WEBVTT - Bloomberg Surveillance TV: April 25, 2025 0:00:00.080 --> 0:00:06.760 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.600 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.440 --> 0:00:18.360 with Lisa Bromwitz and am Marie Hordern. Join us each 0:00:18.480 --> 0:00:21.360 day for insight from the best in markets, economics, and 0:00:21.400 --> 0:00:24.720 geopolitics from our global headquarters in New York City. We 0:00:24.760 --> 0:00:27.400 are live on Bloomberg Television weekday mornings from six to 0:00:27.480 --> 0:00:31.000 nine am Eastern. Subscribe to the podcast on Apple, Spotify 0:00:31.200 --> 0:00:33.479 or anywhere else you listen, and as always on the 0:00:33.479 --> 0:00:36.920 Bloomberg Terminal and the Bloomberg Business App. Here's the take 0:00:36.960 --> 0:00:39.440 on the economy, Nathan sheets of City rising the following. 0:00:39.479 --> 0:00:41.640 We see global growth this year softening to two point 0:00:41.680 --> 0:00:44.680 one percent, down from under three percent last year. Given 0:00:44.720 --> 0:00:47.360 the trajectory of recent developments, the risk to our forecast 0:00:47.440 --> 0:00:50.360 are skewed to the downside. Nathan joins us now for more. Nathan, 0:00:50.400 --> 0:00:52.480 good morning, good to be here. How much has changed 0:00:52.520 --> 0:00:54.080 for you in the team in the last four months? 0:00:54.680 --> 0:00:58.880 Oh, this is this is a completely different world one 0:00:59.120 --> 0:01:02.040 as you read our view as the global growth this 0:01:02.120 --> 0:01:04.320 year and next year are both going to be much weaker, 0:01:04.680 --> 0:01:08.880 but even beyond that, it's deeply structural and I think 0:01:08.920 --> 0:01:11.600 we felt that this week during the Bank Fund meetings. 0:01:11.880 --> 0:01:14.520 The US has been the center of the system for decades, 0:01:14.959 --> 0:01:17.480 and now the US is standing up and rejecting in 0:01:17.600 --> 0:01:22.280 very fundamental ways key features of this system. And I 0:01:22.319 --> 0:01:23.760 think the rest of the world is just kind of 0:01:23.760 --> 0:01:25.720 looking around and saying, what's next. 0:01:25.880 --> 0:01:29.400 They're the near term effects and they're the longer term ramifications. 0:01:29.440 --> 0:01:31.959 In the near term, all of the finance ministers and 0:01:32.000 --> 0:01:33.880 central bankers are saying, we need the dollar to be 0:01:33.920 --> 0:01:36.720 the reserve currency. How much do you expect that, though, 0:01:36.760 --> 0:01:38.959 to change longer term? And are they questioning that in 0:01:38.959 --> 0:01:40.080 private conversations with you. 0:01:40.440 --> 0:01:42.840 I think that's one of the leading questions that I'm 0:01:42.880 --> 0:01:45.560 hearing is what about the dollar's role over the medium 0:01:45.600 --> 0:01:49.120 belong run as reserve currency? But even if we extrapolate 0:01:49.200 --> 0:01:51.560 out five to ten years, it's still not clear that 0:01:51.600 --> 0:01:56.040 there are really any real challengers for the dollar in 0:01:56.120 --> 0:01:59.200 that role. And I think most say, well, you know, 0:01:59.240 --> 0:02:01.680 we're kind of stuck with the dollar. But then the 0:02:01.800 --> 0:02:05.920 question comes at what price? And I think that question 0:02:06.000 --> 0:02:10.119 of risk premium on US assets is one that markets 0:02:10.160 --> 0:02:11.680 are struggling with as we. 0:02:11.680 --> 0:02:14.320 Speak, which goes to the question of weakness, and if 0:02:14.360 --> 0:02:16.320 there is some sort of downturn in the United States, 0:02:16.360 --> 0:02:18.280 what is the fiscal impulse and the ability for the 0:02:18.360 --> 0:02:21.480 United States to borrow into weakness at a time where 0:02:21.480 --> 0:02:24.080 we have near record deficits as a per percentage of 0:02:24.120 --> 0:02:25.240 GDP and you have. 0:02:25.240 --> 0:02:28.920 The structural shift going on if we have a downturn, 0:02:29.160 --> 0:02:33.200 and that is a very reasonable, plausible scenario. Many people 0:02:33.240 --> 0:02:36.000 have that as their baseline forecast. If we have a 0:02:36.040 --> 0:02:40.200 downturn in the United States, the implications for the US 0:02:40.200 --> 0:02:43.840 fiscal deficit or grim. We could be again easily knocking 0:02:43.880 --> 0:02:47.520 on the door of ten percent fiscal deficits. And in 0:02:47.560 --> 0:02:50.160 that environment, do I think the Treasury can issue I do, 0:02:50.560 --> 0:02:53.240 but again at what price? What do those yields look like? 0:02:53.560 --> 0:02:55.960 What are the risk premiums? And I think that's the 0:02:56.080 --> 0:02:59.480 question we're going to be struggling with in the years ahead, 0:02:59.680 --> 0:03:01.480 is where is this first premium going. 0:03:01.639 --> 0:03:04.360 The President this morning speaking to Time magazine saying that 0:03:04.720 --> 0:03:05.680 he didn't get the yips. 0:03:05.720 --> 0:03:06.720 The bond market got. 0:03:06.560 --> 0:03:08.880 The yips, but it wasn't the reason why he came 0:03:08.919 --> 0:03:11.160 out with that pause, even though everyone is saying that 0:03:11.240 --> 0:03:12.400 was the Trump put in action. 0:03:12.880 --> 0:03:14.560 Do you think that it is this bond. 0:03:14.360 --> 0:03:16.919 Market that is putting pressure up against this administration to 0:03:17.000 --> 0:03:19.320 come out and tweak and change policy. 0:03:19.960 --> 0:03:23.000 I think the bond market has been front and center 0:03:23.040 --> 0:03:25.960 in this. I think it's the financial markets more broadly. 0:03:26.280 --> 0:03:30.800 But I also think gets the discussion with CEOs and 0:03:30.840 --> 0:03:33.920 what he's hearing, and I think it's political reality. So 0:03:33.960 --> 0:03:37.160 I think there was a lot of pushback to this 0:03:37.280 --> 0:03:40.600 tarift policy, and I think the upshot of that is 0:03:40.640 --> 0:03:44.680 that we've officially now moved, it seems, from the phase 0:03:44.760 --> 0:03:49.080 of announcing tariffs to the phase of negotiating what these 0:03:49.120 --> 0:03:53.280 tariffs are ultimately going to look like. And maybe that's progress. 0:03:53.560 --> 0:03:55.480 When it comes to China, one hundred and forty five 0:03:55.520 --> 0:03:58.600 percent is unsustainable. Everyone continues to say that, But even 0:03:58.600 --> 0:04:00.880 if we go to sixty percent, which was what the 0:04:00.880 --> 0:04:03.080 President talked about in the campaign trail, is that still 0:04:03.080 --> 0:04:06.520 in essence a trade embargo between Washington and Beijing. 0:04:06.880 --> 0:04:10.200 One hundred and forty five percent tariff is prohibitive. And 0:04:10.480 --> 0:04:14.040 I argue during the election that a sixty percent tariff 0:04:14.080 --> 0:04:18.640 would be prohibitive. It would destroy many supply chains and 0:04:19.200 --> 0:04:22.440 mean a lot of shelves at various stores were empty. 0:04:22.920 --> 0:04:27.520 So absolutely sixty percent. We're going to still see sharp 0:04:27.680 --> 0:04:33.279 declines in imports from China with negative ramifications throughout the economy. 0:04:33.320 --> 0:04:35.560 We've seen some pill forward and Sunday. We've seen that 0:04:35.600 --> 0:04:37.680 in retail sales, and we're probably going to see that 0:04:37.680 --> 0:04:40.560 in invantries too. I want to understand from your perspective 0:04:40.560 --> 0:04:42.479 how much time we actually have here. It takes somewhere 0:04:42.480 --> 0:04:44.280 between twenty to forty days to got a shift from 0:04:44.320 --> 0:04:47.560 China to the United States. Taris went on an April second. 0:04:47.560 --> 0:04:48.400 How close are we? 0:04:48.920 --> 0:04:52.479 This is another issue that we're debating in real time. 0:04:53.040 --> 0:04:56.479 My view is that the second quarter is likely to 0:04:56.520 --> 0:04:59.680 be okay, that we've seen the soft data fall off, 0:04:59.720 --> 0:05:02.000 but the hard data are lagging and they're going to 0:05:02.000 --> 0:05:06.839 continue to lag as people continue to front load inventories 0:05:06.880 --> 0:05:11.160 and probably certain types of consumption. But the third and 0:05:11.200 --> 0:05:13.880 fourth quarter could be pretty ugly. How can that's the 0:05:13.920 --> 0:05:14.719 heart of darkness? 0:05:14.720 --> 0:05:17.440 How convinced are you and the tame that that'd respond quickly? 0:05:17.520 --> 0:05:20.400 The Federal Reserve being thy to any sign of weakness. 0:05:20.640 --> 0:05:24.600 The FAT is in a very tough place here where 0:05:24.600 --> 0:05:28.360 the bond market is equally focused, if not more focused 0:05:28.360 --> 0:05:31.360 on what's going to happen with inflation, and so what 0:05:31.400 --> 0:05:33.800 the FED has got to do is make sure that 0:05:33.839 --> 0:05:38.600 the inflation expectations are well anchored, and once that's achieved, 0:05:38.640 --> 0:05:40.960 then they can pivot to rate cuts. And I do 0:05:41.080 --> 0:05:43.440 expect by the end of the year will be seeing 0:05:43.560 --> 0:05:46.320 ray cuts, but it could take us a few months 0:05:46.320 --> 0:05:48.960 and it may not be a conferred side of weakness. 0:05:48.480 --> 0:05:49.800 And that could mean a lot of hand in this 0:05:49.880 --> 0:05:52.840 market stone account absolutely could nice and it's going to 0:05:52.880 --> 0:05:55.279 say thank you, sir nice and shakes that of sisy. 0:06:05.400 --> 0:06:07.000 Here's a take from a man who's seen it, or 0:06:07.040 --> 0:06:10.240 the former Deputy Treasury Secretary Wally Otama writing, the only 0:06:10.240 --> 0:06:12.719 way we can address the China problem is by working 0:06:12.720 --> 0:06:15.080 with other countries. But for many of them, they're still 0:06:15.120 --> 0:06:17.760 waiting to hear while the US even wants while he 0:06:17.839 --> 0:06:19.240 joins to snaf for more. What a good money. So 0:06:19.320 --> 0:06:20.320 it's good to see you, Good. 0:06:20.160 --> 0:06:21.800 To see you here, Thanks for coming to Washington, DC. 0:06:22.120 --> 0:06:23.880 You've been in the room of the Chinese many times. 0:06:24.120 --> 0:06:26.560 How difficult is it to negotiate with them? Just set 0:06:26.560 --> 0:06:27.760 the scene? What is it like? 0:06:28.080 --> 0:06:30.719 The reality for the Chinese is they are very systematic 0:06:30.760 --> 0:06:33.480 in trying to find your weaknesses by both talking to 0:06:33.520 --> 0:06:35.520 you directly but also talking. 0:06:35.240 --> 0:06:36.360 Around you to other people. 0:06:36.440 --> 0:06:39.159 So when you are negotiating with the Chinese, you have 0:06:39.240 --> 0:06:41.680 to be very clear about what you want. You have 0:06:41.720 --> 0:06:43.360 to repeat it over and over. You need to tell 0:06:43.400 --> 0:06:45.640 your friends and your allies in the hopes that you'll 0:06:45.640 --> 0:06:48.000 get fifty percent of what you want in that conversation. 0:06:48.400 --> 0:06:50.800 And it's always about how do you make progress rather 0:06:50.839 --> 0:06:52.680 perfect than perfection with the Chinese. 0:06:52.720 --> 0:06:55.359 You refer to the China problem. What is the problem 0:06:55.480 --> 0:06:56.960 and what you make of the approach so far? 0:06:57.640 --> 0:06:59.440 The reality is and over the course of this week, 0:06:59.480 --> 0:07:01.279 in addition to getting to see you, I've gotten to 0:07:01.279 --> 0:07:05.039 see a number of my former counterparts. And the thing 0:07:05.080 --> 0:07:08.320 you've heard from our closest allies is just disappointment because 0:07:08.560 --> 0:07:11.400 they all face the same challenge, which is that China 0:07:11.520 --> 0:07:16.040 takes steps to subsidize their industries and export access capacity 0:07:16.160 --> 0:07:19.360 to the world. And the challenge we have in the 0:07:19.440 --> 0:07:21.800 United States is the same challenge they have in Europe, 0:07:22.120 --> 0:07:24.440 the same challenge they have in parts of Southeast Asia, 0:07:24.760 --> 0:07:26.480 And for many of them, they want to work with 0:07:26.560 --> 0:07:30.360 us to address this because if the US blocks Chinese 0:07:30.360 --> 0:07:33.200 goods from coming to America. The people today who are 0:07:33.200 --> 0:07:34.840 afraid those goods are kind of show up on their 0:07:34.840 --> 0:07:37.600 shores are in Southeast Asia and in Europe, and they 0:07:37.600 --> 0:07:39.200 now need to think through what are they going to 0:07:39.200 --> 0:07:41.240 do to deal with China's access capacity is coming in 0:07:41.240 --> 0:07:41.680 their direction. 0:07:41.920 --> 0:07:43.960 Let's look at Europe. Are they speaking with one voice? 0:07:43.960 --> 0:07:46.640 We had the Spanish Finance minister in the room here 0:07:46.760 --> 0:07:49.280 yesterday and John picked up on something he said, he 0:07:49.320 --> 0:07:52.000 called it China an ally and we have seen the 0:07:52.000 --> 0:07:55.680 Prime Minister Pedro Sanchez go to Beijing three times in 0:07:55.720 --> 0:07:58.400 the past two years. It feels like they're playcating to 0:07:58.600 --> 0:08:01.600 China and actually not coming on board with the United States. 0:08:01.800 --> 0:08:03.720 So I think you're right that's part of the challenges 0:08:03.760 --> 0:08:06.160 that Europe doesn't speak with one voice, because today, if 0:08:06.200 --> 0:08:07.960 Europe did speak with one voice, they'd be in a 0:08:08.000 --> 0:08:12.520 better position to negotiate terms. Europe is the third largest 0:08:12.520 --> 0:08:14.640 economy in the world. If they were willing to work 0:08:14.680 --> 0:08:17.600 together to do things like put in place the free 0:08:17.640 --> 0:08:21.120 trade agreement they have with countries like with other countries, 0:08:21.400 --> 0:08:24.200 and to go and work with the TPP countries, they'd 0:08:24.200 --> 0:08:26.000 have the ability to dictate more terms. 0:08:26.160 --> 0:08:27.480 But today, because they're unwilling to. 0:08:27.520 --> 0:08:30.280 They're caught between China and the US, and that's the 0:08:30.320 --> 0:08:33.600 most important thing for the Chinese. They're concerned that if 0:08:33.640 --> 0:08:37.040 they don't find a way to dial back this, they're 0:08:37.040 --> 0:08:39.400 going to end up in a place where countries like Europe, 0:08:39.520 --> 0:08:41.839 or regions like Europe or other countries will choose the 0:08:41.960 --> 0:08:45.199 US over them. But unfortunately the approach the Trump administration 0:08:45.240 --> 0:08:48.040 has taken as instead of bringing Europe closer to US, 0:08:48.080 --> 0:08:50.079 put them in a place where they're up to for debate. 0:08:50.080 --> 0:08:52.000 And you hear things like that from the Spanish in 0:08:52.080 --> 0:08:53.880 terms of are we allies with the US? 0:08:53.960 --> 0:08:55.120 Are we allies with China? 0:08:55.160 --> 0:08:56.800 And then Rachel Reeves in the UK and along the 0:08:56.800 --> 0:08:59.040 sidelines to the IMF is saying things like Trump is right, 0:08:59.200 --> 0:09:02.360 China does need to rebalance their economy. How difficult was 0:09:02.400 --> 0:09:05.160 it for you and Treasure Secretary Jadet Yellen to get 0:09:05.160 --> 0:09:07.800 that message across to China. You have to start rebalancing 0:09:07.840 --> 0:09:08.559 your economy. 0:09:08.679 --> 0:09:11.120 And this is not a new message, Secretary Pulson center 0:09:11.160 --> 0:09:15.520 to the Chinese Secretary Geidner, Secretary Lou Secretary Yellen, and 0:09:15.760 --> 0:09:18.079 I know that the current secretary is sending it as well. 0:09:18.360 --> 0:09:20.880 The truth is that China is only going to respond 0:09:20.920 --> 0:09:22.719 if they feel pressure, and it's not just going to 0:09:22.720 --> 0:09:24.439 be from the United States. They've got to feel it 0:09:24.480 --> 0:09:26.120 from the UK, they have to feel it from Europe. 0:09:26.120 --> 0:09:27.680 And the best way to do that is to work 0:09:27.679 --> 0:09:31.439 together to confront the Chinese. Today, the Chinese feel empowered 0:09:31.480 --> 0:09:34.200 because instead of being confronted by the world who's suffering 0:09:34.200 --> 0:09:36.560 from their access capacity, the United States. 0:09:36.360 --> 0:09:38.360 In lots of ways, has alienated the world. 0:09:38.480 --> 0:09:40.920 The hope over the next few weeks is that a 0:09:41.040 --> 0:09:43.559 Secretary Bessett and the President are going to be able 0:09:43.600 --> 0:09:45.600 to work with our allies and partners to find an 0:09:45.600 --> 0:09:47.440 approach that works, because the people who are going to 0:09:47.440 --> 0:09:50.160 suffer most from this are American consumers. 0:09:50.559 --> 0:09:51.480 You can see their bills go. 0:09:51.440 --> 0:09:54.160 Up by three thousand dollars, and that's not just the statistics. 0:09:54.200 --> 0:09:56.880 You've heard all of the CEOs who've been doing earning 0:09:56.920 --> 0:09:59.160 calls who have said that they're going to have to 0:09:59.240 --> 0:10:02.319 raise prices, and they've all said that they had great 0:10:02.360 --> 0:10:05.000 first quarters because the economy is doing quite well. So 0:10:05.200 --> 0:10:07.280 we're in a place right now where if the United 0:10:07.320 --> 0:10:09.679 States doesn't get into a posture of working with our 0:10:09.679 --> 0:10:12.600 allies and partners and reducing these tariff rates. I can't 0:10:12.640 --> 0:10:14.760 guarantee that we're going to have a recession, but I 0:10:14.760 --> 0:10:16.400 can say that prices are going to go up for 0:10:16.400 --> 0:10:17.319 American consumers. 0:10:17.480 --> 0:10:18.559 Is it too late to. 0:10:18.559 --> 0:10:21.120 Really create that alliance and go after China, as China 0:10:21.160 --> 0:10:25.040 already made inroads in terms of making alliances, whether it's 0:10:25.040 --> 0:10:27.520 with the stains of the world or even in Southeast Asia. 0:10:27.600 --> 0:10:29.439 So the interesting thing I've heard over the course the 0:10:29.520 --> 0:10:32.800 last few days here is that people are equally as 0:10:32.840 --> 0:10:36.400 nervous of American tariffs as they are of Chinese access capacity. 0:10:36.640 --> 0:10:39.600 So the people who live in Southeast Asia, the people 0:10:39.640 --> 0:10:41.920 in Europe are worried that all those goods that were 0:10:41.920 --> 0:10:45.080 headed to the United States, that we're hurting our industrial base, 0:10:45.360 --> 0:10:47.840 are heading to a port near you, and that China's 0:10:47.880 --> 0:10:51.040 access capacity is going to overwhelm them. So I don't 0:10:51.080 --> 0:10:53.480 think it's too late, but our allies and partners are 0:10:53.480 --> 0:10:55.760 going to be more cautious about dealing with us. But 0:10:55.800 --> 0:10:57.760 the reason that countries are coming to the United States 0:10:57.880 --> 0:11:00.720 is because they want to make sure that the industries 0:11:00.720 --> 0:11:03.760 and their countries aren't overwhelmed by Chinese overcapacity either. So 0:11:03.960 --> 0:11:06.640 there is an opportunity here, but it's not one that's 0:11:06.640 --> 0:11:09.000 going to be open forever, and the Chinese are working 0:11:09.000 --> 0:11:11.400 hard to try and counter that. President She's visit was 0:11:11.440 --> 0:11:14.920 all about trying to buttress their ability to have allies 0:11:14.960 --> 0:11:18.520 and partners as the US confronts them. But Vietnam, in 0:11:18.520 --> 0:11:21.760 addition to gaining a great deal of economic value from 0:11:21.760 --> 0:11:24.800 their relationship with China, has to be worried about Chinese 0:11:25.160 --> 0:11:26.800 capacity showing up there as well. 0:11:26.960 --> 0:11:28.640 There was a story in the Financial Times and on 0:11:28.679 --> 0:11:32.520 Bloomberg about how Apple was moving all of its iPhone 0:11:32.559 --> 0:11:36.080 production away from China into India hopefully by the end 0:11:36.120 --> 0:11:38.520 of next year. This hopefully for them. That is the 0:11:38.559 --> 0:11:40.880 projection they put out there is that how this is 0:11:40.880 --> 0:11:43.600 going to work from what you hear that essentially India 0:11:43.679 --> 0:11:45.680 is going to be the big beneficiary from a lot 0:11:45.679 --> 0:11:48.200 of the tariffs, particularly on China. 0:11:48.240 --> 0:11:51.800 That's how it's worked the entire time since basically the 0:11:51.840 --> 0:11:54.920 Obama administration, a number of companies have been moving to 0:11:55.040 --> 0:11:58.040 a China plus one strategy, where they build for China 0:11:58.160 --> 0:12:00.560 in China and they build for everybody else somewhere else. 0:12:00.840 --> 0:12:04.800 That's been Vietnam, Malaysia and India but the problem has 0:12:04.880 --> 0:12:08.280 been Chinese companies have taken a China plus one strategy too. 0:12:08.520 --> 0:12:10.320 They've moved away from the terrorists they put in China 0:12:10.360 --> 0:12:14.079 by setting up shops in Vietnam, Malaysia and probably now 0:12:14.080 --> 0:12:16.280 in India too. That's why we have to work with 0:12:16.320 --> 0:12:19.320 these countries because the Chinese are being very clever about this. 0:12:19.480 --> 0:12:21.439 They see the huge tariffs have been placed on them 0:12:21.440 --> 0:12:24.040 in China, so they're setting up shop. And my understanding 0:12:24.080 --> 0:12:26.720 is that a big part of the negotiations with Mexico 0:12:26.720 --> 0:12:30.199 and Canada is around making sure that Chinese firms can't 0:12:30.240 --> 0:12:33.439 set up plants in Mexico. Ultimately, I think that they 0:12:33.480 --> 0:12:35.160 should be able to get to a deal with Mexico 0:12:35.400 --> 0:12:39.079 and Canada because we're such an integrated economy, but it's 0:12:39.120 --> 0:12:40.599 going to be harder to get to those kind of 0:12:40.640 --> 0:12:42.520 deals with countries that are closer to China. 0:12:42.640 --> 0:12:44.640 Well, I've got thirty seconds left. Is there anything you 0:12:44.679 --> 0:12:47.400 wish you'd done differently with regards to this topic. 0:12:48.440 --> 0:12:50.439 I think the reality is that the thing you always 0:12:50.480 --> 0:12:51.880 hope that you could do is get to a deal 0:12:51.920 --> 0:12:54.200 with your allies and partners that confront the Chinese. But 0:12:54.240 --> 0:12:56.200 the other thing that I think is clear is that 0:12:57.200 --> 0:12:59.000 terrorists work when you use them strategically. 0:12:59.160 --> 0:13:00.880 They don't work when you use them in. 0:13:00.880 --> 0:13:03.000 A broad based way, because what that does is it 0:13:03.040 --> 0:13:05.319 causes more pain for your consumers and your allies. 0:13:05.559 --> 0:13:06.760 And the thing that's worried me a. 0:13:06.679 --> 0:13:10.360 Great deal is talking to asset allocators around the world, 0:13:10.720 --> 0:13:12.800 and for each one of them, they've been overweighted the 0:13:12.920 --> 0:13:16.319 United States for a long time because of the exceptionals 0:13:16.440 --> 0:13:19.720 of our economy. But today each one is talking about 0:13:19.880 --> 0:13:23.000 reallocating their assets. Hard to find other places to do 0:13:23.040 --> 0:13:25.199 that in the short term, but if over the long 0:13:25.320 --> 0:13:28.079 term we don't provide clarity and certainty the things the US, 0:13:28.640 --> 0:13:31.520 the American economy has done over the last decades, I 0:13:31.520 --> 0:13:33.800 do worry about our ability to attract capital into the 0:13:33.880 --> 0:13:34.520 United States. 0:13:34.720 --> 0:13:36.400 Wale, it's going to see us a great to see 0:13:36.480 --> 0:13:38.640 nice bit of this. So let's just talk about particularly 0:13:38.679 --> 0:13:40.600 the deficit. I'm let to talk about that with Wally 0:13:40.679 --> 0:13:43.880 at another time. They FOMA definitely try to resacretrate Wale 0:13:43.920 --> 0:13:56.040 out of YMI. We begin this SA with this week's 0:13:56.080 --> 0:13:59.520 rally on Hold as Chinatown place progress in trit and negustiations. 0:13:59.640 --> 0:14:02.280 Jason Thomas of Carlia, writing, if treasury yields do not 0:14:02.440 --> 0:14:06.080 decline when stocks sell off, investors may discover they've been 0:14:06.120 --> 0:14:09.440 paying for a hedge that no longer works. Jason joined 0:14:09.440 --> 0:14:11.120 a snaff for more. Jason, good morning, good to see it, 0:14:11.200 --> 0:14:11.680 Good to see you. 0:14:11.679 --> 0:14:12.320 Thanks for having me. 0:14:12.360 --> 0:14:14.200 I'm pleased you've picked up on that piece, because I 0:14:14.200 --> 0:14:15.760 want to pick up on it with you as well. 0:14:16.000 --> 0:14:18.800 This em type dynamic that started to take hold of 0:14:18.920 --> 0:14:23.240 US assets dollar denominated assets. What's behind it? One? And 0:14:23.320 --> 0:14:25.080 do you think it's sustainable too? 0:14:25.720 --> 0:14:25.920 Well? 0:14:25.960 --> 0:14:27.760 I think, first of all, we have to remember that 0:14:27.880 --> 0:14:30.960 bonds are volatile in a way that cash is not so. 0:14:31.000 --> 0:14:33.240 At the start of this month, if you had a 0:14:33.280 --> 0:14:35.800 one hundred dollars invested in money markets, it was yielding 0:14:35.880 --> 0:14:38.400 four point three percent the ten year treasury at the 0:14:38.440 --> 0:14:42.240 time four percent. A week later, the cash was still 0:14:42.240 --> 0:14:45.280 at poor as it always is, the bond was down 0:14:45.360 --> 0:14:48.480 at ninety six. And so in the past there's generally been, 0:14:48.480 --> 0:14:51.160 of course, a term premium to compensate for the volatility 0:14:51.560 --> 0:14:54.880 that went away in the decade after the GFC. Why 0:14:55.480 --> 0:14:58.040 because anytime there was a hint of weakness in the economy, 0:14:58.600 --> 0:15:02.280 anytime there was decline in stocks, the FED would launch 0:15:02.320 --> 0:15:06.400 another round of QE, with of course the intention of 0:15:06.480 --> 0:15:09.000 driving down bond yields. So of course there are many 0:15:09.080 --> 0:15:13.320 risk parity strategies. You had investors who are hedging their 0:15:13.360 --> 0:15:16.480 stock market risk through leverage positions and bonds. 0:15:16.600 --> 0:15:17.480 That worked very well. 0:15:17.680 --> 0:15:21.440 Some years, stocks down twelve percent, those leverage bond positions 0:15:21.520 --> 0:15:24.800 up fifteen percent. Now I think we're in a somewhat 0:15:24.800 --> 0:15:28.960 different world. Partly, of course, that's the external sector wondering 0:15:29.000 --> 0:15:33.560 about being over allocated to the US. That's stocks, that's bonds. 0:15:33.560 --> 0:15:37.040 I think, more broadly, the deficit. When you think about 0:15:37.240 --> 0:15:42.160 how large the deficit is this year, treasury net issuance 0:15:42.560 --> 0:15:46.760 is consuming over forty two percent of US private savings 0:15:47.280 --> 0:15:49.760 that is, the savings of the household sector, the free 0:15:49.840 --> 0:15:53.280 cash flow of the corporate sector. So you know, if 0:15:53.280 --> 0:15:55.320 this is not going to be financed in large part 0:15:55.760 --> 0:15:59.600 by external investors, you have to wonder what the market 0:15:59.640 --> 0:16:02.600 clearing interest rate is going to be. So I think 0:16:02.640 --> 0:16:04.800 that what we're seeing is that if there is not 0:16:04.920 --> 0:16:10.200 this hedge, if treasuries do not predictably rise when stocks fall, 0:16:10.840 --> 0:16:13.600 then there has to be a much larger risk premium 0:16:13.640 --> 0:16:16.960 on bonds relative to cash, and if you look historically 0:16:17.040 --> 0:16:19.480 the nineteen eighties nineteen nineties, that was in the range 0:16:19.480 --> 0:16:21.280 of about one hundred and fifty basis points. 0:16:21.640 --> 0:16:24.280 So fill signe that that process is underway. Where can 0:16:24.320 --> 0:16:26.000 our way through it? Without doubt? You can say on 0:16:26.040 --> 0:16:28.320 the screen and the price sanction of the last several weeks, 0:16:28.480 --> 0:16:30.080 I want to want to stand from your perspective, how 0:16:30.120 --> 0:16:32.840 investors should now manage that risk. They've got very used 0:16:32.840 --> 0:16:35.400 to having this ballast in the portfolio. The treasuries typically 0:16:35.480 --> 0:16:37.120 provide where do you go now? 0:16:37.600 --> 0:16:39.680 Well, of course I would recommend that people go to 0:16:39.920 --> 0:16:43.520 private assets, particularly private credit, but I think that the 0:16:44.000 --> 0:16:48.960 general portfolio thoughts have to be re examined. There's talks 0:16:48.960 --> 0:16:51.680 that you know of a fifty to thirty twenty portfolio, 0:16:51.960 --> 0:16:55.080 but in general it's that what has worked, what works 0:16:55.120 --> 0:16:58.160 so well in that decade after the GFC, is not 0:16:58.240 --> 0:16:59.880 going to work today. 0:16:59.680 --> 0:17:00.760 So whatever your. 0:17:00.600 --> 0:17:04.240 Solution is, there needs to be a rethink. And I 0:17:04.280 --> 0:17:08.280 think that again it's been so ingrained that treasuries are 0:17:08.280 --> 0:17:11.399 supposed to rise in value when stocks fall. There's no 0:17:11.600 --> 0:17:14.840 mathematical law that that's supposed to occur. And again, the 0:17:15.200 --> 0:17:19.040 return correlation with stocks and bonds was positive in the 0:17:19.080 --> 0:17:22.360 nineteen eighties and nineteen nineties, so this is not entirely new. 0:17:22.680 --> 0:17:22.880 Yet. 0:17:23.000 --> 0:17:25.680 There is a larger consequence here, though. I'm thinking through 0:17:25.720 --> 0:17:27.320 as you're saying this, and if you're talking about a 0:17:27.320 --> 0:17:29.919 clearing price, it's different for treasuries to account for that 0:17:29.960 --> 0:17:31.320 additional res risk premium. 0:17:31.440 --> 0:17:32.320 We could be talking. 0:17:32.080 --> 0:17:34.639 About five five and a half percent on ten your 0:17:34.640 --> 0:17:37.960 treasury is pretty easily based on your calculations, which would 0:17:37.960 --> 0:17:40.760 have a massive effect on private aid valuations. 0:17:40.240 --> 0:17:42.080 Which would have a massive effect on. 0:17:42.359 --> 0:17:45.159 Stock valuations, which just kind of really speaks to this 0:17:45.240 --> 0:17:47.200 question of whether it's a sell America trade. 0:17:47.440 --> 0:17:50.280 Well, I think that again, it's if I were thinking 0:17:50.320 --> 0:17:53.160 about exposure today, it would be short duration. I see 0:17:53.160 --> 0:17:55.119 a lot of duration risk in the market, and I 0:17:55.119 --> 0:17:57.760 think it's a generally investors have not had to worry 0:17:57.800 --> 0:18:02.240 about duration risk. It's again, and the mindset is, whenever 0:18:02.240 --> 0:18:05.240 we get into trouble, there's going to be another round 0:18:05.240 --> 0:18:08.440 of QE and they're going to drive down longer term yields. 0:18:08.560 --> 0:18:11.400 Now we're in a situation where where those prices could 0:18:11.400 --> 0:18:14.440 move in the opposite direction, and that actually compounds losses. 0:18:14.960 --> 0:18:16.520 I think that the issue right now. 0:18:16.560 --> 0:18:20.480 Also, the Treasury is funding twenty two percent of the 0:18:20.520 --> 0:18:22.760 outstanding stock of debt in the bill market. 0:18:22.920 --> 0:18:23.840 In the money. 0:18:23.600 --> 0:18:27.160 Market, there's of course a desire to turn that out, 0:18:27.800 --> 0:18:30.680 but there's a of course a hesitancy. You want to 0:18:30.720 --> 0:18:32.960 write wait for the right time. I think people were 0:18:33.000 --> 0:18:36.000 hoping that the tenure would fall below four percent, then 0:18:36.080 --> 0:18:38.880 let's turn out some of that debt, and by waiting 0:18:39.000 --> 0:18:41.000 they might be in a situation where they have to 0:18:41.040 --> 0:18:43.840 turn it out at much higher yields. 0:18:43.600 --> 0:18:44.919