving that forward and doing something more dramatic. But you've
Speaker 2: touched on something important, the erosion of trust in US
Speaker 2: assets that we've seen. Some people have made the case
Speaker 2: that over the last week all we saw was treasury
Speaker 2: markets responding to the unwinding a trade, some hedge funds
Speaker 2: blowing up, and maybe it was nothing bigger than that.
Speaker 4: What do you think it was.
Speaker 6: I think there's a broad story here, and if I
Speaker 6: had to say one word, I think it's debt. It's
Speaker 6: the large US debt that is a big part of
Speaker 6: the story here. But you know, I think we've seen
Speaker 6: and we were with a view with discuss that before
Speaker 6: that we were.
Speaker 7: An environment shape by supply.
Speaker 6: I think the tariff discussion we're having here is very
Speaker 6: much an example of another supply shock that is that
Speaker 6: is leading German power to be more awkish and people expected,
Speaker 6: I guess, but there is a really real story of
Speaker 6: supply shock that is putting pressure on rates to go up.
Speaker 6: So I think there was already uh, pressure for long
Speaker 6: term rates to go up, but you add on top
Speaker 6: of that, you know, questions about tariffs that are really
Speaker 6: like if you really are trying to decouple from the
Speaker 6: rest of the world quickly, Uh, that also means that
Speaker 6: you're cutting yourself out from a source of funding for
Speaker 6: your debt, and the that is large and I think
Speaker 6: this is this is the the key thing that is
Speaker 6: driving here is that you know, the financiers of that debt,
Speaker 6: people financing it, are looking at this differently now and
Speaker 6: I think that's adding another kind of risk premium, if
Speaker 6: you will, in terms of long term rates. And so
Speaker 6: that is the nimic at least, not about one player.
Speaker 6: It's not about like you know, one official government selling
Speaker 6: or not. I think this is a broader kind of
Speaker 6: sentiment story.
Speaker 3: So Jean, you set up, you told us about what
Speaker 3: you heard, You told us about the sentiment, how far
Speaker 3: are we in this rebalancing from the US to the
Speaker 3: rest of the world.
Speaker 7: I think we're pretty far.
Speaker 6: I mean, if if there's a if they are real
Speaker 6: intent of reducing current account deficit and surpluses and balancing
Speaker 6: these things, were very far from that objective and decoupling,
Speaker 6: and in fact, I don't think that can happen very quickly.
Speaker 7: So to me, this is more than there's a very.
Speaker 6: Near term, kind of immutable kind of constraint that we're
Speaker 6: going to be bumping against, as I said before, and
Speaker 6: it's going to be materializing by rates going up, which
Speaker 6: will make the debt look very different for the government
Speaker 6: I think themselves. I think their bigger channe The biggest
Speaker 6: challenge for them is rates at five percent ten year
Speaker 6: changes completely the budget are in medic going forward, and
Speaker 6: I think that will have to be confronted at some point.
Speaker 6: So that's why I mean, no matter the intent, I
Speaker 6: think we're going to be stopp along the way. It's
Speaker 6: a many year's process as opposed to a mini month's.
Speaker 5: Process, and that goes against a key objective from this administration,
Speaker 5: which is to keep rates much lower. They want to
Speaker 5: see it going lower to four percent. When it comes
Speaker 5: to things like who is dumping these assets? The Treasury
Speaker 5: Secretary didn't seem to think it was foreign governments. Do
Speaker 5: you think it's sovereigns?
Speaker 6: As I said, I think this is a broader global
Speaker 6: reassessment and thinking. I think there's broad fundamental reasons for
Speaker 6: rates to go up, and then you get events like
Speaker 6: we got last week, and it adds to this narrative.
Speaker 7: So I think it's difficult.
Speaker 6: To pinpoint like a single source. I think this is broader.
Speaker 6: And then when these things happen, there's always other things
Speaker 6: that happen at the same time, so you get like
Speaker 6: the dynamic leveraging in the market that gets triggered by this.
Speaker 6: So I don't think we'll ever pinpoint one, but I
Speaker 6: think we should take note that there is a sentiment
Speaker 6: story that is playing on.
Speaker 3: So John, one of the things that is really debated
Speaker 3: right now among global macro ponomous is what is the
Speaker 3: beta of the rest of the world to US growth.
Speaker 3: So some people feel that it'ser point five, others feel
Speaker 3: it's more than one. Where would you put the beta
Speaker 3: the growth beta of the rest of the world, Well,
Speaker 3: it's the US for Europe and for developing countries.
Speaker 6: You know, I think there's a distinction between where this
Speaker 6: administration might want to go in many years from now
Speaker 6: and where we are right now. I don't think the
Speaker 6: world has changed materially yet. I mean, yes, the tone
Speaker 6: and everything has changed like drastically, and the uncertainty is
Speaker 6: as uncertainty as we've ever seen it, as you said before,
Speaker 6: But right now, the fundamentals where the US is still
Speaker 6: very much as link as it was. And I think
Speaker 6: we've seen it right, you know, when we've seen the
Speaker 6: baration day, we've seen the US market tank. It's not
Speaker 6: like Europe has outperformed during those days or other markets are.
Speaker 6: So the beta is still very much as strong as
Speaker 6: it was.
Speaker 3: Over time, more than one, more than one or less
Speaker 3: than one.
Speaker 7: I think we're looking at something that looks like one
Speaker 7: right now. So I don't think I wouldn't.
Speaker 6: Take a big on either side, but I think it
Speaker 6: looks like it's very much correlated with it.
Speaker 2: Does that mean you can't think is bigger bet for
Speaker 2: Europe against the United States and vice versa if they're
Speaker 2: on the same boat.
Speaker 7: Yeah, So I think I think it's it's it's it's something.
Speaker 6: To say US is risky, so let's let's go elsewhere.
Speaker 6: But because of that beta, I think we're still in
Speaker 6: the world where you know, all boats will be moving together.
Speaker 6: But there is one thing happening though, is that in
Speaker 6: this environment that you know, clients have always been having
Speaker 6: a home bias, right, it's easier to invest shelter to home.
Speaker 6: I think that exacerbates that home bias we have. So
Speaker 6: it's in this environment.
Speaker 2: Your high conviction view is actually in the treasury market.
Speaker 2: So should we finish on that underway treasure raise? Is
Speaker 2: it for all the reasons we've discussed or something missing?
Speaker 6: It's for while we had on top of that the
Speaker 6: inflation story that is not resolved. It's actually being you know,
Speaker 6: fueled somewhat more with with those measures.
Speaker 7: So we have been on the way to us church.
Speaker 6: This is the highest conviction we've been having for the
Speaker 6: last many months, even I would say many years. We're
Speaker 6: setting through a high rate environment. Everything we see confirms
Speaker 6: out and the leader's development. I think after that as well, and.
Speaker 2: The latest communication from cham and Pan which reinforced it
Speaker 2: to Choman Van a black crop can I'm shure before
Speaker 2: my senior Trump trying to advice that joins us now
Speaker 2: for more Candian is.
Speaker 4: Good to see you. Good to see you as well.
Speaker 2: What are the prospects of making a deal in this
Speaker 2: smaller timeframe with this money countries?
Speaker 8: Well, I think the chances of making a deal with
Speaker 8: Japan seem pretty high. Right, Like you've heard bess and
Speaker 8: talk about the fact that there are about fifteen countries
Speaker 8: with whom they're close to making a deal. I don't
Speaker 8: foresee ninety countries in ninety days, but certainly with some
Speaker 8: of our major trading partners with whom we have some
Speaker 8: of these significant issues, I do think the administration is
Speaker 8: very optimistic.
Speaker 5: Let's talk about the one that's a little bit harder, China.
Speaker 5: They came out this week with a number of demands
Speaker 5: they'd like to see response. By the way, we should
Speaker 5: note this was a bloomberg scoop according to someone familiar
Speaker 5: with the CCP, thinking right now, do you think this
Speaker 5: administration is ready to appoint a point person for Beijing
Speaker 5: to deal with.
Speaker 8: Well, I think both sides are looking to see if
Speaker 8: there is an off ramp. Right Like last week, we
Speaker 8: backed ourselves into a trade embargo between the two world's
Speaker 8: largest economies, So there has to be a way to
Speaker 8: resolve this at some sort of political level, and I
Speaker 8: think appointing someone seems like a reasonable way forward. But
Speaker 8: that said, the President has said that he wants to
Speaker 8: negotiate directly with Shijing Pang, so there's going to be
Speaker 8: some negotiations behind the scenes to see if they want
Speaker 8: to back off that approach or if they're willing to
Speaker 8: delegate one level down.
Speaker 5: Do you think the likely scenario here is that there's
Speaker 5: a call and then they appoint someone, and then who
Speaker 5: do you think that individual's going to be?
Speaker 8: Well, of the constellations of actors, who it could be.
Speaker 8: It could be a Secretary Bessant, could be a Secretary Letnik,
Speaker 8: it could be someone like Jamison Greer. But I do
Speaker 8: think that in the last week or two we've seen
Speaker 8: Bessant really take the lead publicly in terms of advancing
Speaker 8: some of the President's trade agenda points. He would be
Speaker 8: a likely interlocutor with the Chinese when it.
Speaker 5: Comes to the other deals. And speaking of China, the
Speaker 5: Secretary has insinuated he wants to shore up some of
Speaker 5: these other deals and then confront China together. Is that
Speaker 5: the kind of concessions they're looking for? When they talk
Speaker 5: to Japan or the European Union or Vietnam.
Speaker 8: Well, I think, like taking a step back, this is
Speaker 8: existential from their perspective of the administration, that we are
Speaker 8: overly reliant on China, that the Western world has become
Speaker 8: overly reliant on China, and so it makes sense from
Speaker 8: their perspective to look at building alliances with other countries
Speaker 8: where they adopt some of the same measures that the
Speaker 8: United States does. And even from the perspective of third markets,
Speaker 8: if the United States and China are in this posture
Speaker 8: of not trading with one another, those goods are going
Speaker 8: to go somewhere else. They're going to flood other markets,
Speaker 8: and so I think that's what they're trying to get to.
Speaker 8: But the question for me is some of these Asian
Speaker 8: nations in particular, are they going to pick sides. Are
Speaker 8: they going to be willing to put up some of
Speaker 8: these barriers on China or not.
Speaker 5: So when it comes to other investigations and administration is launching,
Speaker 5: we learned this week that there is an investigation a
Speaker 5: section two thirty two on pharmaceuticals on semi conductors that
Speaker 5: was launched April first. Why did we learn about it
Speaker 5: this way.
Speaker 8: I have to say I spent ten years in government
Speaker 8: and have never heard of a secret.
Speaker 7: Two thirty two.
Speaker 8: But that's effectively what we saw happen. Well, there is
Speaker 8: no legal obligation to notify the public that an investigation
Speaker 8: has been launched. There is a legal obligation to give
Speaker 8: the public an opportunity to comment. But some of this
Speaker 8: may have just been there's so much going on that
Speaker 8: they failed to alert the public. Could be that they
Speaker 8: were just investigating and sort of got out over their skis.
Speaker 8: But for whatever reason, it's neither here nor there. We're
Speaker 8: in an active investigation and the administration has two hundred
Speaker 8: and seventy days to complete those investigations.
Speaker 4: They have two seventy How quickly can they wrap it up.
Speaker 8: As soon as almost humanly possible? So that comment period
Speaker 8: is I think it's going to be May seventh when
Speaker 8: all those comments are due. They could potentially announce the
Speaker 8: results as soon as May eighth. Now I don't think
Speaker 8: it will be the soon. I think they'll give themselves
Speaker 8: another month to digest some of the comments. But we've
Speaker 8: heard Secretary Best or Secretary Letnix say that within a
Speaker 8: month or two we're likely to see some of those measures.
Speaker 2: A couple of names in the mix right now, Who
Speaker 2: do you think is running the show at the moment?
Speaker 8: I think Donald Trump. I think President Trump is running
Speaker 8: the show. He has always been his own trade advisor.
Speaker 8: But of the economic advisors who seemed to be in
Speaker 8: the mix, Secretary Bessett, Secretary Latnik, Jamison, and Career.
Speaker 5: Does it surprise you that the Treasury Secretary has almost
Speaker 5: made a U term when it comes to negotiations in
Speaker 5: the past two weeks. When I spoke to him after
Speaker 5: what Trump called Liberation Day, he said he wasn't part
Speaker 5: of the negotiations. Then clarified to me this week he
Speaker 5: meant he wasn't in charge or a part of the
Speaker 5: negotiations regarding the tariff rates. On that big chart, How
Speaker 5: big of a disagreement was those reciprocal tariffs.
Speaker 7: Yeah.
Speaker 8: In Trump run, it was very clear that we had
Speaker 8: different advisors on different spectrums. We had the free traders,
Speaker 8: we had the protectionists, and Trump two the difference between
Speaker 8: them is much smaller, right, So, I think you have
Speaker 8: advisors who might have different perspectives, but their view is
Speaker 8: largely rowing in the same direction. So I don't see
Speaker 8: the same break in the same way. But I do
Speaker 8: agree that Secretary Bessant is much more active now in
Speaker 8: terms of driving some of the agenda, at least in
Speaker 8: terms of the public voice of the administration.
Speaker 2: And this is certainly something malcat Pontispen's wanted to say,
Speaker 2: including Jamie time at a JP Morgan, who basically said
Speaker 2: that in a Financial Times interview.
Speaker 4: Early this week.
Speaker 5: He said he's an adult in the room and he
Speaker 5: likes that he's now taking a louder voice when it
Speaker 5: comes to these trade negotiations and thinks he should be
Speaker 5: the point person. Neil Dutta has talked about this the
Speaker 5: ascent of Bessent, and he said Trump has cracked a
Speaker 5: lot of eggs and now it's up to the secretary
Speaker 5: to make an omelet. So Wall Street is definitely feeling
Speaker 5: more comfortable that the Treasury Secretary is the one who's
Speaker 5: bit more careful with his words when it comes to
Speaker 5: these negotiations. He's in driver and seat.
Speaker 2: Kellyan's good to say thanks for dropping bye, thank you.
Speaker 2: The former senior Trump tried to devise a Kelly On show
Speaker 2: with that. The New York Fed President John Williams, speaking
Speaker 2: at the moment just said this. The economy is in
Speaker 2: a very good place. Learn Goodwin of New York Life.
Speaker 2: John's isnaw from are Lauren, Come, I ask you, is
Speaker 2: the economy in a very good place?
Speaker 3: Ooh?
Speaker 1: I think the economy is in a pretty precarious place.
Speaker 1: But we're starting from a really strong base. Our economic
Speaker 1: scenario is. Coming into this year, we expected growth to
Speaker 1: slow from around two and a half percent to just
Speaker 1: below two percent. We're now looking at half a percent
Speaker 1: of GDP growth out of the US this year. So
Speaker 1: it's not a recession, but that's a much more worrisome position,
Speaker 1: let's say, than we expected just a couple.
Speaker 7: Of months ago.
Speaker 1: And perhaps more important than that, though we have about
Speaker 1: a fifty to fifty percentage on recession versus not. We're
Speaker 1: pretty confident that will end the year with inflation higher
Speaker 1: than it is. And so as I see investors look
Speaker 1: around and say, maybe we'll wait and see see how
Speaker 1: tariffs develop, see how monetary policy developed, I look at
Speaker 1: that expectation for higher inflation, and I say, even if
Speaker 1: you were going to wait and see, do you have
Speaker 1: the portfolio that you need to wait and see When
Speaker 1: we have such inflation volatility.
Speaker 2: Let's get in that in a second, to just focus
Speaker 2: on the economy of monetary policy, and then we can
Speaker 2: get to the market. Cause if you think the growth
Speaker 2: is going to come down from three to zero point
Speaker 2: five and inflation by the end of the year will
Speaker 2: be higher than now Cham and Pal, it's not giving
Speaker 2: us any clues on what hate reduce interest rights? When
Speaker 2: do you think hate reduce interest rights? If at all?
Speaker 1: I think that the FED will do as much as
Speaker 1: it can to do as little as possible. It's just
Speaker 1: very difficult to change policy credibly in a position where
Speaker 1: inflation in inflation expectations are so.
Speaker 7: On the line.
Speaker 1: Do I completely agree with Mike that short term inflation
Speaker 1: expectations that we're seeing out of consumers, out of businesses
Speaker 1: have de anchored in a meaningful way in reaction to
Speaker 1: how people feel right now. I expect that those will
Speaker 1: come down as reality proves to be less dire. But
Speaker 1: we're still in an environment where, in order for the
Speaker 1: FED to avoid some of the worst case scenarios for
Speaker 1: the econ ME, cutting rates doesn't get you there. I
Speaker 1: don't think cutting rates does much to shore up supply
Speaker 1: chain challenges. Cutting rates certainly doesn't do much to manage
Speaker 1: inflation expectations in both short and long term market interest rates,
Speaker 1: and so they're going to do everything they can not
Speaker 1: to move.
Speaker 5: So your base case is stackflation.
Speaker 1: Stackflation light, where you have a little bit of growth
Speaker 1: but inflation moving up. And the difference between being in
Speaker 1: recession and not in recession, I think is meaningful for
Speaker 1: the markets. But when we're looking at the economic scenario,
Speaker 1: not a whole lot of daylight between us sort of
Speaker 1: muddle through with inflation as opposed to an outright recession.
Speaker 1: Our lowest probability, about fifteen percent, is for a recession
Speaker 1: that's deep enough and demand destruction is pronounced enough to
Speaker 1: actually bring inflation lower. I think that's the least likely scenario.
Speaker 5: You mentioned things like trade and supply chains. The President
Speaker 5: was out this morning with a few different social media posts,
Speaker 5: but one of them was about the fact that he
Speaker 5: talked to Mexico, He talked to the Japanese, the GHOSTI.
Speaker 5: He says, even China is waiting to come in. The
Speaker 5: Italians are here today. What if all these trade barriers
Speaker 5: and concerns are actually solved within ninety days.
Speaker 1: For one, I think it's very unlikely and expect that
Speaker 1: the average tariff rate will be higher in a couple
Speaker 1: of months than it was a couple of months ago,
Speaker 1: which has a meaningful impact on inflation. But perhaps more important,
Speaker 1: tariffs are a negotiating tool, but they're also a policy
Speaker 1: in themselves. We've been hearing from the administration that trade
Speaker 1: deficit is perceived as a sign of global economic weakness,
Speaker 1: and it's a challenge that the administration is looking to
Speaker 1: resolve on top of that.
Speaker 4: If the goal of.
Speaker 1: Those policies in the end is to re shore some
Speaker 1: important supply chains, how far that goes remains to be seen.
Speaker 1: But even so, that's a very capital intensive trend that frankly,
Speaker 1: even if tariffs were completely rolled back and we shook
Speaker 1: our shook our hands of the last couple of weeks,
Speaker 1: those capital intensive trends are happening, they're underway. And see
Speaker 1: that as an environment where outright disinflation is unlikely.
Speaker 3: So, Louren, you tease the portfolio implications of everything we
Speaker 3: just discussed at the beginning of the interview. So what
Speaker 3: audi and how far our investors from where you think
Speaker 3: they should be.
Speaker 1: For starters the sixty to forty portfolio, and look not
Speaker 1: all investors use it, but just as a baseline, the
Speaker 1: sixty to forty portfolio was designed for a period where
Speaker 1: inflation and inflation volatility were low. That's not the situation
Speaker 1: that we're in right now, and so it's not the
Speaker 1: benchmark probably that investors should be using.
Speaker 7: For two, if you think.
Speaker 1: About the last fifteen years, the most effective acid allocation,
Speaker 1: if we're all honest with ourselves, would have been to
Speaker 1: be ninety percent invested in US large cap growth equity.
Speaker 1: We got a couple of extra years of that, even
Speaker 1: as inflation rates have been higher because of the boom
Speaker 1: from AI.
Speaker 4: But as I look forward, I.
Speaker 1: Don't think that that's the allocation that overweight US equity
Speaker 1: allocation that makes the most sense moving forward. So geographic
Speaker 1: rebalance I think is important. We're definitely seeing that out
Speaker 1: of x US investors already. I think US investors need
Speaker 1: to do the same. We're also looking at building inflation resilience,
Speaker 1: whether that's in dividend payers or inflation or income generating equity,
Speaker 1: or by taking equity like risk in credit or in
Speaker 1: the bond market. And we're considering some hedges for inflation volatility.
Speaker 1: Those moments when you get inflation surprises, so including gold,
Speaker 1: real estate, other inflation aware asset classes sort of.
Speaker 3: One thing you didn't mention is government bonds. You completely
Speaker 3: avoided government bonds, So let me take you there. What
Speaker 3: about government bonds?
Speaker 1: So I have very high conviction that duration is a
Speaker 1: tactical bet at best for the foreseeable future. Now we
Speaker 1: know that, taking the ten year treasury bond as an example,
Speaker 1: there are three things that move the tenure treasury the
Speaker 1: path of the Fed funds rate over that ten year period.
Speaker 1: We're not seeing a lot of price expectation or changing
Speaker 1: there inflation expectations which have been pretty well anchored, but
Speaker 1: are are there's a wide dispersion of estimates so that
Speaker 1: it moves a little higher. And then the term premium,
Speaker 1: supply and demand issues, and not only in moves in
Speaker 1: the tenure but also in moves in currency tell us
Speaker 1: that demand for treasuries is fraying a bit on the margin,
Speaker 1: and that makes sense to me given the what we're
Speaker 1: seeing globally. So that's an environment where I think the
Speaker 1: tenure treasury yield is absolutely live between four and five percent.
Speaker 1: So if you can be in the market tactically and
Speaker 1: trade those moves, sure, but for the average investor that's
Speaker 1: making one month, three month, two year changes, duration is
Speaker 1: not our favorite place to take.
Speaker 3: Risk, Lauren.
Speaker 2: I appreciate the clarity. It's good to see. As always,
Speaker 2: thank you, Lauren good when they're in New York life.
Speaker 2: This is the Bloomberg Sevenmans podcast, bringing you the best
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Speaker 2: Terminal and the Bloomberg Business out
Speaker 4: Mm hmm.