WEBVTT - Joe Lavorgna Talks US Economy, Bond Market

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>For Global Wall Street.

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<v Speaker 3>Now, this is a tree his public service to America

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<v Speaker 3>at the White House for President Trump, Joseph Flifornia.

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<v Speaker 4>Jones joins us.

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<v Speaker 3>But what you don't know, and probably President Trump didn't

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<v Speaker 3>know he was at Deutsche Bank years ago and the

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<v Speaker 3>combine that melded economics into fixed income. We're thrilled he

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<v Speaker 3>could be with us today with parchment from Vassar and

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<v Speaker 3>some work at New York University as well. Okay, I

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<v Speaker 3>got to get this out of the way right now.

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<v Speaker 3>I saw Gold and Sachs treatment and they look at

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<v Speaker 3>four point six to zero ten years a pivot point. Okay,

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<v Speaker 3>we're there, and we're there quickly. Do you have in

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<v Speaker 3>your head a ten year yield where the system unravels?

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<v Speaker 1>No, but I do think rates are going higher Tom,

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<v Speaker 1>for a whole host of factors. Higher inflation risk, premium

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<v Speaker 1>they need at some point for treasure to raise more supply,

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<v Speaker 1>and the fact that the market has really only priced

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<v Speaker 1>it's about one tightening, and I could see potentially a

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<v Speaker 1>series of tightening, so yields go higher.

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<v Speaker 3>Okay, Paul's got eight questions. I'm going to get this

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<v Speaker 3>one in quickly here.

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<v Speaker 4>If yields go higher, price down, it can be ambiguous

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<v Speaker 4>good or bad or zag and posin say you're going

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<v Speaker 4>to see a higher wage, a higher real wage.

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<v Speaker 3>Do you buy that optimism or is it going to

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<v Speaker 3>be stress?

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<v Speaker 1>It's possible, I mean the AI the productivity story could

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<v Speaker 1>translate into much higher wages. The corporate share of income

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<v Speaker 1>is high, so hopefully at some point that does flow

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<v Speaker 1>to workers. I was very bullish on the economy, and

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<v Speaker 1>we was talking in my prior role of a disinflationary boom,

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<v Speaker 1>which seems very reasonable until the Middle East War started,

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<v Speaker 1>because I think that completely changed the dynamics. So yes,

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<v Speaker 1>I'm bullish on I was bullish on growth in terms

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<v Speaker 1>of being lower in non inflationary and rates coming down

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<v Speaker 1>in the FED easing. All that's kind of thrown by

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<v Speaker 1>the wayside. In terms of what level of yields crack

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<v Speaker 1>the system, we don't really know. It's really a liquidity

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<v Speaker 1>and confidence story. Could be four seventy five on tens,

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<v Speaker 1>it could be five percent on tens, and there's so

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<v Speaker 1>many other dynamics up playing. As you're well aware, the

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<v Speaker 1>narrowness of the market, the equity market has been a

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<v Speaker 1>handful of companies, and at some point, you know that

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<v Speaker 1>exuberance may itself be stretched. So if if it's tightening,

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<v Speaker 1>financial conditions suddenly tighten risk appetite changes, then it could

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<v Speaker 1>unravel quickly.

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<v Speaker 5>Joe and your notes, you say inflation is a problem.

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<v Speaker 5>I think most of our viewers and listeners would agree

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<v Speaker 5>with you.

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<v Speaker 2>How long is it going to be a problem?

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<v Speaker 1>Do you think that's a great question? I mean, when's

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<v Speaker 1>the war going to end? And how quickly can these

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<v Speaker 1>bottlenecks stop. I mean the way to think of this

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<v Speaker 1>is it's too many COVID, and I think that's what

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<v Speaker 1>most investors don't understand, which makes me think yields go

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<v Speaker 1>higher when I say many COVID, there's major supply chain disruptions.

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<v Speaker 1>It's not just energy, it's NITROGENU relates to fertilizer, different

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<v Speaker 1>material to go into. Plastics are the sensitive commodities. And

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<v Speaker 1>what we learned during COVID is you just can't turn

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<v Speaker 1>wells off. You just can't shut this on a much

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<v Speaker 1>much smaller scale, but you can't just turn the system

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<v Speaker 1>off and like a light switch, automatically goes back and

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<v Speaker 1>the market is I don't think the bond market isn't

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<v Speaker 1>fully appreciative of that.

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<v Speaker 3>Joe Varna, SMBC and Eco Securities totally could be with

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<v Speaker 3>us at youday and we continue here. I guess with

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<v Speaker 3>the arch idea and you live this at the White House.

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<v Speaker 3>This is a president who likes joint stimuli all the time.

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<v Speaker 3>We've got a nominal GDP pop in five percent plus

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<v Speaker 3>persistently there, we've got you know, inflation well above the

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<v Speaker 3>FED target and all that are we just living in

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<v Speaker 3>a new stimulus driven miliu and it goes until it goes.

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<v Speaker 1>We might tom But if that's the case, then you

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<v Speaker 1>know inflation expectations need to be reset and you need

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<v Speaker 1>a higher term structure rates to reflect the environment.

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<v Speaker 2>You just describe. So it's either one or the other.

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<v Speaker 1>Either the economy is going to produce non inflationary growth

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<v Speaker 1>and eventually the FED can get rates to neutral or

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<v Speaker 1>right that works.

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<v Speaker 2>Were in a regime where.

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<v Speaker 1>You've got rising debt to GDP, higher inflation relative to

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<v Speaker 1>where the fedce carriot is and that would be in

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<v Speaker 1>the Fed's not cutting and that's a higher rate region.

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<v Speaker 3>Do you perceive that model is one hundred basis point shift? Sorry,

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<v Speaker 3>folks jargon a one percentage point shift up in the

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<v Speaker 3>curve or could it be more sixties like and be

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<v Speaker 3>a real shift into Provoker.

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<v Speaker 1>Well, in the sixties is very as you know, Tom's

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<v Speaker 1>very gradual, yet cyclical. The floor on inflation saw higher

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<v Speaker 1>cyclical floors as you move through the sixties into the seventies.

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<v Speaker 1>Best guess it's the latter that it would be like

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<v Speaker 1>maybe let's say one hundred basis points repricing. It's a

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<v Speaker 1>nice round number, but you know, could it be something longer?

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<v Speaker 2>It's possible.

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<v Speaker 1>I mean, in the last couple of years inflation is

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<v Speaker 1>running about seventy five basis point above the Fed's target.

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<v Speaker 1>We're going to go higher than that in the next

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<v Speaker 1>few months. When could it end?

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<v Speaker 2>Maybe by the fall, We'll see, I.

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<v Speaker 1>Mean, how I guess, question is how disinflationary is AI

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<v Speaker 1>in the short term may actually be contributing to the

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<v Speaker 1>problems we have to the data center build out and

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<v Speaker 1>energy usage. Longer term is probably disinflationary.

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<v Speaker 5>We've got a new FED chairman, presumably he feels a

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<v Speaker 5>little pressure to get rates down, but boy, the data

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<v Speaker 5>does great.

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<v Speaker 3>Question, Paul, We're going to make some news. Here are

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<v Speaker 3>you interviewing for a position at the FED.

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<v Speaker 2>No, I'm not interviewing for the position at the FED.

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<v Speaker 3>No.

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<v Speaker 1>By the way, the UH and I've gotten to know them.

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<v Speaker 1>I think they're a bunch of Fed people. That was

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<v Speaker 1>one cool thing about the job. There's a lot of

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<v Speaker 1>super talented people there. Kevin worsh will do a great job.

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<v Speaker 2>I'm very confident of that.

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<v Speaker 1>However, I don't see how Kevin's going to make a

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<v Speaker 1>plausible case for raycuts.

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<v Speaker 2>Yeah, it just is just not there.

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<v Speaker 1>And if the market continues to price tightening, maybe he

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<v Speaker 1>just pushes back against the committee that's certainly becoming, at

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<v Speaker 1>least on from the President's more hawkish. Maybe he pushes

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<v Speaker 1>back a bit, gets it more center, and then kind

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<v Speaker 1>of hope for the best. Things may be unfold in

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<v Speaker 1>a positive way in the back half of the year.

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<v Speaker 1>But right now, look at like the Price is Paid

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<v Speaker 1>series in the isms. The New York Fed's got this

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<v Speaker 1>global pressure supply index. Not sure exactly how they put

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<v Speaker 1>it together, but the picture certainly shows these supply chain disruptions.

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<v Speaker 2>That's all pro inflation in the system.

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<v Speaker 5>Again, is this a inflation, I don't know. It just

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<v Speaker 5>feels stickier to me than just a bit sticky.

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<v Speaker 1>Well, well, you could see if you look at like

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<v Speaker 1>the San Francisco Fed, they've got the acyclical and cyclical

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<v Speaker 1>price trends. You look at the Atlanta fit sticky price index, Yeah,

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<v Speaker 1>you're seeing it absolutely sticky. And by the way, it's

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<v Speaker 1>been above trend, so you know, we've been well above

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<v Speaker 1>two and a lot of these components, the supercre that

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<v Speaker 1>the former chair Jay Powell likes looking at running about

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<v Speaker 1>three and a half percent, definitely sticky.

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<v Speaker 5>So, I mean there's nothing the FED can do, right,

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<v Speaker 5>I mean's.

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<v Speaker 1>Nothing the Fed can do other than at some point

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<v Speaker 1>potentially raise rates, try to slow demand. And the problem

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<v Speaker 1>with raising rates to slow demand to bring inflation back

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<v Speaker 1>to target, which right now it's probably going to be

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<v Speaker 1>at least a point, if not a point and a

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<v Speaker 1>half above target is generally a recession.

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<v Speaker 2>The question is does the FED want to do that?

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<v Speaker 1>If it doesn't want to do that, they implicitly change

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<v Speaker 1>their target. You're going to be in a world then

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<v Speaker 1>where rates are higher, You're gonna have a steeper urb

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<v Speaker 1>and higher yields.

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<v Speaker 3>Real treat for you across this nation and worldwide. Joseph

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<v Speaker 3>Livornia with us today with this SMBC Nico here with

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<v Speaker 3>his service to the nation in the first Trump administration,

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<v Speaker 3>lots of good work, including serious fixed income chaps with

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<v Speaker 3>Deutsche Bank a number of years ago, also with the

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<v Speaker 3>American First Policy Institute. What happens to the world you

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<v Speaker 3>parachuted into after the president?

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<v Speaker 2>When you say that, you mean after the midterms, not

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<v Speaker 2>thank you.

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<v Speaker 3>I should have made that clear, No, after his term?

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<v Speaker 3>How does Trumpism carry forward? After what you witnessed in

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<v Speaker 3>the hallways?

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<v Speaker 1>The shift, There's been a real shift in the base, Tom,

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<v Speaker 1>I mean, look at the polling numbers, and not a

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<v Speaker 1>lot of very good pollsters. Richard Barris of the Big

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<v Speaker 1>Day to Poll, the People's Pundit actually is an excellent polster.

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<v Speaker 1>There's some others out there, and it does show a

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<v Speaker 1>huge compositional shift in the base where a lot of

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<v Speaker 1>independence and others are not identified.

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<v Speaker 3>Do you have Tom show that list? Well?

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<v Speaker 1>Yeah, well, and she made a very good point, and

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<v Speaker 1>he's sort of these posters a sort of an inside club.

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<v Speaker 1>But yes, New York Times SIENA poll accurately now reflects

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<v Speaker 1>what's happening at the moment, because you've got this affordability

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<v Speaker 1>issue that that is a problem. I'm not sure exactly

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<v Speaker 1>what happens. I mean, I don't want to say too much,

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<v Speaker 1>but I understand that.

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<v Speaker 3>But I've never said this, Paul. Are we out there somewhere?

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<v Speaker 3>I sound like a Linda Renstad song. Out there somewhere?

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<v Speaker 3>Is the dreaded a word involved austerity?

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<v Speaker 1>No? I don't think we're going to get austerity. No,

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<v Speaker 1>because as you know, neither party wants to actually do anything,

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<v Speaker 1>and you know they didn't want to do it when

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<v Speaker 1>we had Simpson Bowls over a dozen years ago, and

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<v Speaker 1>right now, unless the bond market or the financial markets

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<v Speaker 1>put the pressure point on there, there isn't going to

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<v Speaker 1>be a resolution, which comes back to like you ask

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<v Speaker 1>about Iran, which to me is a very important, obviously development.

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<v Speaker 1>I'm stating the obvious. But where's the pressure point for

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<v Speaker 1>the president? Is it six dollars gassling prices? Seven dollars

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<v Speaker 1>gasoline prices? I mean, certainly, with the stock market at

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<v Speaker 1>all time record highs and rates still relatively low, there

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<v Speaker 1>isn't really a pressure point for the president necessarily to

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<v Speaker 1>make a strong decision. So maybe just the option is

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<v Speaker 1>just waiting and seeing maybe there's some sort of change

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<v Speaker 1>in leadership somehow, by luck or whatever it might be.

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<v Speaker 1>But you just sit and wait and these things just

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<v Speaker 1>drag on. But again, in that world, as inflation's moving up,

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<v Speaker 1>your real funds rate is shrinking, and that by that metric,

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<v Speaker 1>monetary policy is easing equity markets, high credit spreads are tight.

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<v Speaker 1>I mean, there's a lot of financial stimulus that's offsetting

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<v Speaker 1>this mildly higher interest rate story we're seeing.

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<v Speaker 5>And on the interest rate story, I guess when we

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<v Speaker 5>think back to the tariffs last year, a lot of

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<v Speaker 5>folks on Wall Street were saying, boy, four point fifty

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<v Speaker 5>on the tenure put some pressure on the White House,

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<v Speaker 5>and they kind of started to back away a little

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<v Speaker 5>bit from some of their initial tariff discussions.

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<v Speaker 2>Boy, we've blown through that. But SMP was down fifteen percent.

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<v Speaker 1>Yeah, let's not forget s ANDP was down fifteen percent,

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<v Speaker 1>and then President quickly pivoted and the market of rally

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<v Speaker 1>and we basically repeated the same thing this past year.

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<v Speaker 3>But that's the key observation. And you know, I don't

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<v Speaker 3>need the inside it from the White House. It's rude,

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<v Speaker 3>but the fact is he is completely beholden to the

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<v Speaker 3>stock market. Is it just simple that way, thinking somewhere

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<v Speaker 3>Secretary Bessen or under Secretary Lavregna walks in on the

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<v Speaker 3>yellow couch and says, hey, stupid, the Dow's down.

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<v Speaker 1>No, I think the secretary does a great job giving

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<v Speaker 1>the president advice, and the President certainly seeks his counsel,

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<v Speaker 1>and he I think is a great voice of reason

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<v Speaker 1>given his given his track record. But you know, the

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<v Speaker 1>secretary is just one person, and the President listens to

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<v Speaker 1>a bunch of different people. He's got his own instincts

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<v Speaker 1>and behaves in a way that he thinks is.

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<v Speaker 2>The right move.

0:10:45.080 --> 0:10:48.120
<v Speaker 1>But certainly the stock market tom is a dominant driver,

0:10:48.240 --> 0:10:50.720
<v Speaker 1>and if the stock market were to correct any meaningful amount,

0:10:51.280 --> 0:10:54.960
<v Speaker 1>that would impact policy both, probably more foreign policy wise.

0:10:54.960 --> 0:10:56.880
<v Speaker 1>I'm not sure what we can do domestically at this point,

0:10:56.920 --> 0:10:58.600
<v Speaker 1>given the midterms of so close.

0:10:58.520 --> 0:11:01.240
<v Speaker 5>And the consumer. The consumer seems to be hanging in there.

0:11:01.240 --> 0:11:03.640
<v Speaker 5>I mean, we can never underestimate, it seems the US

0:11:03.760 --> 0:11:06.559
<v Speaker 5>consumer here. I know, we've got that case shaped economy

0:11:06.760 --> 0:11:10.680
<v Speaker 5>and the different people are behaving differently, but the consumer

0:11:10.760 --> 0:11:12.040
<v Speaker 5>generally seems to be pretty such.

0:11:12.080 --> 0:11:14.760
<v Speaker 1>Consumer's holding in well. I mean that you get the

0:11:14.800 --> 0:11:17.200
<v Speaker 1>refund numbers aren't. We'll see what happens. They've not been

0:11:17.240 --> 0:11:18.920
<v Speaker 1>as big as I would have guessed, or as big

0:11:18.920 --> 0:11:21.520
<v Speaker 1>as I think what Treasury might have been assuming. But

0:11:21.559 --> 0:11:24.120
<v Speaker 1>the refunds are helping a little bit. Of course, they're

0:11:24.160 --> 0:11:26.920
<v Speaker 1>going to pay for higher gas prices, higher energy costs.

0:11:27.040 --> 0:11:27.840
<v Speaker 2>That's been an offset.

0:11:28.000 --> 0:11:30.320
<v Speaker 1>And aggregate, Yes, the consumer's done well, and it reflects

0:11:30.360 --> 0:11:31.920
<v Speaker 1>the fact that if you have a job, you're doing

0:11:31.920 --> 0:11:35.360
<v Speaker 1>reasonably well. Certainly, we're an environment where there's not been

0:11:35.400 --> 0:11:39.040
<v Speaker 1>a tremendous amount of job growth, but it's been positive enough,

0:11:39.040 --> 0:11:41.400
<v Speaker 1>and income growth nominally has been strong enough to keep

0:11:41.440 --> 0:11:42.120
<v Speaker 1>spending going.

0:11:42.160 --> 0:11:45.199
<v Speaker 2>And as you know, the build out on AI.

0:11:45.040 --> 0:11:48.080
<v Speaker 1>And the spending by the hyperscalers has been massive, and

0:11:48.120 --> 0:11:49.880
<v Speaker 1>that's been a huge driver of growth. If you look

0:11:49.880 --> 0:11:53.120
<v Speaker 1>at the contributions table in GDP, about a third of

0:11:53.200 --> 0:11:55.679
<v Speaker 1>output in the last year has been AI related.

0:11:55.679 --> 0:11:56.640
<v Speaker 2>And that's the direct effect.

0:11:56.679 --> 0:11:59.720
<v Speaker 1>Of course, there's all these indirect effects through higher equity prices,

0:11:59.800 --> 0:12:01.160
<v Speaker 1>well effects, things of that sort.

0:12:01.320 --> 0:12:03.640
<v Speaker 3>Yeah, I'm looking here. I just went log standard and

0:12:03.679 --> 0:12:06.679
<v Speaker 3>poors five hundred. I'm doing this for President Trump. I'm

0:12:06.720 --> 0:12:09.320
<v Speaker 3>doing the you know, the huge boom coming out of

0:12:09.320 --> 0:12:13.960
<v Speaker 3>COVID for whatever reason, stimulus, whatever, whichever president. I got

0:12:13.960 --> 0:12:17.640
<v Speaker 3>a correction out point eight standard divitions up in a

0:12:17.679 --> 0:12:20.400
<v Speaker 3>way of negative twenty one percent. I got a correction

0:12:21.040 --> 0:12:24.360
<v Speaker 3>of negative twenty seven percent before the Edgyard Denny call

0:12:24.840 --> 0:12:26.760
<v Speaker 3>with Alfra A Kompora.

0:12:26.920 --> 0:12:28.359
<v Speaker 4>I'm only out one point.

0:12:28.080 --> 0:12:33.240
<v Speaker 3>Three standard deviations in this crazy boom economy. I mean,

0:12:33.400 --> 0:12:38.959
<v Speaker 3>we really haven't had a bear market of substance that stay.

0:12:39.040 --> 0:12:42.120
<v Speaker 4>We go down and we come right back. That's our

0:12:42.160 --> 0:12:42.760
<v Speaker 4>new addiction.

0:12:43.080 --> 0:12:46.120
<v Speaker 1>Yes, yes, here's the thing though, Tom, this is the

0:12:46.160 --> 0:12:48.239
<v Speaker 1>hard part is if you look at the earnings revisions

0:12:48.559 --> 0:12:50.440
<v Speaker 1>or the innings beats in the first quarter, it looks

0:12:50.480 --> 0:12:52.960
<v Speaker 1>like a right angle. So I mean again the question

0:12:53.040 --> 0:12:57.119
<v Speaker 1>is how sustainable is it. It's probably not long term sustainable.

0:12:57.160 --> 0:12:59.880
<v Speaker 1>I like what Paul Tudor Jones had said I talked about,

0:12:59.880 --> 0:13:01.600
<v Speaker 1>you know, you sort of have to kind of be

0:13:01.640 --> 0:13:04.079
<v Speaker 1>in it. Even though it looks a bit frothy, they

0:13:04.120 --> 0:13:06.080
<v Speaker 1>still have some room to run. Of course, he's a

0:13:06.080 --> 0:13:09.280
<v Speaker 1>phenomenal investor and been able to time things. But yeah,

0:13:09.320 --> 0:13:11.240
<v Speaker 1>I mean this could go another six months, you could

0:13:11.280 --> 0:13:13.520
<v Speaker 1>go another several years if we just don't know.

0:13:14.559 --> 0:13:17.000
<v Speaker 5>How do you think about the other part for the

0:13:17.040 --> 0:13:19.959
<v Speaker 5>FED is the labor market. Again, it seems like it

0:13:20.000 --> 0:13:22.880
<v Speaker 5>is a no higher, no fire kind of That's fine.

0:13:22.720 --> 0:13:23.319
<v Speaker 2>It seems that way.

0:13:23.520 --> 0:13:25.360
<v Speaker 1>Labor market does seem to be strengthening a little bit

0:13:25.400 --> 0:13:28.880
<v Speaker 1>relative to where we were last year. It is still

0:13:29.080 --> 0:13:30.960
<v Speaker 1>more or less no higher, no fire. I mean, take

0:13:31.240 --> 0:13:32.840
<v Speaker 1>healthcare out. You don't have a whole lot of job

0:13:32.880 --> 0:13:35.520
<v Speaker 1>growth for the FED to cut rates, though, just because

0:13:35.559 --> 0:13:37.960
<v Speaker 1>that was the dominant narrative for quite some time. There

0:13:38.040 --> 0:13:40.920
<v Speaker 1>us to be labor market deterioration, which means unemployment rate

0:13:41.200 --> 0:13:43.960
<v Speaker 1>is kind of gapping higher. It's been a very slow,

0:13:44.080 --> 0:13:47.800
<v Speaker 1>kind of monotonic rise in the unemployment rate. If it

0:13:47.840 --> 0:13:49.400
<v Speaker 1>starts to go up, if it's four to three, and

0:13:49.440 --> 0:13:51.680
<v Speaker 1>if it goes next month to four to five, and

0:13:51.679 --> 0:13:54.360
<v Speaker 1>then four eight and then five to one, they'll actually

0:13:54.440 --> 0:13:57.400
<v Speaker 1>probably be cutting I don't see that, but that's that's

0:13:57.440 --> 0:13:58.040
<v Speaker 1>what it would take.

0:13:58.040 --> 0:13:59.319
<v Speaker 2>It take real deterioration.

0:14:00.080 --> 0:14:01.400
<v Speaker 3>Care. Do you have Knicks tickets?

0:14:02.040 --> 0:14:02.679
<v Speaker 2>No, I don't.

0:14:02.920 --> 0:14:07.440
<v Speaker 1>My kids actually are are Pistons fans, so there you go,

0:14:07.559 --> 0:14:10.280
<v Speaker 1>which I was actually happy they sort of lost so

0:14:10.280 --> 0:14:11.720
<v Speaker 1>I don't have to take them to a Knicks game,

0:14:11.760 --> 0:14:14.680
<v Speaker 1>because because then my wife would want to go, and

0:14:14.720 --> 0:14:16.840
<v Speaker 1>it's you know, it's absorbitive. It's a small fortune for

0:14:16.880 --> 0:14:17.720
<v Speaker 1>a family of four.

0:14:17.960 --> 0:14:21.840
<v Speaker 3>Yes, there you go. He's bar able to do the

0:14:21.880 --> 0:14:24.960
<v Speaker 3>deuce now that we able to Detroit. He's okay with

0:14:25.160 --> 0:14:27.720
<v Speaker 3>doing this now that he knows there's two other Knicks fans,

0:14:27.840 --> 0:14:32.320
<v Speaker 3>Pistons fans in there. Joseph Flavornia, father of Pistons fans,

0:14:32.360 --> 0:14:33.760
<v Speaker 3>Thank you so much, that said me.

0:14:33.880 --> 0:14:33.960
<v Speaker 4>Se