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Speaker 3: Peter Sheer of Academy Securities writing, the end of free
Speaker 3: money has been a major factor in the recent downturn
Speaker 3: and could weigh on the economy and markets going forward.
Speaker 3: I think the economy is at a greater risk than
Speaker 3: we've seen in some time.
Speaker 1: Peter joins us. Now, Peter, great to see you, see
Speaker 1: you too.
Speaker 3: This seems to be echoing what we heard from Neil
Speaker 3: Dotta yesterday of Renaissance Macro, where he said that he
Speaker 3: thinks the train may have already left the station when
Speaker 3: it comes to FED rate cuts and the potential damage
Speaker 3: that has been foisted upon the economy.
Speaker 1: Why are you so negative as well.
Speaker 4: So what I'm seeing, I think is what we're calling the
Speaker 4: end of free money and kind of being a bit
Speaker 4: cavalier about that. But there was a time, right if
Speaker 4: you announced you were spending x billion on data centers
Speaker 4: or AI, your stock went up two x And all
Speaker 4: of a sudden, now you're seeing people question that. You're
Speaker 4: seeing stories emerged about ooh, which technology should we use?
Speaker 5: So I think we're going through this breather right.
Speaker 4: A year ago at this time, if you didn't have
Speaker 4: an AI strategy, you were ridiculed as a CEO. Your
Speaker 4: stock was going to suffer. So there was spend, spend, spend.
Speaker 4: There was this kind of real rush to spend, spend, spend.
Speaker 4: Now I think everyone's sitting back, Okay, what do we
Speaker 4: want to spend on?
Speaker 5: What is the best value?
Speaker 4: And the hyperscalers Right, all of a sudden, you can't
Speaker 4: just say you're going to build more and your stock
Speaker 4: goes up.
Speaker 5: So this is kind of this first time.
Speaker 4: I think we might see a bit of an AI
Speaker 4: diet where people are like, Okay, how do we be
Speaker 4: cautious on this? Where do we spend? What do we
Speaker 4: spend on? What technology is emerging. We haven't talked about
Speaker 4: anything out of China yet that could derail some of
Speaker 4: our stocks.
Speaker 5: So I think this is where we get a bit
Speaker 5: of a slowdown.
Speaker 3: Right now, before we get into the details of the
Speaker 3: AI trade, you said the end.
Speaker 1: Of free money.
Speaker 3: I don't want to dive into that because yesterday we
Speaker 3: were talking about tightening liquidity conditions. Now a lot of
Speaker 3: people attributed that to the sell off that we saw
Speaker 3: in things like bitcoin and also the big tech names.
Speaker 3: Why is this now the end of free money with
Speaker 3: the federers are of cutting rates and ending quantitative tightening.
Speaker 4: Well, you've also seen coming back to some of the
Speaker 4: crypto you had the dacos or the digital asseid treasury companies.
Speaker 4: Some are very sophisticated, some do a lot of things,
Speaker 4: some simply buy the underlying And there was a period
Speaker 4: of time right if you bought x amount of ether,
Speaker 4: your stock went up two x.
Speaker 5: All of a sudden, that's not happening.
Speaker 4: So all these trades that we're kind of self perpetuating
Speaker 4: are falling down, and you're having a bit less liquidity
Speaker 4: come through this and everything I hear and see when
Speaker 4: we're talking whether it's consumers, corporate, I feel there's belt tightening.
Speaker 5: Going on everywhere.
Speaker 4: I think people are going to be a little bit
Speaker 4: surprised where as they go through the budgeting process that
Speaker 4: companies are actually shrinking their budgets rather than growing full scale.
Speaker 6: What do you think the administration does in this? Because
Speaker 6: we were speaking with the Commerce Secretary yesterday who was
Speaker 6: beating the drum saying AI has been such a boon
Speaker 6: for our economy. David Sacks, the cryptos are, which also
Speaker 6: has an ear to the administration, was putting on x
Speaker 6: yesterday that it is an AI related investment accounts that
Speaker 6: half of GDP in a reversal.
Speaker 1: Would risk recession.
Speaker 6: Is this an administration that would see the sector as
Speaker 6: too big to fail? As Sam Altman has hinted at
Speaker 6: to the ugarn of others at open AI.
Speaker 4: You know what I think they are doing, I think
Speaker 4: it's rightfully to do, is investing heavily in electricity and
Speaker 4: energy production. Right we are putting money into nuclear, We're
Speaker 4: putting money into everything. That's that's really the bottleneck right
Speaker 4: now is this electricity. And supposedly that's one of the
Speaker 4: arguments with the TPUs versus the GPUs is lower electricity
Speaker 4: US so I think electricity is actually a bottleneck. I
Speaker 4: see the government spending a lot of time on that,
Speaker 4: which fits very much. I know you're sick of hearing it.
Speaker 4: But production for security or prosec I think they are
Speaker 4: trying to figure out mark. I think these are the
Speaker 4: things that the government's trying to make sure goes along.
Speaker 4: I think it's gonna be hard for them to intervene
Speaker 4: directly in a But yes, if we get this AI
Speaker 4: slow down, unless other parts of the economy really pick up,
Speaker 4: we are going to see this potential maybe not a recession, but.
Speaker 5: A slow down. And that's why I'm concerned. How does
Speaker 5: the WELFERFI to play into that?
Speaker 6: At least it has been talking about how just more
Speaker 6: of everyday people of household's own equities at this point,
Speaker 6: and a lot of the gains and equities have been
Speaker 6: tied to AI. If AI starts to take a breather,
Speaker 6: what overall wealth effect does that come back and have
Speaker 6: on the consumer we I think.
Speaker 4: We've already seen a big hit to crypto right Bitcoin
Speaker 4: itself is down six hundred and fifty.
Speaker 5: Billion, and it seems to track very well.
Speaker 4: You know, I always use ARKK as a proxy for
Speaker 4: disruptive stocks. Those stocks are down, so you've kind of
Speaker 4: seen this big move in certain segments of the market.
Speaker 4: Almost anything momentum related is down. So I think you've
Speaker 4: already seen a chunk of wealth wiped out for people
Speaker 4: who would spend that money. So I think we need
Speaker 4: to see this turnaround or you're going to see everyone. Hey,
Speaker 4: maybe we've got to be a little bit classes right,
Speaker 4: everything's going to the moon. Crypto is going to two
Speaker 4: hundred thousand, wherever the number is. All of a sudden,
Speaker 4: you're sitting here at eighty six thousand on bitcoin.
Speaker 5: I think it.
Speaker 4: Doesn't create this negative wealth effect where people are.
Speaker 5: Going to be conservative coming into their spending.
Speaker 1: So there are three ways to look at this.
Speaker 3: There's one way to look at it saying, Okay, this
Speaker 3: is going to be a recession next year that no
Speaker 3: one's expecting, which is typically how it happens, which is
Speaker 3: what we heard from neal data. Then there's a way
Speaker 3: of saying that actually there's going to be a rebound
Speaker 3: early next year because of the tax refunds and other
Speaker 3: types of stimulative effort, but that there will be sort
Speaker 3: of this flagging growth. And then the third way of
Speaker 3: looking at this is it is going to be morally
Speaker 3: hazardous for either this administration or the Federal Reserve to
Speaker 3: allow this market to creter. So you're going to see
Speaker 3: this bazooka of stimulus coming from quantitative easing, from federrate cuts,
Speaker 3: and from fiscal that will ultimately propel this market higher.
Speaker 1: Where do you fall in?
Speaker 4: You know, I do think coming into the midterm elections,
Speaker 4: we are going to see a huge effort. I think
Speaker 4: Trump and Trump one point, Oh, learn the pain. If
Speaker 4: you don't win the midterms, it's really hard to govern
Speaker 4: your next two years. So I expect a lot of
Speaker 4: stimulus coming into that, and I have liked, for example,
Speaker 4: my favorite trade right now has been to be underweight
Speaker 4: NASDAQ one hundred so QQQ and ETF form and I
Speaker 4: like the S and P five hundred equal weights, so
Speaker 4: RSP is one you know ETF that you can use
Speaker 4: for that. And I think you're going to get this
Speaker 4: bit of a rebouncing right. Some of the air is
Speaker 4: going to leak out of the AI, some of it
Speaker 4: should be transferring to the rest of the economy. And
Speaker 4: that's why I like kind of the equal weighted S
Speaker 4: and P five hundred. I think as we take away
Speaker 4: investor focus from the AAI to electricity, which is still
Speaker 4: going to be a part of this, But what else
Speaker 4: is going on in the economy?
Speaker 5: What else are we building? What are we making?
Speaker 4: We are going to be trying to build manufacturing plants,
Speaker 4: We're going to be trying to build mindes. We're going
Speaker 4: to be trying to build refining and processing companies. So
Speaker 4: there will be activity, and I think that's the area
Speaker 4: that's going to shine next year.
Speaker 3: If you are defensive, can you go into long term
Speaker 3: bonds with the expectation that this is an incentivized fed
Speaker 3: to reserve to ultimately bring down long term costs in
Speaker 3: whatever type of financial engineering it requires.
Speaker 4: Normally I would say yes, but I'm kind of stuck
Speaker 4: more in the belly of the curve five to seven years.
Speaker 4: I just think there's going to be some outward pressure
Speaker 4: on the tens and beyond as people are nervous did
Speaker 4: we cut too much? Are we being too aggressive? Are
Speaker 4: we paying attention to inflation? So I think that's going
Speaker 4: to diminish a bit of the rally there. So I
Speaker 4: kind of like the belly of the curve. I think
Speaker 4: you're going to see two ten spreads actually go potentially
Speaker 4: to one hundred. So I could see us down at
Speaker 4: three percent on FED funds, and I could still see
Speaker 4: a ten year close to four percent.
Speaker 6: Are you getting those vibes from the Fed that they
Speaker 6: are going to be forceful in their cuts. We heard
Speaker 6: from Chris Waller yesterday saying yes, December, and then it's
Speaker 6: meeting by meeting, I'll.
Speaker 4: Be slightly embarrassing, and honest, I'm not really paying that
Speaker 4: much attention. I think we are going to get a
Speaker 4: new administration. The Fed's going to look very different next year.
Speaker 4: We're going to get to three percent before the middle
Speaker 4: of the summer. I don't really care whether it's a
Speaker 4: cut in December or not. That's kind of my base case,
Speaker 4: right this is the direction we're headed. It's going to
Speaker 4: come almost hill or high water. So that's kind of
Speaker 4: how I'm thinking about it. I'm spending less attention to
Speaker 4: who's talking today and tomorrow. Look who's going to be
Speaker 4: talking in the future. We know we're getting these cuts
Speaker 4: next year.
Speaker 3: Peter's share of academy securities is still with us, Mister Prosek,
Speaker 3: Let's put that hat on because ultimately this really does
Speaker 3: go down to what is your takeaway. Does this have
Speaker 3: more consequences potentially for Ukraine, Russia or potentially for Taiwan.
Speaker 4: I think probably more for Taiwan. So when we're looking
Speaker 4: at this, and again I work with thirty retired general's admirals,
Speaker 4: a couple of CIA people, so we spend a lot
Speaker 4: of time on where.
Speaker 5: This is all playing out.
Speaker 4: And I think as we're having conversation with clients, we're
Speaker 4: reminding one g said he wants his military to be
Speaker 4: ready by twenty twenty seven.
Speaker 5: It's not a sign that.
Speaker 4: He's going to do anything in twenty twenty seven. But
Speaker 4: we've always thought what's going to happen is there's going
Speaker 4: to be a multiple application of the levers of power.
Speaker 4: So the levers of power are diplomacy, information, military, and economics.
Speaker 4: So the DIME framework, I think they are going to
Speaker 4: put so much pressure on Taiwan that Taiwan may eventually
Speaker 4: just say enough's enough. And we are seeing the US
Speaker 4: pivot a little bit away from the kind of this
Speaker 4: global policeman of the world to really focused on domestic
Speaker 4: right north South, the Monroe doctrine seems to be taking
Speaker 4: place again. Right we move the forward into the aircraft
Speaker 4: carry into the Caribbean. So there's this big domestic focus.
Speaker 4: So I think there is some risks that Taiwan feels
Speaker 4: a little bit maybe left out, a little bit nervous.
Speaker 4: And when we look at trade negotiations right now, the
Speaker 4: two things that I think China has some power over
Speaker 4: us are still the processed and refined rarest and critical minerals.
Speaker 4: So on pro sac, I think we are trying to
Speaker 4: do a lot of that. I am convinced that this
Speaker 4: administration from some talks as well. One we want to
Speaker 4: produce the rarest and critical minerals, but really we want
Speaker 4: to make sure we can process and refine them to
Speaker 4: break that lock that China has us on us. We
Speaker 4: control the chips, we control the best quality chips. Again,
Speaker 4: maybe now we throw the TPUs into that. Those are
Speaker 4: things China wants. At the same time, China controls a
Speaker 4: little bit the ability for Taiwan to ship things. So
Speaker 4: far China has not done anything, but they do have
Speaker 4: this very very large maritime militia. They've used it in
Speaker 4: the past and little incidents, but they could put this
Speaker 4: to work.
Speaker 5: It's largely shipping vessels.
Speaker 4: They have larger vessels within that and they would just
Speaker 4: disperse themselves in such a way that it would slow
Speaker 4: shipping down.
Speaker 5: They would throw.
Speaker 4: Logs off back, they would throw knits nets trying to
Speaker 4: foul propellers, so they could do a lot if they
Speaker 4: really wanted to push on us against Taiwan. So I
Speaker 4: don't know where this is all headed, but it feels
Speaker 4: a little bit Parson Parcel where we're focusing a little
Speaker 4: bit more north south Monroe doctrine, and maybe China has
Speaker 4: a little bit more control in that region.
Speaker 6: Where does that leave someone like Japan, who has been
Speaker 6: leading on the US alliance in their current height intentions
Speaker 6: with China after the Prime Minister made those off the
Speaker 6: cuff marks that they would support or take action if
Speaker 6: China had military action against Taiwan.
Speaker 5: I think it leaves everyone a little bit questioning what
Speaker 5: is our mission? Right?
Speaker 4: The Biden administration is very clear that we would support Taiwan.
Speaker 4: Trump has not been clear so far, And our official
Speaker 4: doctrine before Biden has always been ambiguity, right, Strategic ambiguity
Speaker 4: has been a part of this. The one thing to me,
Speaker 4: it comes back and we've been talking to clients about
Speaker 4: this for four years and people used to kind of
Speaker 4: roll their eyes at us, and now I think they're listening.
Speaker 4: Is shipping you have to diversify your supply chains along
Speaker 4: shipping routes. You cannot be dependent on one shipping lane.
Speaker 4: So Thailand and Vietnam, you're not diversified. They're going through
Speaker 4: the same place, maybe even South Korea. So I think
Speaker 4: this is kind of a huge wake up call that
Speaker 4: everyone has to look at shipping as a bigger risk
Speaker 4: than we ever have in the past and say, hey,
Speaker 4: what happens if and maybe it never happens, Maybe we
Speaker 4: go on living peacefully and we have these great economic
Speaker 4: deals that allow it. I think we have to prepare
Speaker 4: for more and more deglobalization and more and more risk.
Speaker 6: That's so interesting you say that, because I've had conversations
Speaker 6: with private equity executives who have companies, lots of them
Speaker 6: that need to deal with supply chain issues, and they said,
Speaker 6: we've done such a good job since Trump came in
Speaker 6: as present, because we've de risked from China and now
Speaker 6: we're in South Asia.
Speaker 1: To your point, we're in Vietnam, We're.
Speaker 6: In these places that still might feel blowback should there
Speaker 6: be a larger scale conflict.
Speaker 1: Are there other options?
Speaker 6: Is the supply chain resilient enough to completely move away
Speaker 6: from that region even if it's not China?
Speaker 4: No, But I think you can diversify, you can have
Speaker 4: some there, you can have some other reasons because you
Speaker 4: are going to want to try and sell into that region.
Speaker 5: Right.
Speaker 4: India is a huge growth story. There's all sorts of opportunities,
Speaker 4: so you want to be there. But I think you
Speaker 4: want to look at South and Central America. What's going
Speaker 4: on there right? Whatever happens, you know, how do we
Speaker 4: do better with Brazil? So far Brazil has been tough.
Speaker 4: We are working closely, I think with Argentina. So I
Speaker 4: think there's going to be a lot of opportunities in
Speaker 4: that North South and again, you know, keep coming back
Speaker 4: and lots of things I've learned not being military, but
Speaker 4: you know they talk about at academy security is the
Speaker 4: tyranny of distance. So in war, it is really hard
Speaker 4: to fight a war if you're far away. If you
Speaker 4: look at where Guam is relative to Taipei or Taiwan,
Speaker 4: it is a very far distance. It's going to be
Speaker 4: hard for us even when we try and do something
Speaker 4: to support that relative to what China. They have the
Speaker 4: same problem when you look at Central and South America.
Speaker 4: And let's not forget the first place Mark rule Rubio
Speaker 4: went was the Panama Canal. That has never really happened
Speaker 4: in our history. Right the you know Secretary of Defense
Speaker 4: to or sorry secretary almost always goes to the UK.
Speaker 4: He went to Panama Canal. So there is something shifting
Speaker 4: in this. So I have pay close attention to that.
Speaker 4: And if you want to be where the US government's
Speaker 4: going to protect you and do the most, I think
Speaker 4: it's pretty clear to me you want to be edging
Speaker 4: or favoring North and Central and South America over Asia.
Speaker 3: Five years ago, when the pandemic was raging, everyone was
Speaker 3: talking about the deglobalization and this idea that you had
Speaker 3: to build in sort of inefficiency in your supply chain
Speaker 3: to create redundancies.
Speaker 1: It was going to be inflationary.
Speaker 3: Now we're not talking about inflation, we're talking about disinflation
Speaker 3: from artificial intelligence. Even as we see an acceleration of
Speaker 3: this trend of being more regional, is there still an
Speaker 3: inflationary overlay to this that's the reverse of what globalization provided.
Speaker 4: I think there is as it comes online, there is
Speaker 4: going to be some pressure on commodity prices if we
Speaker 4: really start building these factories, if we build out the
Speaker 4: energy production that we need, or electricity production, we are
Speaker 4: going to see levels of inflation that have been higher.
Speaker 4: I think it's persistent, say that two and a half
Speaker 4: to three and nine percent. It's not going to get
Speaker 4: out of control. But over time, we've also built a
Speaker 4: much more secure system. I think costs will go down
Speaker 4: over time. Right if you're not shipping things long ways?
Speaker 4: Can I just keep coming back to I really believe
Speaker 4: this kind of concept of production for security is going
Speaker 4: to replace kind of EESG. When we're thinking about sustainability.
Speaker 4: It's going to be much more like what do we
Speaker 4: need at the base? And this is going to sound wonky,
Speaker 4: but you know, I look at Maso's hierarchy of needs.
Speaker 4: I always think that's probably the most useful course I
Speaker 4: took with psych.
Speaker 5: One oh one.
Speaker 4: But it talks about you basically need shelter, you need food,
Speaker 4: and all those things before you can move up to
Speaker 4: self actualization. And we're kind of at the self actualization.
Speaker 4: What we would like, well, I'd love to do this,
Speaker 4: I'd like to do these things, and then we realized
Speaker 4: we had to our base.
Speaker 5: It erodent. We cannot produce the things that we need.
Speaker 4: How can you be safe for sustainable if you're not
Speaker 4: making some level of your basic necessities. So I think
Speaker 4: that's where we are headed. I think the government's the
Speaker 4: first to see it. I think capital is already starting
Speaker 4: to flow into it. So capital is going to be second.
Speaker 4: Corporation is going to adopt it, and I think Europe's
Speaker 4: going to start falling. I think Europe's going to fight
Speaker 4: out a bit more tooth and nail, but ultimately they're
Speaker 4: going to get dragged into this where you have to
Speaker 4: produce your basic necessities or some portion of it yourself,
Speaker 4: and work with close allies because you cannot just rely
Speaker 4: on China to be your friend.
Speaker 1: Stay with us.
Speaker 2: Multile inpex Devinance coming up off.
Speaker 3: To this, I'd always say me of Columbia thread noodle
Speaker 3: casting doubt. I'm a so called productivity boom. Writing AI
Speaker 3: will lead to an acceleration and automation, which has been
Speaker 3: a central feature of economic growth. AI will have no
Speaker 3: impact an aggregate economic productivity. It joins us now at
Speaker 3: that bold statement, ed, why do you think that that's
Speaker 3: the case?
Speaker 1: Given the fact that so many people are saying.
Speaker 3: That is when this will start to pay off, that
Speaker 3: is when this will be disinflationary and not necessarily just
Speaker 3: the investment in nuts and bolts in the physical world.
Speaker 5: Yeah.
Speaker 7: Absolutely, Look, we've seen these waves before. The point I
Speaker 7: wanted to make is it's really difficult to translate technological innovation,
Speaker 7: which we've seen pretty much continuously over the course of
Speaker 7: the past forty years, into aggregate economic productivity. That's extraordinarily difficult.
Speaker 7: It really requires us to reorganize how we make economic widgets.
Speaker 3: So at this point, you're saying that there are implications
Speaker 3: for the fixed income world in terms of the ultimate payoff, right,
Speaker 3: because it comes to not only the corporate debt market
Speaker 3: that's been fueling a funding a lot of this, but.
Speaker 1: Also it goes down to the expected inflation.
Speaker 3: Right, just what kind of growth you can see on
Speaker 3: the heels of AI. So where do you think the
Speaker 3: biggest misunderstanding really is right now?
Speaker 7: Yeah, I mean part of the problem is with channeling
Speaker 7: an extraordinary amount of savings now into the AI thematic,
Speaker 7: it's going to cannibalize to some extent the capital that's
Speaker 7: available to other parts of the economy, including the treasury market.
Speaker 7: When in the early stages of this the AI theme
Speaker 7: has just come to the investment grade market wholesale. It
Speaker 7: will be with us for a number of years, no doubt.
Speaker 6: Well.
Speaker 7: One of the risks is it starts to lift yields
Speaker 7: across the ward and starts to make the cost of
Speaker 7: capital more expensive for other companies. That ultimately could be
Speaker 7: a drag on growth down the line.
Speaker 6: This is a real crowding out because not only in capital,
Speaker 6: but in manufacturing the way that energy is used to
Speaker 6: So wouldn't that be a healthy thing. If all of
Speaker 6: a sudden we've decided we've gone so too far and
Speaker 6: AI backs up and the spending on AI backsup, does
Speaker 6: that open up other parts of the economy to make
Speaker 6: use of this capital, make use of the energy, make
Speaker 6: use of America's manufacturing capacity.
Speaker 7: Yeah, eventually that could very well be the story. We've
Speaker 7: seen this happen in other parts of the world. China
Speaker 7: as a fantastic example of this.
Speaker 1: It's gone too far.
Speaker 7: We're now seeing deflation, outright deflation because of that capacity
Speaker 7: in China. It's very early in the story, But one
Speaker 7: of the risks is we've invested an extraordinary amount of capital,
Speaker 7: some starting with a te at this point in the
Speaker 7: AI thematic, and some of that capital either depreciates rapidly
Speaker 7: or is stranded and doesn't contribute to economic growth.
Speaker 6: What happens to private asset players who've all started to
Speaker 6: pour money in this. A lot of the conversation there
Speaker 6: is we're not taking AI risk, We're taking meta risk.
Speaker 6: We're taking oracle credit risk. If what you're talking about
Speaker 6: that corporate bond markets also start to feel some of
Speaker 6: the pain. What does that due to this entire ecosystem
Speaker 6: of funding.
Speaker 7: Yeah, it's quite vulnerable.
Speaker 1: Let me say this.
Speaker 7: The good news is we're starting with corporate balance sheets
Speaker 7: that are extraordinarily strong.
Speaker 5: These are high quality, high grade issuers.
Speaker 7: The corporate bond market, particularly the investment grade market, was
Speaker 7: practically invented for this. It's there to fund these themes.
Speaker 7: So it's going to be a while until we get
Speaker 7: to a point where it starts to degrade and we
Speaker 7: see whether it has an impact on earnings. But the
Speaker 7: fact that the story is so deeply interconnected is definitely vulnerability.
Speaker 7: That's not a new theme, but it's going to be
Speaker 7: with us for some time.
Speaker 3: So how much of a liability do you think this
Speaker 3: is for the treasure market.
Speaker 1: A little bit?
Speaker 7: And again the good news is we're sort of focused
Speaker 7: on the narcissism of small differences. What is the fad
Speaker 7: going to do in a couple of weeks. The AI
Speaker 7: theme doesn't affect that in any meaningful way. One of
Speaker 7: the core questions for the Fed in the next couple
Speaker 7: of years is should we assume, the way Greenspan did
Speaker 7: in the mid nineties, that productivity is rising. That's a
Speaker 7: license to keep monetary policy tighter than it would have
Speaker 7: been otherwise. If they make a mistake, and look, Greenspan,
Speaker 7: god lucky and he got it right. But if we
Speaker 7: make a mistake that leads to lower growth, that leads
Speaker 7: to tighter policy, that leads to lower inflation in the
Speaker 7: coming years, And that's going to be a really, really
Speaker 7: interesting debate in both twenty twenty six and beyond.
Speaker 3: If this does lead to greater weakness and potentially overly
Speaker 3: tight financial conditions at least for the rest of America
Speaker 3: or the rest of corporate America that hasn't experienced the
Speaker 3: AI boom, Are you expecting this to be essentially disinflationary
Speaker 3: for the wrong reasons, right, the idea that they could
Speaker 3: actually slow growth and end up in a situation where
Speaker 3: the corporate debt issuance really suffers because the growth just
Speaker 3: isn't there to really fuel the returns and the profits
Speaker 3: in an ongoing way.
Speaker 7: Yeah, let me start with the second other questions. So,
Speaker 7: if productivity does not materialize, in other words, productivity is
Speaker 7: very concentrated in parts of the economy that potentially deliver
Speaker 7: earnings to these companies, it's fine. If productivity becomes more
Speaker 7: diffuse and the economy as a whole starts to lift,
Speaker 7: that's a license for again higher interest rates across the board.
Speaker 7: That's a license for a healthier growth story. That's something
Speaker 7: we saw in the mid nineties through the mid two thousands,
Speaker 7: great outcomes in terms of inflation, fiscal interest rates, stability,
Speaker 7: and so on. The challenge for the FED is, again,
Speaker 7: if we make the wrong assumption in the short term
Speaker 7: and we put that higher productivity story into our strategy
Speaker 7: at the moment, you could make a much stronger case
Speaker 7: for tighter policy, and that would be a mistake of
Speaker 7: the stage.
Speaker 3: So, if that's the case, what's yours conviction right now?
Speaker 3: Heading into your end into twenty twenty six.
Speaker 7: With respect to interest rates, Look, I think we have
Speaker 7: a starting level if really yields inflation adjusted yields across
Speaker 7: the board that are still quite healthy. At the same time,
Speaker 7: when you look at the corporate debt market where we're
Speaker 7: financing and underwriting this AI story, corporate spreads are extraordinarily tight.
Speaker 7: There's a lot more room for those spreads to widen,
Speaker 7: and there's a lot more room for real interest rate
Speaker 7: inflation adjusted yields to come down in the course of
Speaker 7: the next twelve to eighteen months.
Speaker 6: What would it take for spreads to widen though, because
Speaker 6: this is a market that's flush with cash looking to
Speaker 6: put it to work, and it feels like every single auction,
Speaker 6: every single debt issue, once that there is so much
Speaker 6: demand that spreads, even when they widen, are widening to like,
Speaker 6: I don't know, seventy bases like nothing crazy still even
Speaker 6: when you do see widening.
Speaker 7: Absolutely And the appropriate answer is I have no idea.
Speaker 7: All I know is at the moment, investors are not
Speaker 7: being compensated for a lot of the risks that they
Speaker 7: are taking, particularly in weaker balance sheets. How quickly those
Speaker 7: balance sheets degrade ultimately is going to be the key
Speaker 7: part of that narrative for next year. And then, most importantly,
Speaker 7: we need a shock to our beliefs. That's what always happens.
Speaker 7: There are deep stories that are embedded in the way
Speaker 7: we price these spreads. There are deep stories around the
Speaker 7: AI thematic, for example, that are being embedded in how
Speaker 7: we price assets in the economy. Shocks to stories like
Speaker 7: that ultimately are what we orient at credits right.
Speaker 2: Stay with US multile Impex Savana's coming up off to this.
Speaker 3: Former senior White House Trade advisor Kelly and Shaw writing,
Speaker 3: the daytant between the US and China is continuing to hold,
Speaker 3: and I expected to through new years.
Speaker 1: I am increasingly.
Speaker 3: Skeptical about the durability of the US EU trade deal.
Speaker 3: Kelly An joins us. Now, thank you so much for
Speaker 3: being with us. Kelly An, Let's just first talk about
Speaker 3: what you make of the idea of negotiating a deal
Speaker 3: for the EU and the US that supposedly was already
Speaker 3: set in stone.
Speaker 8: Yeah, good morning, Thanks so much for having me on.
Speaker 8: This is why I'm so skeptical about this deal and
Speaker 8: frankly watching it very very closely. The United States and
Speaker 8: Europe announced back in July that they had agreed on
Speaker 8: a package of mutual concessions, including tariff cuts going both ways.
Speaker 8: The US implemented that going all the.
Speaker 1: Way back to August.
Speaker 8: First, the EU has only introduced its legislation with no
Speaker 8: real hope of even passing it in the short term.
Speaker 8: So the EU has yet to cut a single tariff line.
Speaker 1: Now the US is in.
Speaker 8: Brussels, you have Ambassador greer As while as Secretary Leutnik,
Speaker 8: who are there talking to their counterparts. What seems to
Speaker 8: be on the table is a potential deal on steel
Speaker 8: in exchange for concessions on the Digital Single Market, on
Speaker 8: the DMA, on some of these digital regulations. But the
Speaker 8: EU has said that they're not budging on that. So
Speaker 8: I don't expect the US to budge on steel and
Speaker 8: aluminum either, which means.
Speaker 1: We have an impasse.
Speaker 8: And I think as soon as the President starts to
Speaker 8: connect with the fact that the EU hasn't cut a
Speaker 8: single tariff line, that's going to spell some serious trouble
Speaker 8: for this relationship.
Speaker 3: That relationship has been afraid for quite a while. There
Speaker 3: are ongoing questions also about the US and China, and
Speaker 3: I think that right now more people are focused on that,
Speaker 3: just simply because of how essential trade is between these
Speaker 3: two econees, particularly when it comes to rare earth minerals
Speaker 3: and a couple other products. I'm just wondering what you
Speaker 3: make of the phone call between President Trump and a
Speaker 3: President g and this idea of a visit coming in April.
Speaker 8: Yeah, this was a really interesting conversation. It wasn't interesting
Speaker 8: so far as the two leaders spoke. They speak all
Speaker 8: the time. It's not unusual to follow up with a
Speaker 8: successful meeting and a deal that is being implemented, to
Speaker 8: touch base, to talk about the trade issues, to talk
Speaker 8: about China soybean purchases, WE purchases, and other commitments that
Speaker 8: are coming due. But what I found so interesting were
Speaker 8: the competing readouts, and one in which China really rushed
Speaker 8: to get out. The President didn't even give his own
Speaker 8: readout for several hours later. China's was almost exclusively focused
Speaker 8: on this issue of time Taiwan, on the importance of Taiwan,
Speaker 8: saying the US had acknowledged the importance talking about its
Speaker 8: criticality for the post world international order. While the US
Speaker 8: readout didn't mention Taiwan at all. It was focused on
Speaker 8: the trade deal focused on Ukraine, and so it's this
Speaker 8: he said, she said. What actually happened in this call mystery. Now,
Speaker 8: of course there are no transcripts available to the public
Speaker 8: about what happens in these behind the scene phone calls.
Speaker 8: But what is interesting is the narrative that both sides
Speaker 8: are laying out. And I think what is clear is
Speaker 8: what's on China's mind right now. I think the President's
Speaker 8: focused on this trade deal. But when the President does
Speaker 8: go visit President she in April, I have no doubt
Speaker 8: that Taiwan is likely to be on the agenda, at
Speaker 8: least from China's perspective.
Speaker 6: The fact that Taiwan wasn't mentioned by President Trump Kelly in,
Speaker 6: does that say anything about the White House's willingness to
Speaker 6: step in should there be military action from China to Taiwan.
Speaker 8: I certainly wouldn't read that into an omission. I think
Speaker 8: from the US perspective, this call was really about checking
Speaker 8: in on the trade deal discussions around what's happening in Ukraine.
Speaker 8: The administration has said several times over the past few
Speaker 8: months that there's no end to the Ukraine Russia war
Speaker 8: without China's active participation. So I do think that those
Speaker 8: are the things that are likely on the administration's mind
Speaker 8: right now. I think what is clear, based on what
Speaker 8: is happening between China and Japan right now, the concern
Speaker 8: over Taiwan is really this messaging campaign that we're seeing
Speaker 8: from China. This seemed to me more about a race
Speaker 8: to win the narrative versus what actually happened in the call,
Speaker 8: and I think that's why you're seeing the US just
Speaker 8: not address it.
Speaker 6: I was going to say, in terms of competing narratives.
Speaker 6: You also had the Japanese Prime Minister say that she
Speaker 6: received a call right after that China US call from
Speaker 6: the President, but we didn't really hear about it from
Speaker 6: the side of the US Kelly, and what do you
Speaker 6: make of that?
Speaker 8: Yeah, clearly there is a tremendous amount of tension right
Speaker 8: now between Japan and China. China's threatening to cut flights,
Speaker 8: There is a huge diplomatic row right now over the
Speaker 8: Prime Minister's comments about the existential threat to Japan of
Speaker 8: any sort of military incursion by China into Taiwan. I
Speaker 8: think with the United States President showing is solidarity with
Speaker 8: the prime minister, I think this is about saying that
Speaker 8: we are with you, We stand with our ally. I
Speaker 8: don't think the President needed to issue any sort of
Speaker 8: statement to make that point. The fact that that phone
Speaker 8: call happened was the message. And so I do think
Speaker 8: that the United States and Japan are united. But again,
Speaker 8: this issue of Taiwan is increasingly on President She's mind,
Speaker 8: and I think this will be a real point of tension,
Speaker 8: particularly going into those April meetings, and I expect President
Speaker 8: She to try to squeeze the President for something on Taiwan.
Speaker 8: And that's when we'll see what the US's real position is.
Speaker 3: Here, Kelly, and how much is it a tit for
Speaker 3: tat this idea that if the US does shift away
Speaker 3: from Taiwan hardcore a rhetoric around Taiwan, that China will
Speaker 3: help the Russia Ukraine war and potentially bringing it in
Speaker 3: to it sooner.
Speaker 8: Look, I think that China is likely to use all
Speaker 8: of its leverage points in terms of trying to push
Speaker 8: issues that are so important to it, and Taiwan is
Speaker 8: issue number one in terms of the things that President
Speaker 8: She wants to do.
Speaker 1: But look, I do think that the US position is
Speaker 1: strategic ambiguity.
Speaker 8: I don't think that the fact that the President hasn't
Speaker 8: departed from that, or at least said anything from that
Speaker 8: indicates a different pivot point in US policy. But again,
Speaker 8: the robber is really going to meet the road come April,
Speaker 8: when I fully expect President She to push the President
Speaker 8: on this issue. And then again we'll see what the
Speaker 8: result is. But the US position, as far as I'm aware,
Speaker 8: has not changed. I think strategic ambiguity continues to be
Speaker 8: the US view.
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