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 Hortern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
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Speaker 2: Academy right in the following. While the market is right
Speaker 2: not to get too concerned at the moment, there is
Speaker 2: a risk that is being very complacent, he joins us
Speaker 2: now for more peke Monic morning.
Speaker 1: That risk always exists.
Speaker 2: Let's talk about whether the base case right now is
Speaker 2: justified or complacent.
Speaker 1: I think it's heading towards complacent. I think the administration
Speaker 1: seems very comfortable with tariffs. They're coming out talking with them.
Speaker 1: Let's not forget Trump A you really like tariffs. And
Speaker 1: I think this whole taco thing is overdone. I think
Speaker 1: he pivoted right. It wasn't going well, stock market was
Speaker 1: coming down, he had other things to focus on. He
Speaker 1: pulled back. Now he's had a few big wins. I
Speaker 1: think the success that we had in Iran very positive
Speaker 1: for him. Getting NATO to agree to five percent except
Speaker 1: for Spain, that was a very positive for him. Getting
Speaker 1: the big beautiful bill turned into an actual law as positive.
Speaker 1: I think he's going to take another cut at this
Speaker 1: and the problem is, I think for markets, we're not
Speaker 1: going to get a quick reaction. We might not even
Speaker 1: get a reaction after August first, assuming the tariffs go in.
Speaker 1: Because last time the tariffs were actually and I believe
Speaker 1: for some number of hours before they pulled back. So
Speaker 1: I think this could drag on. I think it's going
Speaker 1: to be more of a slow bleed. Unfortunately, there's a
Speaker 1: larger question here.
Speaker 3: Is this just the market saying, look, we've been fooled before.
Speaker 3: What are you doing We're not going to buy into
Speaker 3: these rates actually going through.
Speaker 4: Or is this a market saying.
Speaker 3: We've seen how companies absorb these tariffs and it isn't
Speaker 3: going to be as big of a hit as many
Speaker 3: people initially thought.
Speaker 1: I think it's the former. I think people are just like,
Speaker 1: we got fooled by this, we all got paniced. We
Speaker 1: all believe the Main Street versus Wall Street, the rhetoric
Speaker 1: I was coming out of the administration that they would
Speaker 1: go forward. I think when you start seeing this one,
Speaker 1: it's too early to expect much of a hit onto
Speaker 1: Wall Street. Right even at ten percent, one company's had
Speaker 1: a lot of ability to pre order stuff that helped
Speaker 1: take care of it. You've seen a lot of USMCA
Speaker 1: goods get compliant approved a USMCA compliant that's where used
Speaker 1: effective tariffs. And you look at the tariff revenue, I
Speaker 1: think it's about eighty billion over the last three months.
Speaker 1: That's a drop in the bucket in terms of inflation
Speaker 1: or anything. So I think we will not start seeing
Speaker 1: the inflation effects or the impact on corporate earnings until
Speaker 1: a few more months down the road.
Speaker 3: Which is the reason why we've been talking about how
Speaker 3: pivotal this week is. How much are you concerned about
Speaker 3: it being a headfake if we don't see the real
Speaker 3: ramifications from tariffs, either in consumer inflation or in bank
Speaker 3: earnings in particular.
Speaker 1: You know, I'm not as worried about the earnings. What
Speaker 1: I'm looking for a little bit is what are people
Speaker 1: seeing globally, what's the global economy looking like. We talked
Speaker 1: so much about the domestic economy. What's it like, what's
Speaker 1: spending going on? And are any of the US brands
Speaker 1: seeing a pullback and spending that's me is one thing
Speaker 1: we've seen it in tourism. Is it more widespread because
Speaker 1: that would be a bigger concern to me that you're
Speaker 1: starting to see this kind of pulling away from the
Speaker 1: American brands, which would be very consistent now with what
Speaker 1: you're reporting this morning that other countries are trying to
Speaker 1: figure out, Okay, what trade deals can we do away
Speaker 1: from the US.
Speaker 5: So what do you like then in this moment if
Speaker 5: you don't think the president is just a negotiating mode
Speaker 5: and potentially some of these rates can stay.
Speaker 1: So I still like anything that's really involved around national security,
Speaker 1: national production, right, And I think last week we saw
Speaker 1: MP ticker symbol got an investment from the Department Offense.
Speaker 1: There's a little bit of ad hoc that the Department
Speaker 1: Defense had that money. But maybe we start seeing the
Speaker 1: sovereign wealth funds that we talked about at the start
Speaker 1: of the administration start turning into something where you start
Speaker 1: seeing investment where the US public actually gets to take
Speaker 1: advantage of the growth. We have to have rarest and
Speaker 1: critical minerals and not just the commids, the process and
Speaker 1: refined versions of those. We need chips, we need pharma,
Speaker 1: all those things. I think that's where I want to
Speaker 1: focus because the President could juggle throo things right, push
Speaker 1: hard on tariff's on the one side, domestic growth and
Speaker 1: those things do take away jobs from China, they bring
Speaker 1: jobs to the US, so they fit a lot of
Speaker 1: it genders a lot of it's deregulation, which again is
Speaker 1: right up the President's alley. So that to me is
Speaker 1: the positive that we last week in that investment of
Speaker 1: the Department Fence is just the tip of the iceberg.
Speaker 5: Do you think the fifty percent tariffs on copper is
Speaker 5: good and it stays.
Speaker 1: I don't know that it's good at all. Again, it's
Speaker 1: something we import a lot of and we need to
Speaker 1: and we're not going to be able to turn it back.
Speaker 1: But yeah, I think he stays. I think he tries
Speaker 1: to grow some domestic businesses around that. But it's going
Speaker 1: to come through investments, not going to come out through handouts,
Speaker 1: their subsidies.
Speaker 2: Quick final word on CPI tomorrow morning. We've had a
Speaker 2: string of softer that expected rates to we get a
Speaker 2: fifth tomorrow morning.
Speaker 1: I don't think so. I think we've kind of bottomed
Speaker 1: out on it for a little while. I think there's
Speaker 1: been some pressure on, you know, through some of what's
Speaker 1: been going on the USMCA. I think people push some
Speaker 1: prices through, So I don't think I'm not alarmed, but
Speaker 1: I don't think we get a you know, a good number.
Speaker 2: It A sure the FED has a lot to answer for.
Speaker 2: Where's this one going?
Speaker 1: I have no idea. It does feel politically that he's
Speaker 1: going to be under a lot of pressure in the
Speaker 1: coming days weeks, you know, And I do think he
Speaker 1: probably should have cut rates or be on the pace
Speaker 1: we should be cutting in July. I think I don't
Speaker 1: like the jobs data, so I don't agree with all
Speaker 1: this policy, but I think pushing them out and this
Speaker 1: pressure markets aren't going to like it. The world's not
Speaker 1: going to like it. So I don't love that stat
Speaker 1: What do you.
Speaker 2: Think the cost is? What's the price of firing the
Speaker 2: FED chair? Not saying it will happen, if it happens,
Speaker 2: What is the cost and is it so high that
Speaker 2: it prevents it from happening.
Speaker 1: You know, unfortunately or not fortunately. I don't think it's
Speaker 1: going to be that high. Front end yields probably go down,
Speaker 1: right because whoever's going to come and is probably going
Speaker 1: to implement cutting. You see yields go higher maybe at
Speaker 1: the back end, but how much can you choose tens
Speaker 1: go out. So I think it's actually going to be
Speaker 1: a muted reaction. I think there's a lot of fear
Speaker 1: that we're going to blow up the treasury market. I
Speaker 1: just don't think that happens right away.
Speaker 4: And part of the reason.
Speaker 3: Why is because people say there's a whole committee full
Speaker 3: of FED members that all have a vote, and yet
Speaker 3: Kevin Walsh, who previously was on the FED Board of Governors,
Speaker 3: came out and said, we need regime change, we need
Speaker 3: an overhaul, and started talking about the strategic shift that
Speaker 3: he would like to see at the Federal Reserve.
Speaker 4: How realistic, how feasible is that?
Speaker 1: You know, I've often wondered for the last decade why
Speaker 1: we don't have more behavioral economists on the FED. Right,
Speaker 1: we have the traditional macroeconomists, and yet when you look
Speaker 1: at the Nobel Prizes, you know, they're going out to
Speaker 1: the behavioral So I think we shake up in kind
Speaker 1: of some different thinking wouldn't be a bad idea. Again,
Speaker 1: I'm not sure that it should be done in this
Speaker 1: kind of, you know, very quick and rough way, but
Speaker 1: I think there are things how do we think about
Speaker 1: the world, how do people respond? I think a lot
Speaker 1: of traditional macroeconomics has failed us, and we've kind of
Speaker 1: missed the GFC, we miss European debt crisis. So bringing
Speaker 1: some new types of thinking might not be a bad idea.
Speaker 3: There are two things that you're sort of alluding to here,
Speaker 3: and one is the fundamental economic justification for both the
Speaker 3: rate cut, andy rethink of some of the economic modeling
Speaker 3: on the FED. The other is the political job boning
Speaker 3: that leaves people concerned about a Turkey situation, air dou
Speaker 3: On like pressure, talking about what happened with Arthur Burns
Speaker 3: that led to the highest pace of inflation that we've
Speaker 3: seen in modern history in the United States. So how
Speaker 3: do you distinguish between the two, And does this kind
Speaker 3: of pressure make it less likely that they can cut
Speaker 3: in a way that might be appropriate.
Speaker 1: So I would have said before this weekend I felt
Speaker 1: they would be pressured not to cut because they didn't
Speaker 1: want to be bowing to this. But it does seem
Speaker 1: like this is a whole new line of attack. They're
Speaker 1: kind of going down different avenues to get that sort
Speaker 1: of change, and if that happens, then I think we
Speaker 1: do get cuts very quickly, because whoever comes in, we'll
Speaker 1: try and say, well, this has to be our mandate.
Speaker 1: It's probably the most confusing I've ever had because we've
Speaker 1: never i think, had to figure out the political ramifications
Speaker 1: of the FED in such a way.
Speaker 5: Kevin Hassett was asked about this over the weekend. He says,
Speaker 5: they're being looked into whether or not if there's cause,
Speaker 5: he could be fired, but this would be about issues
Speaker 5: regarding renovations at the FED. Does it matter to the
Speaker 5: markets what the potential issue is that they think they
Speaker 5: have a legal standing to fire the FED share?
Speaker 1: I think it does make a difference. And I do
Speaker 1: think one thing. Powell was very successful independently before he
Speaker 1: joining the FED, so I think he probably has a
Speaker 1: lot more stomach to fight this than someone who didn't have,
Speaker 1: you know, his own personal wealth isn't coming into this
Speaker 1: job very strong. I think he is very committed to
Speaker 1: what he's doing, So you know, I find you will
Speaker 1: not go down easily.
Speaker 5: If he's not going to go down easily, then do
Speaker 5: you think he sticks around to finish out his governorship
Speaker 5: to twenty twenty eight?
Speaker 1: I think that's such a long way away in this
Speaker 1: environment right now. It's like we have trouble living week
Speaker 1: to week.
Speaker 5: Right But he won't tell Trump administration officials, he won't
Speaker 5: tell reporters. He's repeatedly asked about this and doesn't give
Speaker 5: an answer.
Speaker 1: I think there's no reason for him to give an answer.
Speaker 1: Why I make it easy on anyone. It says kind
Speaker 1: of a little bit of leverage. Maybe it is what
Speaker 1: makes him happy when he's fighting with this. So I
Speaker 1: feel it's all a bit of a side show to
Speaker 1: what we should be looking at, and that's not good.
Speaker 2: The price of this now, you said it wouldn't be
Speaker 2: that high, Joe Somervellos said, it's thirty to forty basis
Speaker 2: points and a fixed thing comes sell off in the
Speaker 2: following twenty four hours for the FX market, it could
Speaker 2: mean a three to four percent move in the trade
Speaker 2: weighted dollar at least support up the experience in Turkey.
Speaker 2: If you go back to spring of twenty twenty one
Speaker 2: when Erdehan fired is then central bank governor. I think
Speaker 2: the following day we have an eight percent move on
Speaker 2: the Turkish LERA. Are you not expecting anything like that
Speaker 2: in the following twenty four hours?
Speaker 1: I think it'll be hard like you want to sell off.
Speaker 1: I think that I agree on the FX. I think
Speaker 1: it's going to push people away from the dollar. I
Speaker 1: think that makes sense to me. But why would Tebow
Speaker 1: sell off a lot? Right? Clearly you're going to get
Speaker 1: someone coming in and I think that will anchor the
Speaker 1: curve a little bit. I think maybe you get this
Speaker 1: and make.
Speaker 2: At the front end. Tell me what happens further along
Speaker 2: the curve. I'm not interested in the front end. I
Speaker 2: don't know what happens to tens and thirties.
Speaker 1: Maybe it widens a little bit. I don't see a
Speaker 1: thirty to forty BIB. I would not be surprised to
Speaker 1: see markets actually remain more calm than all the hype. Unfortunately,
Speaker 1: I think that gives the whole ammunition. But I think
Speaker 1: there's just so much more going on than the FED share. Now,
Speaker 1: if we believe that someone's going to come in and
Speaker 1: cut one hundred BIPs immediately and get us down to
Speaker 1: two percent, that's a different story. But I think if
Speaker 1: you think someone's going to cut fifty and try and
Speaker 1: get down one hundred bits by September, do we really
Speaker 1: sell off that much? Like that's kind of more in
Speaker 1: the ballpark what I think the FED should be doing anyway.
Speaker 1: So I'm not going to react that negatively.
Speaker 3: I was setting though, a precedent that becomes dangerous for
Speaker 3: the bond market going forward. And I say this not
Speaker 3: just from the US perspective, but globally at a time
Speaker 3: when you see all the long bonds around the world
Speaker 3: and develop market selling off in the prospect of more
Speaker 3: end and politicians that don't want to have to raise
Speaker 3: taxes or cut spending in order to reduce the deficit.
Speaker 3: Isn't this a fundamental problem that increasingly politicians will just
Speaker 3: job own their central banks as opposed to actually taking
Speaker 3: the pain.
Speaker 1: Yeah, And I think it's like a lot of things.
Speaker 1: We've had executive orders skyrocket over the last twenty years.
Speaker 1: Everything's kind of being done a little bit backdoor, maybe
Speaker 1: not quite by the official channels. So I think those
Speaker 1: are all risks. One thing I keep. You know, we've
Speaker 1: been arguing to our customers probably for three years now.
Speaker 1: You're supposed to be if you're investing in one year
Speaker 1: end paper heavily, heavily, heavily overweighted towards corporate debt commercial
Speaker 1: paper because corporations actually have good governance, right, corporations that
Speaker 1: are there to make sure their bills are paid on time.
Speaker 1: So I would be overweight. I think you're getting that
Speaker 1: extra spread, and I think there's going to be more
Speaker 1: and more conversation about what should one of these top
Speaker 1: companies trade versus the US dollar, or sorry, versus T bills.
Speaker 1: I don't think we're right through. I don't think we're
Speaker 1: there at this point, but I could see us approaching
Speaker 1: that right. It's happened in some third world or em
Speaker 1: countries in the past for a variety of reasons. We're
Speaker 1: not there, But I think you're getting free spread almost
Speaker 1: when you look at some of these double A, triple A,
Speaker 1: even single A companies orrising commercial paper. I would own
Speaker 1: that all day long instead of tea bills. I think
Speaker 1: it's less hassle.
Speaker 5: Peter, if you don't think there's going to be a
Speaker 5: massive implication to the market, if they fire fed Chair J.
Speaker 5: Powell's what's holding them back then from doing it.
Speaker 1: I assume there's legalities and how to do it, whether
Speaker 1: they're allowed to do it, and I'm sure that's being
Speaker 1: worked on it.
Speaker 2: Pete, it's going to say, as always, thanks for dropping
Speaker 2: by a pity share there of Academy. The former senior
Speaker 2: White House Trade advisor Kelly and Shaw, writing the President
Speaker 2: believes he still has a long leash when it comes
Speaker 2: to tariffs for countries that don't have deals by August first,
Speaker 2: I do expect tariffs to go up. Kelly and joins
Speaker 2: us now for more Kelly, and welcome back to the program.
Speaker 2: I think you told us all to get a beer
Speaker 2: and take a break last time, and then everyone gets
Speaker 2: fired up after the announcements over the weekend. How seriously
Speaker 2: are you taking some of the threats this past weekend.
Speaker 6: Yeah, good morning, And I think I have the same
Speaker 6: advice today that I had last week, and that this
Speaker 6: is not for us, This is not for business.
Speaker 4: These tactics are really for other governments.
Speaker 6: And I think that director has it said it well
Speaker 6: on Sunday when he said the President was trying to
Speaker 6: squeeze every last drop out of some of these deals.
Speaker 4: So that to me is really what these letters are about.
Speaker 6: I'm still relatively optimistic will land somewhere with the European Union.
Speaker 6: The Mexico letter was a bit of a surprise to me,
Speaker 6: given that they weren't negotiating one of these full reciprocal deals.
Speaker 4: It was really about steel and aluminum.
Speaker 6: But that said, we've got two and a half weeks
Speaker 6: to go and I expect to see a bunch of deals,
Speaker 6: and for those countries that don't have them, I expect
Speaker 6: to see those terif.
Speaker 4: Rates go up.
Speaker 5: When you say you do think this is the President
Speaker 5: trying to squeeze every lens ounce out of these trade negotiations,
Speaker 5: say what comes to the European Union?
Speaker 1: What is he after?
Speaker 6: Well, with the European Union, there are a number of
Speaker 6: sticking points, and I think everyone's expectation is that if
Speaker 6: the US and EU were able were going to be
Speaker 6: in a position to agree, that it would be too
Speaker 6: basically a subset of issues, and not every irritant. But
Speaker 6: I had been hearing some consternation about agriculture in particular,
Speaker 6: and some frustration on the US side that the EU
Speaker 6: wasn't willing to cut some of the more sensitive teriff rates,
Speaker 6: and then a lot of disagreement over those Section two
Speaker 6: thirty two carve outs and what those might look like
Speaker 6: on auto steel, pharma, semiconductors.
Speaker 4: And then of course, the President has long talked about
Speaker 4: Europe's treatment of US tech.
Speaker 6: Firms and from state aid to the DMA and DSA,
Speaker 6: and so those are going to continue to be difficult
Speaker 6: points between the US and the European Union.
Speaker 5: The European Union, we have this story, is preparing to
Speaker 5: step up engagement with other countries, potentially pros the United
Speaker 5: States with other allies. Do you think that tactic could
Speaker 5: work with this administration?
Speaker 6: I mean, I think it is a unique administration who
Speaker 6: negotiates in ways that are not typical in terms of
Speaker 6: diplomatic relations. So why not come to the United States
Speaker 6: as a block and say here is a potential solution
Speaker 6: and a potential way forward. Because is what is clear
Speaker 6: from Presidents Trump's tactic in terms of taking the sledgehammer
Speaker 6: to the global trading system and negotiating bilaterally with every
Speaker 6: government on Earth, is that the current global trading system,
Speaker 6: the World Trade Organization that is one hundred and sixty.
Speaker 4: Six member countries just doesn't work.
Speaker 6: And so if there are a subset of countries who
Speaker 6: want to join together and approach the United States, I
Speaker 6: think the administration could be open to that.
Speaker 3: Kelly, and you said a keyword there, tactic. And this
Speaker 3: is what the market is viewing all of this as,
Speaker 3: at least in terms of the muted reaction that we're
Speaker 3: seeing this morning, a tactic to negotiate a better deal.
Speaker 3: Is this negotiating with the trade partners or is this
Speaker 3: negotiating with the market.
Speaker 6: I think it's predominantly negotiating with the trading partners.
Speaker 4: But I do think that the market is playing a role.
Speaker 6: And right now, the fact that the market hasn't reacted
Speaker 6: as significantly as it did in the aftermath of April second,
Speaker 6: coupled with low inflation, positive job reports, and overall good
Speaker 6: economic indicators, I think doesen bolden the president and gives
Speaker 6: him a longer leash on his tariff strategy.
Speaker 4: Now, if the markets were to.
Speaker 6: Totally go the other way, I do think that that
Speaker 6: might have a bit of a mitigating impact on some
Speaker 6: of these tariffs. But I think the market is reading
Speaker 6: the situation exactly right, which is the President is sending
Speaker 6: these letters out the announcing these high tariff rates in
Speaker 6: the hopes of actually getting deals so that he won't
Speaker 6: have to impose those tariffs.
Speaker 4: So Kelly, And that's where.
Speaker 3: I think there is some confusion. What is the tariff strategy?
Speaker 3: Is it to get deals that are specific and have
Speaker 3: certain parameters, or is it just to see how far
Speaker 3: someone can push before you get revenues on the tariff's
Speaker 3: side and markets don't freak out.
Speaker 1: Yeah.
Speaker 4: I think it can be a little bit of both.
Speaker 6: I mean, certainly the pressing task right now is to
Speaker 6: create this action forcing event that by August first, these
Speaker 6: tariff rates will be exceptionally high unless countries are able
Speaker 6: to get a deal. I think that's really first and
Speaker 6: foremost on the president's mind. But the second line of
Speaker 6: messaging that we're hearing is about this revenue and the
Speaker 6: fact that the tariffs have been good for the US economy,
Speaker 6: that prices haven't gone up, and we're going to use
Speaker 6: it to pay for some of.
Speaker 4: These tax cuts.
Speaker 6: I think that's about softening the message on tariff so
Speaker 6: that for countries that don't get deals, it's not viewed.
Speaker 4: As catastrophic the sky is falling.
Speaker 6: That there might be some positive benefit there, But I
Speaker 6: do think at the end of the day, it would
Speaker 6: be best case scenario for everyone involved to find some
Speaker 6: sort of landing zone in terms of these bilateral negotiations
Speaker 6: with countries and to see a bunch of deals get
Speaker 6: inked and see those tariff and non tariff barriers come down.
Speaker 2: Kelly on I appreciate the update, the catch up. Thank
Speaker 2: you the former senior White House trying advise that Kelly
Speaker 2: on Shore that on the leak system. Vito s Perduto
Speaker 2: of BC Capital Markets saying EMINI activity is delayed, not derailed,
Speaker 2: writing the backlog of Vemini opportunities continues to build. Itals
Speaker 2: what happen that're just not happening as quickly as many
Speaker 2: had expected. Vita, it's going to see it.
Speaker 1: Good morning. Thank you for having me.
Speaker 2: The difference between those two words delayed and derailed what
Speaker 2: inspires confidence this is just a delay and not a derailment.
Speaker 7: Well, I think the fundamental conditions have continued to be
Speaker 7: very solid. I think the corporates are sitting flush with
Speaker 7: cash more so than they have historically. I think for clients,
Speaker 7: for instance, we're open to lend the clients to support
Speaker 7: their transactions much like we were earlier in the year.
Speaker 7: I think people have gotten comfortable with the current environment.
Speaker 7: They are operating in an environment of constant uncertainty, and
Speaker 7: so when you talk about whether it's tariffs or other
Speaker 7: policy coming out of EC, you have to plan for
Speaker 7: multiple scenarios. And so what we're finding with our clients
Speaker 7: is that they're preparing for transactions. There's a fair amount
Speaker 7: that they'd like to do. They're continuing their plans. It's
Speaker 7: just a question of when do you make the decision
Speaker 7: to do it, and so it's delayed to the right,
Speaker 7: it's not being taken off the t and so I
Speaker 7: think there's a fair amount of activity when the window
Speaker 7: does open.
Speaker 2: A lot of people said it was a wait and
Speaker 2: see economy, and then doutsa airlines happened and Ed Bastion
Speaker 2: came out and said that things are stable. Businesses have Clarency,
Speaker 2: they're investing again. Have we broken out of that weight
Speaker 2: and see economy.
Speaker 1: I think some have.
Speaker 7: I think we're seeing it certainly. I take a look
Speaker 7: very closely, for example, at the CEO Confidence Index out
Speaker 7: of the Conference Board. So the median there is fifty
Speaker 7: on a scale of zero to one hundred, in terms
Speaker 7: of the inflection point. In the first quarter, which was
Speaker 7: taken in February, CEOs were at a sixty, meaning that
Speaker 7: they were confident in the forward outlook. They felt positive
Speaker 7: about it. The survey that was taken in mid May
Speaker 7: dropped to thirty four. It's the biggest quarterly drop that
Speaker 7: you've seen. So what's happened between February and May Liberation Day?
Speaker 7: So that tariff and policy uncertainty, concerns about geopolitical instability,
Speaker 7: and then also an uncertain regulatory environment in some cases
Speaker 7: has driven them to not make decisions. And so when
Speaker 7: they looked at that, a very high number of them
Speaker 7: felt that we were in a worse position versus six
Speaker 7: months ago, back in May. But what we are seeing
Speaker 7: is that, Look, I think you look to Trump one
Speaker 7: point zero versus this. It took a full year of
Speaker 7: the first administration for people to get their arms around
Speaker 7: what it meant. I think it's happening quicker now, and
Speaker 7: I think the better companies are prepared and they're going
Speaker 7: to enact policy.
Speaker 3: The pipeline is rich, the pipeline is there. Look, I
Speaker 3: think one reason why a lot of people are looking
Speaker 3: at this is because we are going to get the
Speaker 3: earnings from JP Morgan and City tomorrow and Wells Fargo
Speaker 3: and then from Morgan Stanley and Goldbin Sachs on Wednesday.
Speaker 3: And people are wondering how much of a boom this
Speaker 3: is going to be to them, considering that heading into
Speaker 3: this year it was supposed to be the year of
Speaker 3: M and A didn't happen. How much has that been derailed?
Speaker 7: Well, I think you're seeing if you look at M
Speaker 7: and A volumes this year announced volumes, it's actually up
Speaker 7: versus last year, but a lot of those transactions in
Speaker 7: the first quarter were things that were already on.
Speaker 1: The books about to happen.
Speaker 7: And so you have USM and announced volumes are up
Speaker 7: sixteen percent this year. Globally it's up twenty six percent.
Speaker 7: But it's really larger deals billion dollar plus are driving that,
Speaker 7: and the smaller deals sub a billion are actually slightly
Speaker 7: down in value. So what's happened is a lot of
Speaker 7: it's just been, like we talked about, pushed to the right.
Speaker 7: People should not be surprised by this, Like I said
Speaker 7: just now, this is what happened back in twenty seventeen
Speaker 7: during the first administration. But what we are seeing is
Speaker 7: that where we sit today versus the beginning of the year,
Speaker 7: is that there has been a tightening of the bid
Speaker 7: ask spread. I think parties that are prepared and feel
Speaker 7: confident are out there doing transactions. I think sellers that
Speaker 7: need capital and need to For instance, if you're a
Speaker 7: private equity firm and you need to return capital to
Speaker 7: your LPs, you're looking at various alternatives. It might not
Speaker 7: be a traditional sale, but maybe you look at a
Speaker 7: continuation vehicle, maybe you're looking at some structured equity.
Speaker 1: Maybe you're looking at a.
Speaker 7: Minority sale or taking a loan on your net asset value,
Speaker 7: and you're finding ways to return capital because that's the
Speaker 7: lifeblood of what they need to do.
Speaker 3: I wonder how much the scenario for how people are
Speaker 3: financing these purchases has changed with yields where they are.
Speaker 3: Have you seen people less willing or companies not people,
Speaker 3: companies less willing to incur debt to make those purchases
Speaker 3: and want you at all stock or crash or whatever
Speaker 3: just lucas of the fees.
Speaker 7: I think if you go back two years ago, a
Speaker 7: year ago, certainly I think people had not accepted this
Speaker 7: new level yet. I think they've accepted it now, so
Speaker 7: they understand rates higher for longer. I think if you
Speaker 7: look at where where the calls are. For instance, our
Speaker 7: rate desk just pushed out their call last week that
Speaker 7: instead of a first cut happening in September, it's now
Speaker 7: going to be December, just because it's too short of
Speaker 7: a window to August first or the September meeting to
Speaker 7: really see any the statistics that will allow the FED
Speaker 7: to cut. And so as a result, I think companies
Speaker 7: are saying, I'm going to be in this environment longer.
Speaker 7: I need to make the right decisions for my business.
Speaker 7: It's too soon to just focus on twenty six and beyond.
Speaker 7: But I think a lot of folks are looking at
Speaker 7: they're more longer term plans, and as a result, you're
Speaker 7: seeing them make decisions that are strategic. I always like
Speaker 7: to say good strategic transactions will happen and we can
Speaker 7: find a way to support them and finance them. And
Speaker 7: we're seeing that with our best clients.
Speaker 5: But what's the risks in delaying.
Speaker 7: The risk in delaying is that someone else takes advantage
Speaker 7: and you're sitting on the sideline and left behind. And
Speaker 7: so we're seeing a lot of activity in some sectors
Speaker 7: where folks are feeling that. For example, if you look
Speaker 7: at the technology sector, I think folks are trying to
Speaker 7: build their pipelines from an AI perspective, and they're looking
Speaker 7: and saying, I need to be in here quickly.
Speaker 1: I can't wait to develop this on my own.
Speaker 7: I'm going to acquire it. If you think about some
Speaker 7: other sectors like industrials, they're looking to diversify their supply
Speaker 7: chains and think about making sure they've got ample supply
Speaker 7: and various geographies and so that they're teriff resistant, and
Speaker 7: they know they have to operate in this environment. We
Speaker 7: know it's going to not necessarily be what's out there
Speaker 7: in terms of a headline today, but we don't know
Speaker 7: what that's going to be, and I think they're planning
Speaker 7: for various scenarios.
Speaker 2: It just finally they support up the price of money
Speaker 2: to right. Cuts make a difference, so they move the dial.
Speaker 7: I think, as I started before, I said, we're looking
Speaker 7: for a signal for the for sort of people to
Speaker 7: make decisions. I think certainly rate cuts would be a
Speaker 7: good signal to the market and to buyers and sellers
Speaker 7: that this is an environment where we're ready to transact
Speaker 7: and there's a level of confidence there. M and A
Speaker 7: is about aligning many different factors, and so you need
Speaker 7: your management teams, you need your boards, you need them
Speaker 7: all to have confidence in the forward outlook. If they
Speaker 7: feel that the Fed's giving a strong signal like that,
Speaker 7: I think that's a positive. But at the same time,
Speaker 7: I think the better companies are prepared to act in
Speaker 7: this environment. And so again I jokingly say, we always
Speaker 7: have a pretty full pipeline.
Speaker 1: It's pretty full right now.
Speaker 7: But again i'd love to see a lot of that
Speaker 7: transition to announce transactions.
Speaker 2: You're certainly not alone. It's going to see you, sir.
Speaker 2: Thanks for dropping by, Thank you for having me. Vita Spaduta.
Speaker 2: There of abc DA of rough capital rights in this
Speaker 2: given the FEDS wait and see approach, prospective CPI readings
Speaker 2: may take on greater importance for risk assets in the
Speaker 2: months ahead. Mike joins us now for more, Mike, welcome
Speaker 2: to the program, sir, what are you expected tomorrow morning?
Speaker 8: Thank you for having me back on SO consensus is
Speaker 8: expecting a three tenths rise, both headlined in Core. So
Speaker 8: I don't really think that is going to change the
Speaker 8: mood on the FED. It's a very divided committee, as
Speaker 8: you guys just discussing. I'm not super worried about a
Speaker 8: big inflation spike here, and the reason I say that
Speaker 8: is bond market inflation expectations are very low and steady.
Speaker 8: Some of the higher frequency data actually looks pretty good.
Speaker 8: There's a gauge called trueflation, which is based on eighty
Speaker 8: million prices in blockchain technology, super high frequency. So we
Speaker 8: have year over year readings extending into almost mid July
Speaker 8: here one point seven percent. So I don't think we
Speaker 8: need to worry about a repeat of that three year
Speaker 8: inflation overshoot, which was really an aggregate demand monetary policy story.
Speaker 8: The tariffs could definitely create some inflationary headwinds, but I
Speaker 8: think they are temporary in the FED probably is best
Speaker 8: to just look through them.
Speaker 3: If that's the case, Mike, do you see this as
Speaker 3: a time for the FED to be cutting especially if
Speaker 3: this CPI print that we get tomorrow shows that ongoing
Speaker 3: disinflation at least not an inflationary trend.
Speaker 8: Yeah, I think so. I think they're getting much closer
Speaker 8: to that point, probably September. That's what markets are priced
Speaker 8: for FED funds futures are priced for just under one
Speaker 8: hundred basis points of rate cuts over the next year.
Speaker 8: That sounds like a lot, but it's really not over
Speaker 8: a twelve month period. If the economy is softening a
Speaker 8: bit at the margin, and I think, you know, some
Speaker 8: of the data suggests that's the case, not falling off
Speaker 8: a cliff, for sure, but we are seeing a little
Speaker 8: bit of softness at the margin with the most recent
Speaker 8: job numbers. And also it looks like GDP underlying growth.
Speaker 8: Real final sales to the private sector probably ran around
Speaker 8: one percent or so in Q two, So that's, you know,
Speaker 8: that's much that's much softer than what we've seen over
Speaker 8: the course of the last you know, two plus years.
Speaker 8: So I don't think it's inappropriate for the FED to
Speaker 8: be starting to consider lowering policy rates here. But I
Speaker 8: will say this, the hectoring from the White House is
Speaker 8: wholly on helpful. I mean, even if the administration were
Speaker 8: to convince Paul to step away from the FED and
Speaker 8: you know, this stuff about the construction project is just
Speaker 8: a fig leaf. It's pretty obviously obvious what's going on here.
Speaker 8: It's completely out of line in my view. But even
Speaker 8: if you were able to convince Paul to step down
Speaker 8: and someone else takes over. It's a committee, they operate
Speaker 8: by consensus, so it's really very unlikely to dramatically change
Speaker 8: the rate path in any event.
Speaker 3: So it's just like Michael, because this is actually one
Speaker 3: key question that the market has right that the people
Speaker 3: are questioning whether the market is pricing in some sort
Speaker 3: of firing of fed Shair J. Powell and wouldn't have
Speaker 3: that big of a reaction at all. Peter Shecheer was saying, no,
Speaker 3: that it is a committee and that people would look
Speaker 3: through that. How much does it complicate a message that
Speaker 3: actually would go the president's way if you've followed the
Speaker 3: economic data at least in your opinion, how much does
Speaker 3: it complicate that kind of messaging from a that wants
Speaker 3: to appear independent.
Speaker 4: That's a great point.
Speaker 8: I think, if anything, this hectoring in the political pressure
Speaker 8: probably makes it more difficult for the committee to move
Speaker 8: forward with rate cuts, and because they don't want to
Speaker 8: be viewed as, you know, a bending to political pressure.
Speaker 8: So I think, if anything, these kinds of shenanigans are
Speaker 8: likely a backfire and it sets a terrible precedent going forward.
Speaker 8: I mean, you know, the FED should be an independent institution.
Speaker 8: We can look back at what happened with President Nixon
Speaker 8: when he pressured FED Chair Burns to inappropriately run easy
Speaker 8: monetary policy, setting off a decade of inflation which eventually
Speaker 8: culminated in double digit interest rates. We saw a situation
Speaker 8: in Turkey where President Erdawan tampered with the central bank,
Speaker 8: wanted low rates, easy money policy, a currency collapse and
Speaker 8: hyperinflation followed. So let's get back to basics. If you
Speaker 8: want low mark at interest rates, what do you need?
Speaker 8: You need price stability, and I think the FED is
Speaker 8: well on their way to achieving that in terms of
Speaker 8: on target inflation. And you need budget integrity, and the
Speaker 8: FED has nothing to do with that in the administration,
Speaker 8: and my judgment and Congress are certainly not on that
Speaker 8: path with the so called big beautiful Bill that was
Speaker 8: miles and miles away from an optimal outcome.
Speaker 5: Jonathan's been talking about this Deutsche Bank note about the
Speaker 5: risks of if Powell was to be ousted are underpriced.
Speaker 5: What kind of market reaction could we see if we've
Speaker 5: come to that point.
Speaker 8: Well, it's very uncertain. I think it's just a matter
Speaker 8: of setting a very bad precedent of political tampering or
Speaker 8: the attempt to tamper with an independent federal reserve. And
Speaker 8: you really look back at history and policized central banks
Speaker 8: don't achieve optimal outcomes. They might do something that helps
Speaker 8: the sitting administration in the short run. In the long
Speaker 8: term price is paid by the public in terms of
Speaker 8: higher inflation and lower real income. So it's really not
Speaker 8: the path you want to be going down. Very hard
Speaker 8: to say in terms of the very short term. I mean,
Speaker 8: what happens even if were to step down, I don't
Speaker 8: think it really changes things dramatically in terms of you
Speaker 8: know where the FED is headed here, given that it's
Speaker 8: a committee, and you know, the administration is not going
Speaker 8: to be able to completely politicize the majority on the
Speaker 8: committee anytime soon. That said, it's really a move in
Speaker 8: the wrong direction. It's totally inappropriate, and they should just.
Speaker 2: Stop it, just a bit of bow on it, given
Speaker 2: all the risks we've talked about. Why are market based
Speaker 2: inflation and expectations so well anchored?
Speaker 8: Well, I think they're well anchored because the FED has
Speaker 8: achieved quite a bit of credibility here, right. I mean,
Speaker 8: they obviously had a big goof in twenty one twenty
Speaker 8: two where we had inflation shoot up to forty year highs.
Speaker 8: But you know, they ended up correcting that with five
Speaker 8: hundred and fifty basis points of rate hikes and we're
Speaker 8: somehow able to achieve a soft landing avoid a recession.
Speaker 8: And now inflation has come down to much lower levels historically,
Speaker 8: So the bond market is giving the Fed the benefit
Speaker 8: of the doubt. The institution has really regained and re
Speaker 8: anchored its credibility, and that's another reason not to tamper
Speaker 8: with the Federal Reserve in a political way, because if
Speaker 8: that credibility is lost, it could be very difficult to reachieve.
Speaker 8: They certainly got very fortunate with this episode a few
Speaker 8: years ago. You know why keep playing Russian roulette with
Speaker 8: credibility doesn't make any sense whatsoever.
Speaker 2: Mikeel, appreciate your time. It's been too long. Let's do
Speaker 2: it against so micro daanave of rough capital. This is
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Speaker 1: Out Mm hmm