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: Bloomberg Terminal and the Bloomberg Business App. Mike Wilson of
Speaker 2: Morgan Stanley writing this week's reciprocal tariff announcement is likely
Speaker 2: a stepping stone for further negotiations as opposed to a
Speaker 2: clearing event. Mike joins us now for more. Mike, good morning,
Speaker 2: Good morning John. What is that distinction important?
Speaker 3: Well, I think that you know, everybody's looking for like
Speaker 3: a final piece here is this is gonna take time,
Speaker 3: you know, and not unlike a lot of the other
Speaker 3: policies that have come out this year.
Speaker 4: Like this is this is what we kind of signed
Speaker 4: up for, right.
Speaker 3: I don't think what so far what the President has
Speaker 3: done has really been surprising. All of the policy changes
Speaker 3: so far have been growth negative. And that you know,
Speaker 3: we've likened this to a new CEO coming in, right
Speaker 3: they have. They're one a restructure to company. They are
Speaker 3: restructuring the company. They're going to kitchen sink it, and
Speaker 3: then they're going to try to make you know, their
Speaker 3: plan work for next year.
Speaker 4: So this is a this is going to take some time.
Speaker 3: And you know, this level that we're at now is
Speaker 3: critical from a market standpoint, not so much from the
Speaker 3: administration standpoint.
Speaker 4: I think that's also something of knowledge.
Speaker 5: It's also very on brand for Trump to take a
Speaker 5: maximalist approach in the very beginning. But how messy could
Speaker 5: it be if he comes in with this maximalist, aggressive
Speaker 5: approach and then we have retaliation from trading partners.
Speaker 3: Well, look, it's the NAFTA and so like you know,
Speaker 3: it's the best alternative to a negotiated agreement and the
Speaker 3: batna and that is that is classic negotiating tactic. You
Speaker 3: you come in and way over here to the right
Speaker 3: with the hope of kind of settling in the middle.
Speaker 3: So I don't think that's unusual either. The response from
Speaker 3: trade partners is that means they're engaging.
Speaker 4: Okay.
Speaker 3: So that's how you get people to engage in your discussion.
Speaker 3: You come out with a big splash. They have to
Speaker 3: come to the table and negotiations begin.
Speaker 4: We're not even at the table yet, okay. So that's
Speaker 4: why this is going to be very uncertain for a
Speaker 4: period of time.
Speaker 5: I think some countries think that they are at the
Speaker 5: table because they sent a few representatives here in the
Speaker 5: past few weeks. But I agree with you, it really
Speaker 5: hasn't started.
Speaker 6: So what do you do if you're an investor.
Speaker 4: Well, you've done what we've sort of done.
Speaker 3: You avoid the areas that are going to be most
Speaker 3: effective consumer discretionary goods, and that area has been hit
Speaker 3: the hardest. So maybe that's getting a little bit extreme.
Speaker 3: I would say, you know, defensively position high quality. That's
Speaker 3: been our core portfolio. Now we've made some trading calls
Speaker 3: lately that would have gone against that. Some of those works,
Speaker 3: some of those didn't work. But I think at this point,
Speaker 3: you want to be up the quality courves. Want to
Speaker 3: be in businesses that can kind of mitigate some of
Speaker 3: these concerns. You have pricing power, you have the ability
Speaker 3: to kind of move production around you can take inventory
Speaker 3: on to kind of buffer this for sixty or ninety days,
Speaker 3: which you've seen all those mitigation strategies somemp to work
Speaker 3: wrote about in our note today. Those are the kind
Speaker 3: of companies we want to own in this period of time.
Speaker 3: I do believe there will be a clearing event at
Speaker 3: some point this.
Speaker 4: Year, but we're not there yet.
Speaker 2: Some of the changes you have made the artwork, and
Speaker 2: let's talk about them. International NEX this morning down two percent,
Speaker 2: nie K overnight down four percent. International starting to turn
Speaker 2: subtle change from where we were over the last month
Speaker 2: or so.
Speaker 7: What's changing?
Speaker 3: Well, that's right, and so last week's note we kind
Speaker 3: of made the call that US probably does better than
Speaker 3: these other regions because at the end of the day,
Speaker 3: those reasons you mentioned are most sensitive to global trade,
Speaker 3: particularly Japan. So the fact that that was down four percent,
Speaker 3: I think is another sign that, hey, actually the market
Speaker 3: now is laser focused on this terror for trade issue
Speaker 3: as opposed to some of the other issues that it's
Speaker 3: been kind of worrying about here. So that relative value,
Speaker 3: if you will, looks still looks good to us. It
Speaker 3: may happen in a downtape, okay, which is also somebody
Speaker 3: to consider, because the US is still the highest quality
Speaker 3: market in the world. In a uncertain world, high quality
Speaker 3: will outperform.
Speaker 2: But you think those European long sort of built up
Speaker 2: over the past few months there might be in trouble here.
Speaker 4: Think that's right.
Speaker 3: I think there's a little extension. You know, our European
Speaker 3: strategy team is in the same page. I mean, there
Speaker 3: are some good things going on in Europe that haven't
Speaker 3: been happening for decades potentially, But boy, that's gonna take
Speaker 3: that's gonna take even longer than this, you know, sort
Speaker 3: of tariff negotiation you're talking about, you know, country spending
Speaker 3: more money on fiscal deregulation. I mean, this is a
Speaker 3: multi year transition in the stock market. You know, some
Speaker 3: cases are fifteen to twenty percent.
Speaker 5: So besides Ryan Mattel or any other industrial military company
Speaker 5: in Europe, do you like anything there?
Speaker 3: Well, I mean, I think the financials have been still
Speaker 3: a place to think about that have a potential structural
Speaker 3: change or benefit in that regard. I think things that
Speaker 3: have levered to the consumer. But once again, these are
Speaker 3: these kind of got extended, you know, and from my standpoint,
Speaker 3: I think there's better value now in the US and
Speaker 3: some of these areas.
Speaker 2: I'm sure you saw the new numbers coming out Goldman Saxon,
Speaker 2: the same new foal costs from Yonhtsias.
Speaker 7: If we can just throw them up on the screen.
Speaker 2: One percent on GDP, three point five percent on PCA,
Speaker 2: that's a siflation remix. What are you a ton of
Speaker 2: clients that ross? Can you about how we would try
Speaker 2: stackflation in America?
Speaker 3: We're not quite in the stagflation camp. We're more in
Speaker 3: the camp that you know, expectations are probably not where
Speaker 3: reality is, which is that growth is worse than people
Speaker 3: thought and inflation is a bit stickier.
Speaker 4: And that's how we came into this year.
Speaker 3: So we don't we didn't mess around with our year
Speaker 3: end targets, but we have been messing around with our
Speaker 3: short term targets. So we're in that fifty five hundred
Speaker 3: to I would say fifty eight to fifty nine. Now
Speaker 3: we've kind of chopped off the upper end of that
Speaker 3: for the first half of this year. I'm not willing
Speaker 3: to throw in the towel yet completely on the full year, because,
Speaker 3: as we've been saying, the good stuff of you know,
Speaker 3: the policy changes that we expect could start to feed
Speaker 3: into the equity markets by year end. Could we pushed
Speaker 3: that timing out, you know, three six months?
Speaker 6: Sure?
Speaker 3: But you know, right now we're still in that fifty
Speaker 3: five hundred to sixty one hundred range with the probably
Speaker 3: a truncated upper band. And now if you get universal terrafs,
Speaker 3: which is something that we talked about in this morning's note,
Speaker 3: then that lower half, that lower end of the band.
Speaker 4: Maybe comes down.
Speaker 3: So we're you know, if we if we break down
Speaker 3: this week and universal terrors for the reason, we could
Speaker 3: see something even lower than fifty five in the short term.
Speaker 2: Can we talk about the rebalancing your expecting though, the
Speaker 2: ultimate vision of this administration and why you still believe
Speaker 2: the more complete policy mix is still bullish.
Speaker 3: Yeah, I think, well, I think it's constructive. I'm not
Speaker 3: sure it's wildly bullish, because you know, valuations were probably
Speaker 3: the biggest constraint coming in. I think it's bullish for
Speaker 3: a lot of parts of the market that have underperformed
Speaker 3: for the last three or four years. I mean, you know,
Speaker 3: our vision, or I think the administration's vision quite frankly,
Speaker 3: it's very simple. They want to affect a slowdown in government.
Speaker 3: They want to kind of liberate the private economy through
Speaker 3: things like deregulation, keeping tax rates lower.
Speaker 4: Maybe tarifts are part of that storyline.
Speaker 3: Fine, and that transition from kind of public government allocation
Speaker 3: of resources to private enterprise allocation of resources actually at
Speaker 3: least atart broadening out something that's been absent really for
Speaker 3: the last two or three or something. You know, we've
Speaker 3: talked about here many times, this crowding out feature of
Speaker 3: the government crowding out small businesses, crowding out the average consumer.
Speaker 3: And look, I think they've been crystal clear in their
Speaker 3: in their and sort of their messaging. It's not going
Speaker 3: to be fun foreriod of time. Okay, we have to
Speaker 3: sort of detox. As the Secretary Treasury mentioned, you know
Speaker 3: that there's going to be an adjustment period, as a
Speaker 3: president has said.
Speaker 4: So it's been crystal clear what they've been.
Speaker 5: Doing the whole Eat your vegetables, then get a dessert.
Speaker 5: When it comes to dessert, we're only talking about current
Speaker 5: policy extension. How exciting is that for the market if
Speaker 5: you're just talking about an extension of TCJA. When it
Speaker 5: comes to tax cuts and not actual additional tax cuts.
Speaker 4: Well that's okay.
Speaker 3: So what you're talking about is fiscal stimulus, and that's
Speaker 3: what we have to detox from. So we don't need
Speaker 3: more fiscal stimulus. We need less fiscal stimulus. We need
Speaker 3: the private enterprise of America doing organic growth.
Speaker 5: If taxes are going up on sales goods, don't need
Speaker 5: more tax cuts for individual Well.
Speaker 3: That's the idea, is that we're going to keep taxes lower,
Speaker 3: maybe lower than further if tariffs A bring in revenue
Speaker 3: and B there's a negotiating ploy so we'll see. I mean,
Speaker 3: this is going to be very messy, and this is
Speaker 3: not going to be easy transition. But John asks, what
Speaker 3: is the bullet story you know over the next twelve months.
Speaker 3: I think it's that, and it's going to be a
Speaker 3: lot of uncertainty, but I still think that is the plan.
Speaker 3: I still think what I see so far is a
Speaker 3: is a direction in that in that manner, and looks
Speaker 3: stock operators and financial market operators just gonna have to
Speaker 3: deal with this adjustment. And that's that's what's the that's
Speaker 3: the consternation right now.
Speaker 2: We're attempting to deal with it right now. Marks good
Speaker 2: to see it. So here's the laces. This morning, President
Speaker 2: Donald Trump planning to stand his reciprocal tariff push on
Speaker 2: all countries, Tempering hopes that the initial scope could be limited.
Speaker 2: On Wednesday, hendrit Trace of Vada Pantas joins US right
Speaker 2: now for more Henrietta, So let's start with the Triton
Speaker 2: dollar question.
Speaker 7: What happens on April second.
Speaker 1: April second, at midnight, lots of tariffs start going on.
Speaker 8: So it's going to be a really long day. We'll
Speaker 8: obviously get.
Speaker 1: The reports from USTR, Commerce and Treasury on the first.
Speaker 1: I think there's going to be a lot of advanced
Speaker 1: warning provided by those documents. You know, we have trade
Speaker 1: agreements with twenty different countries, and I think when the
Speaker 1: President says we're going to tear if everybody that we're
Speaker 1: talking about, he means those twenty countries.
Speaker 8: So I'm expecting to pull out.
Speaker 1: Of the Phase one China deal or call them out
Speaker 1: in violation of the deal, which means that all the
Speaker 1: Section three oh one tariffs covering over three hundred and
Speaker 1: fifty billion dollars worth of goods from China will go up.
Speaker 1: I think we're going to see new tariff investigations start
Speaker 1: on India, for example, pharmaceuticals I think there's going to
Speaker 1: be new tariffs under Section two thirty two and AIPA
Speaker 1: across the auto sector.
Speaker 8: I'm very wary about auto parts.
Speaker 1: I think that'll be sort of a secondary event that
Speaker 1: happens in a couple months time. Should any of the
Speaker 1: nations like the EU not come to the nego of
Speaker 1: shooting table sufficiently.
Speaker 8: It takes a long time to get through.
Speaker 5: There's a lot coming, Henrietta, what do we see that
Speaker 5: can happen almost immediately when it comes to AIPO or
Speaker 5: three three eighth. Is that going to specific countries or
Speaker 5: is that going to industries?
Speaker 8: AIFA is specific countries and industries.
Speaker 1: Although Section two thirty two, the National security justification is
Speaker 1: really where a lot of the sector specific items go. Copper, dairy,
Speaker 1: things along those lines'd be a Section two thirty two tariff.
Speaker 1: My biggest concern with any rationale that's not AIPA or
Speaker 1: even three thirty eight is that there's no time horizon
Speaker 1: to take them off. The Section two thirty two tariffs
Speaker 1: on steel and aluminium have been in effect.
Speaker 8: For almost eight years. The Section three oh one tariffs
Speaker 8: against China have been in.
Speaker 1: Effect for almost eight years, So once those tariffs come
Speaker 1: on with the rationale, like the Auto investigation that they
Speaker 1: completed during Trump's first term. Those tariffs don't come off,
Speaker 1: so those are the most pernicious. The AEPA pieces on
Speaker 1: Canada and Mexico, for example, theoretically can come off in
Speaker 1: three to six months.
Speaker 8: The others have very serious standing power Henrietta.
Speaker 5: When it comes to how the president is approaching Wednesday,
Speaker 5: he said we're going to start with all countries. Is
Speaker 5: that where he's going to end?
Speaker 8: I think that's a fair question.
Speaker 1: I think we start with about the twenty countries that
Speaker 1: we have trade agreements with. That's what the agencies have
Speaker 1: been tasked with doing. But I see the potential for
Speaker 1: expansion before we see any pullbacks. So, for example, there's
Speaker 1: no investigation into India. I mentioned that at the outset.
Speaker 1: I think we have a lot of issues with India,
Speaker 1: from trade in pharmaceuticals, genetic drugs to generic drug excuse me,
Speaker 1: the trade and services deficit.
Speaker 8: Those are all.
Speaker 1: Sort of institutional issues that we know usdr Career had
Speaker 1: during Trump's first term, and I would expect to see
Speaker 1: a really long drag to any approach to India. So
Speaker 1: I think a lot more are going to come on
Speaker 1: in the next four years of Trump's term than necessarily
Speaker 1: come off, although Canada and Mexico should be excluded, especially
Speaker 1: USMC eight compliant pieces.
Speaker 8: That trade deal needs to be reagreed to by next summer.
Speaker 5: When it comes to what the Senate is also going
Speaker 5: to do tomorrow, there's supposed to be a vote on
Speaker 5: a Democratic resolution blocking Trump's use of AEPA when it
Speaker 5: comes to Canada. How difficult is that going to be
Speaker 5: for some Republicans, Whether or not they're going to say
Speaker 5: yay or nay.
Speaker 8: Well, just think about it.
Speaker 1: There's already reporting that we're going to see a bailout
Speaker 1: for the farmers, which is widely represented by Republican lawmakers
Speaker 1: in the United States Senate, including the Majority leader John Thune.
Speaker 1: I think it's fascinating to see tariffs go on our
Speaker 1: closest trading partners, and Republicans who just for a couple
Speaker 1: of years ago where a party of free trade and
Speaker 1: zero percent tariffs, now have to get behind the President's
Speaker 1: justification for fentanyl from Canada being an international economic emergency.
Speaker 1: So you're going to see some serious backpedaling, which is
Speaker 1: compounded by the election losses that Republicans are seeing across
Speaker 1: the country, obviously with the Atlas Stephonics seat and upstate
Speaker 1: New York, but just this past weekend on four amendments
Speaker 1: in the deep red state of Louisiana, where Democratic voters
Speaker 1: turned out after being sleepy for six years and crushed
Speaker 1: four amendments. We're going to see that in Florida in
Speaker 1: two different districts, the first and the sixth, to see
Speaker 1: what the margins look like. Is it's still Trump plus
Speaker 1: thirty plus forty or is it now something that Republicans
Speaker 1: should be more concerned about going into the midterm.
Speaker 8: It's a very big vote next tomorrow.
Speaker 5: How much pressure Republicans under to make sure they get
Speaker 5: TCGA extension done sooner rather than later.
Speaker 1: Tons of pressure, it has to be done. I think
Speaker 1: the best triggering mechanism is the.
Speaker 8: X state for Treasury.
Speaker 1: So we know that we've gotten estimates from outside advisors
Speaker 1: and CBO that suggest late July to even mid October.
Speaker 8: As the time horizon.
Speaker 1: But all the staff on the hill you know, which
Speaker 1: I used to be one, are making sure that we're
Speaker 1: hearing from Treasury Secretary Bessett and he is not going
Speaker 1: to report that date.
Speaker 8: Until may, and it really is going to depend on
Speaker 8: tax re seats.
Speaker 1: So it's disconcerting when you see Doge going in and
Speaker 1: firing IRS employees. It's expands the tax gap and that's
Speaker 1: really what's going to determine what the X date is.
Speaker 1: And that's I think the linking mechanism for passing this
Speaker 1: tax bill, which as you pointed out before, is just
Speaker 1: an extension of the status quo.
Speaker 8: There are not and there will not be tax cuts
Speaker 8: in this bill.
Speaker 2: Darrel Kronk of wels Fango seeing tariffs having a measured impact.
Speaker 2: Rising tariffs hurt the economy by complict kit and CAPEX
Speaker 2: decisions about the future. But today the issue is mainly
Speaker 2: price increases, which we foresee as incremental and dilute. Darrell
Speaker 2: joins us now for more. Darren good Mornick and Morning John.
Speaker 7: I have to say this the more constructive view from you.
Speaker 7: What does that come from? What underpins that view?
Speaker 9: Well, I think it's you know, obviously Wednesday will be big.
Speaker 9: We're looking at it through kind of three lenses. One
Speaker 9: is what is the universe?
Speaker 6: Right?
Speaker 9: So think tariffs are on imports themselves. I'm really focused
Speaker 9: on things like the VAT as item too. Right, then
Speaker 9: you've got non tariff subsidies things like you know, where
Speaker 9: you subsidize an industry. And then you can also have
Speaker 9: some noise around currency manipulators. Countries are labeled by Treasury
Speaker 9: as currency manipulator or at least.
Speaker 6: Put on watchlists.
Speaker 9: Right, that universe will will break down between your universal
Speaker 9: and sectoral And then I think what we really want
Speaker 9: to focus on on Wednesday is what's known versus unknown?
Speaker 6: Right, So we know the autos right at.
Speaker 9: Twenty five percent, you know, imported autos and autoparts. We
Speaker 9: know we're probably going to see the additional tariffs on
Speaker 9: Venezuelan oil, right, and we know that there's going to
Speaker 9: be some impact on Mexico and Canada, the USMCA coming
Speaker 9: back maybe twenty five percent, maybe less. The key is
Speaker 9: do we buy another kind of month of negotiation time
Speaker 9: as the Treasury secretary to say escalate to de escalate, right,
Speaker 9: and some room to negotiate, or do we just on
Speaker 9: April second, let them have it right and kind of
Speaker 9: implement those tariffs.
Speaker 5: Do you think that it's going to be reciprocity for
Speaker 5: each individual country or universal across the board.
Speaker 9: I think it's country by country. I mean, I know
Speaker 9: there was a lot of banter about universal over the
Speaker 9: weekend and the.
Speaker 8: Entire campaign trail.
Speaker 9: I understand, and I think that's part of that escalate
Speaker 9: to de escalate. It's trying to send kind of the
Speaker 9: worst case message and scenario. But I think what the
Speaker 9: President and the administration is really interested in doing is
Speaker 9: negotiating country by country on very specific things like what
Speaker 9: we still haven't seen is tariffs on pharmaceuticals. We haven't
Speaker 9: seen tariffs on semiconductors. We haven't seen it on copper, timber, lumber.
Speaker 6: Right.
Speaker 9: A lot of those sectoral elements that people are talking
Speaker 9: about are still forthcoming. So whether we get some of
Speaker 9: that on Wednesday or not, I think is important. But
Speaker 9: I don't know that i'd look for just broad based
Speaker 9: universal tariffs. I think it's a it's a negotiation point country.
Speaker 5: I think some countries say they have a massive export
Speaker 5: of copper, they will face both, yes, so they will
Speaker 5: be doubly tariff doubly taxed.
Speaker 6: Yeah.
Speaker 9: I think if you break down so very interested in
Speaker 9: closing trade deficits. Right, if you look at the top
Speaker 9: three trade deficits, China runs about a two hundred ninety
Speaker 9: five billion dollars trade deficit number one, Mexico number two
Speaker 9: at one hundred and seventy five billion, Vietnam number three
Speaker 9: at one hundred and twenty five billion, right, and then
Speaker 9: you go down. Actually, Canada's number eight on the list
Speaker 9: of actual goods trade deficit. If you close that and
Speaker 9: only close that at the same tariff rates as what
Speaker 9: they charge us, it's about fifty billion dollars worth of tariffs.
Speaker 9: If I add in the vat right, the value add attacks.
Speaker 9: Now we're talking three x that number. It's about one
Speaker 9: hundred and seventy billion dollars by our math, So that
Speaker 9: that matters, I think in how they're going to play
Speaker 9: this out in the coming week.
Speaker 2: This is a relative game, but who wins who loses?
Speaker 2: Relatively speaking? I think what's interesting about the call from
Speaker 2: you and the team at wels Faranko at the moment
Speaker 2: is you're sticking with the US economic leadership.
Speaker 7: Yes, that's the theme for you.
Speaker 2: Guys coming into the and you're staying with it as
Speaker 2: other people change their forecasts. What's interesting about this morning
Speaker 2: if you're just tuning into the program, yes, you'll see
Speaker 2: equity futures down across the board, the S and P
Speaker 2: down one percent, but check out Japan down four percent,
Speaker 2: check out Germany down one point eight percent. Starting to
Speaker 2: see and I know it's very early days, and we've
Speaker 2: seen some massive outperformance in those parts of the world
Speaker 2: over the year so far.
Speaker 7: But thing's about to change.
Speaker 9: Yeah, I think there's a lot of chasing that happened
Speaker 9: earlier this quarter. Particularly let's pick on Europe for example,
Speaker 9: and the German fiscal spend on defense and everything else.
Speaker 6: If you go back since two thousand and.
Speaker 9: Seven, So go back, you know, literally, you know, almost
Speaker 9: twenty years, eighteen years the time period of sustained European
Speaker 9: outperformance relative to the US. I threw a chart in
Speaker 9: my notes today shows that it's on average about ninety
Speaker 9: to one hundred and eighty days, and then it fades.
Speaker 9: Why does it fade Because you need a sustained lower
Speaker 9: dollar for that trade to work over any long period
Speaker 9: of time, and you need earnings to deliver.
Speaker 4: Right.
Speaker 9: If I went back again to that same time period
Speaker 9: and said, show me aggregate US S and P earnings
Speaker 9: one hundred and seventy five percent, show me aggregate Euro
Speaker 9: earnings seven that's the differential over that time aggregate right
Speaker 9: of earnings growth. So if I don't get earnings growth
Speaker 9: and I don't get a weeker dollar over any period
Speaker 9: of time, that trade invariably fades on you.
Speaker 2: So far this trade story has led to a wake
Speaker 2: a dollar. Do you believe that reverses and why.
Speaker 6: We think it stabilizes here?
Speaker 4: Right?
Speaker 9: So I would not look for, you know, the dixie
Speaker 9: to go back to one ten across the broad batthkets.
Speaker 6: But I do think you can have it go.
Speaker 9: Back to kind of the one o six one oh
Speaker 9: seven kind of range and just stabilize here. I wouldn't
Speaker 9: look for you just continued week week week dollar, right,
Speaker 9: And if and if we are that kind of flies
Speaker 9: in the face of this growth scare, right, because obviously,
Speaker 9: if you're going to get growth scare, what's going to happen?
Speaker 9: Flight to quality, US treasuries, rally dollar rallies, right, all.
Speaker 6: That stuff that just doesn't make a lot of sense
Speaker 6: to us.
Speaker 5: This administration do you think want a week dollar because
Speaker 5: they want to see, you know, a rejuvenation of exports.
Speaker 9: I think they're quintessentially the same as a lot of
Speaker 9: administrations that that say they want a strong dollar. But
Speaker 9: actually want a week dollar, right, because the week dollar
Speaker 9: favors you know, economic growth to an extent, as long
Speaker 9: as it's not a as long as it's not a
Speaker 9: debasement of the currency or something like that. It's just
Speaker 9: a sustained kind of steady weakness.
Speaker 6: I think you can live with it.
Speaker 9: I think what people miss here in the economic story
Speaker 9: in the near term of US over some of the
Speaker 9: other parts of the world is you do have rates
Speaker 9: coming down. You do have the dollar that has come down, right,
Speaker 9: Labor markets are still okay. You know, we're just about
Speaker 9: ready to roll into Q two or Q wondering season.
Speaker 9: Excuse me, right, you know today's the end.
Speaker 6: Of the quarter.
Speaker 7: Yep.
Speaker 6: So we'll see what people say about earning.
Speaker 2: Do you think we have reset expectations for earnings low enough?
Speaker 6: Not yet.
Speaker 9: I still think that has to come. And I think
Speaker 9: what happens is whether it's consumer spending. If you look
Speaker 9: at the drivers of what's been the growth drivers in
Speaker 9: the US economy, it's AI cap X, it's the high
Speaker 9: end consumer, consumer spending broadly, but particularly the high end consumer,
Speaker 9: and it's the fiscal impulse.
Speaker 6: Right.
Speaker 9: So if I lose those engines, right, am I am
Speaker 9: I losing AI cap X, am I losing the high
Speaker 9: end consumer, am I losing some of.
Speaker 6: The fiscal impulse?
Speaker 4: Right?
Speaker 6: Something else has to.
Speaker 9: Step into that void at this point, right, which means
Speaker 9: that growth is going to be a neema care for
Speaker 9: a while, and it's going to be hard to generate a.
Speaker 2: Question marks I've roll three, Yes, which one of those
Speaker 2: engines are you most concerned about right now? Because the
Speaker 2: one that I don't think it's talked enough about is
Speaker 2: the AI story. We're all obsessing over to trade headlines,
Speaker 2: but over the past few weeks we've had some pretty
Speaker 2: damage headlines for that part of the market, and it's
Speaker 2: an important part of the equity market.
Speaker 9: Yeah, if you take the top ten names obviously in
Speaker 9: the S and P five hundred, they still account for
Speaker 9: fifty percent of the net income growth in the index.
Speaker 9: Fifty percent, right, I mean talk about the skew right
Speaker 9: and lack of breadth that we've talked about many times.
Speaker 9: So obviously the broadening out of that what's not discussed, John,
Speaker 9: is so we're going to probably put at the end
Speaker 9: of today one of the weakest quarters as a whole
Speaker 9: for technology as a sector in probably thirty to forty years.
Speaker 4: Right.
Speaker 6: Energy's up seven percent.
Speaker 4: Right.
Speaker 9: Financials and comm services on a relative basis are doing
Speaker 9: quite well, right compared to the endscy and everything else.
Speaker 9: It's really centered in tech and consumer discretionary right.
Speaker 6: So I agree with you on the AI cap X.
Speaker 9: I'll tell you what though, I watch very very closely
Speaker 9: that high end consumer, actually high end consumer spending and
Speaker 9: expectations now have dipped below the middle quintile tiers, right,
Speaker 9: So it's hooking harder than even the low and middle quintile.
Speaker 9: So that's where your discretionary spend comes from. And the
Speaker 9: question isnt are they able to spend? They're still able
Speaker 9: to spend, it's just are they willing to spend?
Speaker 2: That's the big question going into NX season. I've got
Speaker 2: some good news. Bonds are working.
Speaker 6: Yes.
Speaker 2: This has been the allocatus dilemma over the past few weeks,
Speaker 2: and we said repeatedly on this program on down days
Speaker 2: in the equity market, bonds haven't behaved in predictable ways.
Speaker 2: Sometimes you use it up, sometimes you havese it down.
Speaker 2: They're down this morning by six bass points. Can you
Speaker 2: depend on that in the year ahead?
Speaker 9: I don't think so, because I think What happens is
Speaker 9: eventually we get a little bit past this growth scare
Speaker 9: in the near term, and we really the inflation narrative
Speaker 9: really starts to come back to the table. So when
Speaker 9: you look at the long side of the curve, it's
Speaker 9: really three premiums. Right, It's a term premium, it's a
Speaker 9: growth premium, and it's an inflation premium.
Speaker 6: Right.
Speaker 9: So if I hold term premium even I bring growth
Speaker 9: premium down a little bit also equal. That's what's driving
Speaker 9: alongside of the of the curve down. But I'm pushing
Speaker 9: up on inflation expectations and premiums in that longside.
Speaker 6: The question is which one wins the day? Right? Does
Speaker 6: the growth scare carry the day?
Speaker 9: And that's why you see the kind of dilemma that happens.
Speaker 9: If it's a particular day where a piece of economic
Speaker 9: data suggests the growth scare is.
Speaker 6: A problem, right, you get a flight to quality rates.
Speaker 9: Down, right, you get a bad inflation reading like we got,
Speaker 9: although it wasn't bad, but you know, a little higher
Speaker 9: inflation reading last week, right, two point eight percent on inflation.
Speaker 6: All of a sudden, you know, rates move higher.
Speaker 2: Tara Krunk Flas Fanca Don Murphy of Banks for American writing.
Speaker 2: Vehicle prices could increase as much as ten thousand dollars
Speaker 2: if automakers pass on the tariffs in full.
Speaker 7: John joins us now for more. It's good to see,
Speaker 7: it's good, good to see here.
Speaker 4: I'm look.
Speaker 2: I'm sure you're exhausted, so thanks for being with us.
Speaker 6: Yes, I'm very exhausted. It's a lot going on.
Speaker 2: And you're going to have be exhausted this way. So
Speaker 2: let's start with the tariffs. Twenty five percent, how much
Speaker 2: we passed through and the same expected.
Speaker 10: Well, I mean, it's really unclear, like you kind of
Speaker 10: let in there ten thousand bucks on imported autos as
Speaker 10: someone elsewhere outside of the US would be subject to
Speaker 10: potentially as much as ten thousand if they decided to
Speaker 10: pass if passed through the tariffs completely, if they decide
Speaker 10: to break even in the interim, right they make a decision, listen,
Speaker 10: we're going to keep making vehicles. We're going to try
Speaker 10: to maintain our market share. They may pass through about
Speaker 10: forty five hundred bucks, or if they do something, you know,
Speaker 10: even more extreme, they might decide, listen, we're not gonna
Speaker 10: be able to make money on these vehicles, we're not
Speaker 10: going to import any and we've got risk of the
Speaker 10: seven point six million vehicles that are imported to the
Speaker 10: United States potentially being at risk. So there's a lot
Speaker 10: of layers of how this kid get passed through and
Speaker 10: the impact on sales.
Speaker 7: The management seems imagine outstanding. Still, I'm sure that you've
Speaker 7: been in touch with many of them over the past
Speaker 7: week or so.
Speaker 2: Stillansis for GM, Tesla, Tesla limited impact here of the
Speaker 2: other three, how are they preparing for Thursday?
Speaker 7: What do they do well?
Speaker 10: I mean, I think we've got the answers for the
Speaker 10: moment for Thursday. We don't necessarily have the answers for
Speaker 10: Friday or the follower week yet. So the volatility in
Speaker 10: the in sort of what's going to happen here or
Speaker 10: the uncertainty is pretty extreme. And I think when you
Speaker 10: look at this, you're making a product and plant decision
Speaker 10: about three to four years out, and then you're going
Speaker 10: to live with that for about seven years out from
Speaker 10: that as the product is launched in the market and produced,
Speaker 10: so you have a ten plus year window of committing capital.
Speaker 10: So it's very difficult on a weekly, monthly or an
Speaker 10: even annual basis for them to make very significant shifts.
Speaker 10: So I think at the moment they're going to look
Speaker 10: at increasing some employment here in the US, trying to
Speaker 10: ramp up the utilization of their plants here.
Speaker 6: In the US to offset this.
Speaker 10: But from a large degree, they're not actually doing anything
Speaker 10: just yet because they don't know the rules of the
Speaker 10: game and they're long term capital allocators.
Speaker 6: Who's best positioned going into Wednesday.
Speaker 10: So I think if you look at Tesla, Lucid, Arrivian,
Speaker 10: the startup ev names here in the US, they basically
Speaker 10: are are largely unexposed except for some of the electronic
Speaker 10: components that they would import. Ford is actually in pretty
Speaker 10: good a pretty good position. They're only importing twenty percent
Speaker 10: of their volume or vehicle volume in the US, and
Speaker 10: none of that is really the big ticket items like
Speaker 10: the Expedition Navigator F one fifty or even super duties.
Speaker 10: But you go down the list, GM is about fifty
Speaker 10: fifty to fifty imports domestic to the US. But then
Speaker 10: you have companies like Nissan, you know, Mazda, Subaru, some
Speaker 10: of the other names that are reasonably well, reasonably exposed,
Speaker 10: and I think there's a lot of sort of mid
Speaker 10: to long term sort of game theory you have to
Speaker 10: play here of where the market will go. And I
Speaker 10: think most of these manufacturers are going to produce higher end,
Speaker 10: higher mixed vehicles to try to offset this incremental costs.
Speaker 10: And I think that's really important to recognize the low
Speaker 10: end consumer is not going to be served, so basic
Speaker 10: transportation is going to be less available to the American consumer,
Speaker 10: and if it's available, it's at a higher price. I
Speaker 10: think the real long term thing to think here is
Speaker 10: this is the door opening to the Chinese at the
Speaker 10: entry level and potentially coming here and building plants, employing Americans,
Speaker 10: potentially bringing their entire supply chain here and entering at
Speaker 10: the low And I think if you sort of run
Speaker 10: this forward a couple of years, that's the thing we
Speaker 10: really need to think about.
Speaker 5: Are you basically talking about the Chinese companies doing what
Speaker 5: Japanese companies did two three decades ago.
Speaker 6: Correct.
Speaker 10: We saw the Japanese do it in the seventies and eighties,
Speaker 10: We saw the Koreans do it eighties and nineties. It
Speaker 10: takes ten to twenty years once you're here in the
Speaker 10: US market actually really gain a foothold. But I think
Speaker 10: that's probably what we're We're staring down the barrel of
Speaker 10: if this holds, so.
Speaker 2: The price war already starts, it s implements. Take a
Speaker 2: big step back here and think about what the last
Speaker 2: two years looked like. We were talking about a real
Speaker 2: price war in China. We were talking about automakers cutting
Speaker 2: prices because the demand wasn't there. So when the President
Speaker 2: comes out and says things like, I don't care if
Speaker 2: they raised prices, is the consumer price tolerance even there
Speaker 2: in this economy for them to raise prices.
Speaker 10: Well, we're already drifting off of all time highs in
Speaker 10: autopricing over the last couple of years. So I think
Speaker 10: if we were to look at this and really spread
Speaker 10: everything that we know right now as best we can,
Speaker 10: we're talking about a five to fifteen percent on average
Speaker 10: price increase in vehicles.
Speaker 6: The consumer is not.
Speaker 10: Really there for that, so that would have a very
Speaker 10: significant impact. We kind of roughly were assuming it's a
Speaker 10: two and a half to three million unit hit to
Speaker 10: saw are just based on price pass throughs, right so
Speaker 10: that's you know, that's a pretty big hit to the market.
Speaker 10: That's about sixteen million units right now.
Speaker 6: I'd have to go back tomorrow. What the President said
Speaker 6: over the weekend.
Speaker 5: To Jonathan's point, he's talking about I couldn't care if
Speaker 5: these automakers raise prices. He said that then they're going
Speaker 5: to start buying American cars. The number one car being
Speaker 5: sold right now in America is a Toyota Wrap four,
Speaker 5: but it's produced in America. So say, would Toyota get
Speaker 5: exemption our carve out?
Speaker 10: Well, I think that Wrap four would be wouldn't be
Speaker 10: tariff save maybe the power train and electronic components that
Speaker 10: are that are in it that might that might be imported.
Speaker 10: We have to kind of dig through that, and everybody's
Speaker 10: still digging, digging through this. So yes, it might be
Speaker 10: non US companies, but it would be US workers that
Speaker 10: would benefit. And I think that's kind of the ultimate endgame.
Speaker 10: I mean, our rough estimate is you could have one
Speaker 10: hundred and five thousand direct jobs if you brought all
Speaker 10: that seven point six million units of production or demand
Speaker 10: slash production back to the US, create another sort of
Speaker 10: almost a million in sort of another million indirect jobs.
Speaker 6: So there's a big focus on.
Speaker 10: Creating jobs, but there's greater greater automation at the plant level,
Speaker 10: So will that actually be sort of a net job
Speaker 10: gain or will it just be bringing that manufacturing back
Speaker 10: here to the US.
Speaker 5: You mentioned when it comes to the American producers forwards
Speaker 5: in maybe more decent shape than GM. The issue at
Speaker 5: GM is their foreign components are Canada and Mexico. Will
Speaker 5: there be a USMCA carve out for these autos?
Speaker 7: Do we know yet?
Speaker 1: So?
Speaker 10: Right now what we know is on parts that are
Speaker 10: imported from Canada and Mexico, as long as their USMCA
Speaker 10: compliant basically seventy five percent of their content is North American.
Speaker 10: That the percentage of the components that are of the
Speaker 10: subcomponents that are produced in the US wouldn't be tariffed.
Speaker 10: Going through that right now is sort of my numbing.
Speaker 10: Nobody actually has the exact answer on that at at
Speaker 10: the supplier level, the folks that are actually doing this,
Speaker 10: and that's why we have a tape delay on the
Speaker 10: tariffs being put on USMCA compliant components.
Speaker 2: This wasn't my numbing, This was ready thoughtful. John Murphy
Speaker 2: of Banks of America want the future of this CAINR
Speaker 2: industry in this country. This is the Bloomberg Surveillance Podcast
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