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 Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. We begin the sour
Speaker 2: with stock steady as investors prepare for a week full
Speaker 2: of event risk. Muhammad al Aaron of Queen's College, Cambridge
Speaker 2: writing a heavy data week on tap for the US
Speaker 2: with the monthly jobs report, lots of speaking engagements for
Speaker 2: policymakers including Treasury Secretary Besson and Fedcha J. Powell, and
Speaker 2: the latest on tariffs and DOGE. Mohammed joins us now
Speaker 2: for more. Mohammed, Welcome to the program, Sir. Where to begin?
Speaker 2: I think we start on Friday and the rupture in
Speaker 2: Transatlantic relations and the breakdown in the Oval Office. When
Speaker 2: you saw that and when you think about the consequences
Speaker 2: it could have for the economic picture in Europe, for
Speaker 2: military spending, and for what it could mean for financial markets.
Speaker 2: To Muhammad, what are your thoughts at the moment?
Speaker 3: Thanks for having me, John.
Speaker 4: My thoughts is that that feeds into some existing themes,
Speaker 4: both top down and bottom up and intensifies them. So,
Speaker 4: top down, we've had issues of fiscal realignment, and that's
Speaker 4: going to feed into fiscal realignment, including putting pressure on
Speaker 4: the dead break in Germany, including the question of how
Speaker 4: does it interact with what.
Speaker 3: Dodge is doing in the US.
Speaker 4: Secondly, it feeds into the energy market and how you
Speaker 4: think about the energy market. And third it feeds into
Speaker 4: the realignment of the global order that also has a
Speaker 4: trade element to it and a currency element to it.
Speaker 4: So you have all these top down factors that are
Speaker 4: being amplified, and then the bottom up factor that's being
Speaker 4: amplified defense and we are seeing significant sector differences occurring as.
Speaker 3: You would expect.
Speaker 4: So I think of it, John, not as unprecedented, which
Speaker 4: is the words that the political science and the international
Speaker 4: relations people are using, but in the field of economics
Speaker 4: and finance, it is amplifying things that were there already.
Speaker 2: So Muhammed, a number of weeks ago, we said on
Speaker 2: this program that the president of the United States may
Speaker 2: well push the Europeans into doing things that might be
Speaker 2: good for them. You wrote in the Financial Times about
Speaker 2: a month ago, the mounting risk to US exceptionalism. How
Speaker 2: does some of these things across these dimensions play into
Speaker 2: what you wrote about a month ago.
Speaker 4: So, John, both the good news and the bad news
Speaker 4: is we have a very action oriented administration has come in.
Speaker 4: It has hit the ground running, if not sprinting, and
Speaker 4: if you are business, it feels like you're trying to
Speaker 4: drink from a fire hose. There's energy issues, there's the
Speaker 4: immigration issue, there are trade issues, that public sector issues,
Speaker 4: including public sector contract their regulation issues.
Speaker 3: So you're trying to.
Speaker 4: Absorb all this and what we've seen is sentiment has
Speaker 4: come down and there's been a wait and see attitude
Speaker 4: because most of these things impact both your income and
Speaker 4: your expenditure, so it's really hard to figure out how
Speaker 4: all these things are going to play out. Then there
Speaker 4: is the international relation side of it, your trading side
Speaker 4: of it. So the worry that I have is that
Speaker 4: the lack of ability by the public sector to absorb
Speaker 4: all This results in a wait and see attitude. That
Speaker 4: wait and see attitude comes at a time when we
Speaker 4: already have a bit of a whiff of sackflation going on.
Speaker 4: And next thing, you know, people start questioning US economic exceptionalism.
Speaker 4: And if they do, two things happen. You start questioning
Speaker 4: the only reliable engine of growth for the global economy,
Speaker 4: and you start questioning the shield that markets have had
Speaker 4: against all sorts of geopolitical and political aspects.
Speaker 1: That's a lot of hair on the American exceptionalism story.
Speaker 1: And we've been talking to people about it for the
Speaker 1: past couple of weeks about the concerns, the lack of certainty,
Speaker 1: the on hold kind of nature of a lot of CEOs.
Speaker 1: And yet when you ask them, they still say they
Speaker 1: prefer to invest in the US over the rest of
Speaker 1: the world. If Europe went through with a nine hundred
Speaker 1: billion euro spending package on defense and infrastructure, would that
Speaker 1: shift for you? Would you see brighter shoots in Europe?
Speaker 3: No, it wouldn't shift for me.
Speaker 4: I would still prefer to US over Europe for the
Speaker 4: simple reason that Europe doesn't have a genuine and durable
Speaker 4: growth engine. So maybe defense contributes in the short term
Speaker 4: to growth, but they need to get a handle on
Speaker 4: some really fundamental things. I encourage everybody to read the
Speaker 4: Dragi Report, the Driver Report, a really good assessment of
Speaker 4: what has gone wrong in terms of investment, in terms
Speaker 4: of competitiveness and productivity, and what needs to go right,
Speaker 4: and that should be your benchmark when you assess future
Speaker 4: growth prospects in Europe.
Speaker 1: So what happens, Muhammad, if this American exceptionalism story is
Speaker 1: challenged to the degree that you're laying out and a
Speaker 1: lot of people are worried about, but there isn't a
Speaker 1: brighter alternative in Europe.
Speaker 4: That's the concern because remember I've always said the good
Speaker 4: and the bad and the ugly of the global economy.
Speaker 4: The good is the US, the bad is China, and
Speaker 4: the ugly is Europe. And if you don't see China
Speaker 4: and Europe converge up to the US, there's a risk
Speaker 4: that the US will converge down to the other two.
Speaker 3: It is a risk scenario. It is not the baseline
Speaker 3: I want to stress.
Speaker 4: But in mid January, no one was questioning US economic exceptionalism,
Speaker 4: and now, as you point out, a lot more people
Speaker 4: are starting to worry.
Speaker 5: About it, Muhammad, what do you make of the tariffs?
Speaker 5: Do you think they're actually going to come on tomorrow
Speaker 5: or do you think the market consensus of that. Maybe China,
Speaker 5: of course goes on, but there will be a pause,
Speaker 5: another pause or pass when it comes to Canada and Mexico.
Speaker 5: Is the accurate way to view this?
Speaker 4: I don't know, and Mary, I really don't know. I
Speaker 4: don't think anybody knows about the president. But what has
Speaker 4: become clear is that there are three sets of tariffs,
Speaker 4: and that explain why the President was pursuing so many
Speaker 4: objectives with tariffs. You know, when he came out in
Speaker 4: October when he said it's my favorite word. He said,
Speaker 4: it can weige revenue, it can result in fairer trade,
Speaker 4: It can put pressure on both adversaries and allies, and
Speaker 4: in addition, it can protect US industry. And the initial
Speaker 4: reaction of the economist was too many objectives for a
Speaker 4: single tool. But we're seeing now what is happening. You
Speaker 4: have a set of general tariffs that do the revenue
Speaker 4: side and the reciprocity side, the fair trade side. You
Speaker 4: have a set of sector specific tariff aluminium steel that
Speaker 4: protect industry, and then you have a third set of
Speaker 4: tariff's aim that particular countries to get particular outcomes. And
Speaker 4: I think that that's the thing we're going to live
Speaker 4: with for the next few months, is not the next
Speaker 4: few years, which is multifaceted trade policy, Muhammad.
Speaker 2: For the first time in a long time, there was
Speaker 2: a FED official in the last week that considered stagflation.
Speaker 2: I'm sure you notice the same comments downside risk to
Speaker 2: growth and upside risk to inflation. If we were to
Speaker 2: have a fedsjior mandate that went into conflict, how do
Speaker 2: you suppose would be the best way to approach that situation.
Speaker 3: It's tough, is really tough.
Speaker 4: Stagflation is the nightmare of policymakers and it is the
Speaker 4: nightmare of FED.
Speaker 3: With the dual mandate, as you point out, So it's
Speaker 3: really tough.
Speaker 4: I worry, like you had an introduction that we've had
Speaker 4: a reactionary FED. So the FED is not going to
Speaker 4: be getting ahead of this anytime soon. I hope it
Speaker 4: understands it, but it's not going to be getting ahead
Speaker 4: of it anytime soon. So the risk is John, that
Speaker 4: monetary policy continues to amplify volatility, rather than acting as
Speaker 4: an act of stability.
Speaker 3: That's the risk we face right now.
Speaker 1: Mohamma, can you just give us a sense of the
Speaker 1: trajectory of your belief that the economy can withstand all
Speaker 1: of this in the United States. As the year has progressed,
Speaker 1: I realized that it's the beginning of March. But how
Speaker 1: much more worried are you now than say, two weeks ago,
Speaker 1: about a real calling into question of American exceptionalism and
Speaker 1: a real rolling over of the US economy.
Speaker 3: You know it's my natue. I've been worried for a while.
Speaker 4: I put out an ft UP head on February fourteenth
Speaker 4: saying be careful that slowly we may see the erosion
Speaker 4: of US economic exceptionalism, and that's bad news for everybody,
Speaker 4: not just the US, for everybody.
Speaker 3: So I've been worried for a while. I've seen sort
Speaker 3: of three elements that have made me worry.
Speaker 4: One is the way business is reacting to all these
Speaker 4: policy changes, which increasingly is wait and see. We think
Speaker 4: it's going to be fine, but let's wait and see. Second,
Speaker 4: we know that the lower segments of the household income
Speaker 4: distribution is under enormous pressure, and that has been a
Speaker 4: concern for a while and then the third issue is
Speaker 4: the risk of a FED policy mistake. So these things
Speaker 4: have been there and now they've amplified because of what's
Speaker 4: been going on.
Speaker 2: Muhammed always appreciate your time, A good front of this program,
Speaker 2: a good friend of ours. We appreciate it. Thank you,
Speaker 2: Sir Mohammed Aaron of Queen's College, Cambridge. There tariff deadline
Speaker 2: fere than twenty four hours away to open markets of
Speaker 2: Wolf Research writing, if Trump follows through with his threats,
Speaker 2: it increases the risk that he'll go big with this
Speaker 2: eight full second reciprocal tariff policy. Tobin joined us now
Speaker 2: for more. Tobin, I guess the first question will the
Speaker 2: President follow through on his threats?
Speaker 6: In some ways, the.
Speaker 7: Setup looks exactly the same as it did in early February,
Speaker 7: when I was fairly confident that he wouldn't end up
Speaker 7: following through and at least not doing so with long duration.
Speaker 7: I have to say I'm less optimistic this time. I
Speaker 7: think he's been, you know, quite resolute that he's going
Speaker 7: to do something. Even over the weekend. The comments from
Speaker 7: Commerce Secretary Lutnik that people are taking encouragement from you know,
Speaker 7: point it to some flexibility in the rate, but still,
Speaker 7: you know, kind of double down on the likelihood that
Speaker 7: they would go ahead and do something. So it's hard
Speaker 7: to have total confidence, but you know, I think it's
Speaker 7: also impossible to write off the risk that he'll actually go.
Speaker 3: Through with it.
Speaker 5: Scott Bessett, the Treasury Secretary. Tobin said to David Weston
Speaker 5: on Bloomberg TV on Friday that the Mexican government made
Speaker 5: a proposal matching US on China tariffs and then said
Speaker 5: it would be a nice gesture if the Canadians did it. Also,
Speaker 5: is that a big enough concession to potentially put another
Speaker 5: pause on these twenty five percent tariffs?
Speaker 7: Conceivably, the terrifts have never really made a lot of
Speaker 7: economic sense for the US. In the Canadian case in particular,
Speaker 7: they are way out of scale with the actual problem
Speaker 7: that we have in terms of migration and drug trafficking,
Speaker 7: which is obviously much more of a Mexico problem than
Speaker 7: a Canada problem. So, you know, it all comes down
Speaker 7: to Trump's assessment I think of whether or not he's
Speaker 7: kind of accomplished his political goal here in the Mexican case, again,
Speaker 7: there is much more in the way of actual policy
Speaker 7: cooperation that we need there have been some indications that
Speaker 7: they're making progress in terms of cracking down on some
Speaker 7: of the cartels. So if he wants to, he certainly,
Speaker 7: I think, can do what he did last time and
Speaker 7: just points of progress made and new commitments and call
Speaker 7: it off. The question is what he wants to do, Truman.
Speaker 5: One of the tariffs is going to be a ten percent,
Speaker 5: basically the Trump administration signaling that they understand how important
Speaker 5: Canadian heavy cruit is, especially to the Midwest. But the
Speaker 5: Canadians are also saying they can maybe have recipable tariffs
Speaker 5: on energy. How ugly can this get?
Speaker 4: Hey?
Speaker 3: Can you get very ugly?
Speaker 7: I mean, you know, the initial give order imposing these
Speaker 7: tariffs back on February first made very clear that the
Speaker 7: United States reserves the right to further escalate if there
Speaker 7: is retaliation, and I think that the sensible expectation would
Speaker 7: be that there will be retaliation because the Canadians and
Speaker 7: the Mexicans can't just take this sitting down. So, you know,
Speaker 7: I think there are absolutely is upside to the rates
Speaker 7: if things go really badly. I think we saw as
Speaker 7: you were just talking about in the confrontation with Zelensky
Speaker 7: last week, when things get personal. You know, I do
Speaker 7: think there's a risk that things can go south in
Speaker 7: ways that don't totally line up with either side's objective interests.
Speaker 1: Wait, Tobin, can you develop that please, this idea that
Speaker 1: actually what happened on Friday will influence the likelihood that
Speaker 1: these tariffs go on tomorrow.
Speaker 7: I don't know that there's a direct influence. I think
Speaker 7: it's more just a case study. As Trump themselves said
Speaker 7: in the true social posts that he put out afterwards.
Speaker 7: You know, you sort of you it's telling what can
Speaker 7: come out under emotion. You know, if there is an
Speaker 7: actual move to go forwards to these terrafs, even at
Speaker 7: a reduced rate, like the likelihood of tiffer tab retaliation
Speaker 7: is definitely thing that we need to worry about. And
Speaker 7: if we're locked into a confrontational stance with these two countries,
Speaker 7: you can't rule out the possibility that, you know, sort
Speaker 7: of interpersonally, things go wrong and we find both sides
Speaker 7: kind of dact into their corners, Tobin.
Speaker 5: Tomorrow, we also have a joint address to Congress from
Speaker 5: the President of United Age, which basically is a different
Speaker 5: way of saying we're going to have a state of
Speaker 5: the Union. What are you expecting.
Speaker 7: Yeah, they've done very little in terms of previewing, even
Speaker 7: talking to Republican sources on the Hill. There's not a
Speaker 7: lot of rumors and gossip going around about what it
Speaker 7: is that he might announce. My guess would be that
Speaker 7: it's mostly focused on accomplishments and that we have kind
Speaker 7: of a Promises made, Promises kept theme where he points
Speaker 7: to the massive amount of activity that's already gone on,
Speaker 7: much of which they feel very good about. I'm sure
Speaker 7: they'll have some, you know, tidbits of news. Would be
Speaker 7: uncharacteristic to go into this and have nothing that's that's
Speaker 7: new and headline grabbing. But I think a lot of
Speaker 7: it is going to be, you know, rehearsing and framing
Speaker 7: up the totality what they've done so far.
Speaker 2: Hi Tobin, I appreciate your time as always, sir. Thank
Speaker 2: you Tobermarcus of war for research things could look very
Speaker 2: different tomorrow. Coming up on the program, Liz Young Thomas
Speaker 2: of SOFI on the momentum reversal, Joe Faudman of TAUSE
Speaker 2: the Advisory Group looking ahead to target earnings, and Steve
Speaker 2: Roshutto on why he's constructive on the US economy, we're
Speaker 2: begin to saut with stock's looking to rebound following last
Speaker 2: month's losses. Liz Young Thomas of SOFI, writing, there's been
Speaker 2: a notable shift in which stock sectors and assets are
Speaker 2: leading or lagging the broad market, and it's one that
Speaker 2: can be best described as a reversal of momentum. Liz
Speaker 2: joins us now for more, Liz, I just wonder in
Speaker 2: your mind whether it's anything just more than that. We've
Speaker 2: had discussions about a growth scare, and based on the
Speaker 2: conversations we've had on this program, it feels like there's
Speaker 2: been a massive sentiment shift. And then you look at
Speaker 2: the equity market, it's down by not even five percent.
Speaker 2: How do we square that circle?
Speaker 8: Well, I think there has been a sentiment shift in
Speaker 8: the sense that everything that got us here for the
Speaker 8: last two years has now gone a little bit out
Speaker 8: of favor. And you could have seen some of those
Speaker 8: markers in the second half of twenty twenty four in
Speaker 8: terms that you look at just the AI related stocks,
Speaker 8: the big tech stocks, there'd been more scrutiny over the
Speaker 8: spend and the expectations. So now coming into twenty twenty five,
Speaker 8: investors started to look for growth in other places and
Speaker 8: then layer on top of that the fears about economic growth.
Speaker 8: So when we're looking at this rotation that's occurred under
Speaker 8: the surface in sectors, I think it's quite healthy. The
Speaker 8: difference is that you need a number of different sectors
Speaker 8: to keep up and to pick up the slack if
Speaker 8: technology stocks are not going to be the darlings again
Speaker 8: in twenty twenty.
Speaker 2: Five, so let's pick up on the growth scare theme.
Speaker 2: Discretionary has had a difficult run of it, but you
Speaker 2: could say a lot of that is just tesla. We
Speaker 2: have seen the bond market start to respond though, seven
Speaker 2: consecutive weeks of lower bond yields on a ten year maturity.
Speaker 2: Are you seeing high yield credit confirm some of those
Speaker 2: growth jitters.
Speaker 8: You do see high yield responding to that consider and
Speaker 8: that's been something that if you look at just high
Speaker 8: yield spreads over the last few months, you've seen this
Speaker 8: grind lower and spreads. High yield, as we know, is
Speaker 8: highly correlated with the equity market. But there has been
Speaker 8: a spike in high yield spreads over the last let's
Speaker 8: call it three to four weeks, which I think again
Speaker 8: is healthy. There should be a correlation with the equity market.
Speaker 8: The big change that's occurred so far in twenty twenty
Speaker 8: five is that yield started to respond, and I'm talking
Speaker 8: about ten year treasury yields started to respond to growth
Speaker 8: fears more so than inflation fears. So what we were
Speaker 8: seeing in the latter half of twenty four and even
Speaker 8: the early weeks of twenty five were that the ten
Speaker 8: year yield was rising because of inflation fears. Well, now
Speaker 8: the ten year yield has come down quite a bit
Speaker 8: because of growth fears.
Speaker 2: The shift, though, is that that.
Speaker 8: Drop in the ten year yield has not served as
Speaker 8: a tailwind for stocks, So you're seeing those growth fears
Speaker 8: bake through into stocks, into high yield spreads, and into
Speaker 8: the tenure treasure yield.
Speaker 1: The reason why it is such a difficult market right
Speaker 1: now is because there's so many different themes that are
Speaker 1: layered on top of each other. We started the show
Speaker 1: talking about the potential for tariffs to come on on Tuesday,
Speaker 1: a potential response from the European Union to different geopolitical developments,
Speaker 1: including the meeting on Friday with Vladimir Zelenski and Donald Trump. Liz,
Speaker 1: from your perspective, what is more interesting to you this
Speaker 1: week and has the bigger catalyst effect potentially on the markets.
Speaker 1: What we get on Tuesday with respect to potential tariffs
Speaker 1: in the state of the Union, or the economic data
Speaker 1: that culminates with the non farm payrolls report on Friday.
Speaker 8: Well, of course, if the non farm payrolls report is
Speaker 8: a surprise of some sort, that'll be likely the more
Speaker 8: market moving event. The tariffs, if they do go into
Speaker 8: place as announced tomorrow. The market really already reacted to
Speaker 8: that back in January. Now, of course there needs to
Speaker 8: be some repricing. There's been quite a bit of volatility
Speaker 8: since then and a lot of uncertainty. But if we
Speaker 8: do get a surprise on the payrolls report, I think
Speaker 8: that's a more market moving event. The trouble is that
Speaker 8: we have to make it all the way through the
Speaker 8: week before we get there, so I don't expect a
Speaker 8: huge surprise on that payrolls report.
Speaker 1: Yet.
Speaker 8: I do think that as the first half of this
Speaker 8: year progresses, we're going to get some bumpier data in payrolls,
Speaker 8: largely because of some things that are going on in
Speaker 8: Washington and just weather patterns other things that could be
Speaker 8: going on. In the construction market, and the fact that
Speaker 8: mortgage rates have stayed so high, so the construction market
Speaker 8: has slowed down a bit, but I don't expect a
Speaker 8: huge surprise this week in payrolls.
Speaker 1: Okay, So given all of this, are you actually leaning
Speaker 1: into some of the selloff or do you think that
Speaker 1: actually that this is a sign that things are going
Speaker 1: to be jittery for a while and people probably should
Speaker 1: reduce risk on some level because of that uncertainty.
Speaker 8: I think you have to, first of all, to find
Speaker 8: what you mean by reduce risk as an investor. So
Speaker 8: if you're looking at your portfolio and you are overweight
Speaker 8: naturally some of those meg seven stocks, technology certain themes,
Speaker 8: maybe it's the AI theme. Many investors have become overweight
Speaker 8: those themes just because the performance has been so strong
Speaker 8: for the last two years. So if you're looking at
Speaker 8: reducing risk by diversifying out the drivers that you're exposed
Speaker 8: to in the portfolio, yes, absolutely, I do think it's
Speaker 8: time to do that, and I think you can broaden
Speaker 8: out into some sectors that have the opportunity to produce
Speaker 8: growth but are trading at lower multiples and aren't quite
Speaker 8: as exposed to some of this volatility that's occurring on
Speaker 8: a day to day or week to week basis. Those
Speaker 8: sectors for me would be healthcare first and foremost. I'd
Speaker 8: be looking at things like materials. If we're worried about
Speaker 8: inflation heating up again, you can look at industrials, you
Speaker 8: can look at financials. Financials haven't traded great for the
Speaker 8: last few weeks, but that could be an opportunity. And
Speaker 8: then I still really like gold here. Despite the fact
Speaker 8: that it's hit new all time high after new all
Speaker 8: time high, there continues to be a lot of appetite
Speaker 8: in that market, both institutional and retail.
Speaker 2: Massive run over the last year. Lets appreciate your time
Speaker 2: as always and enjoyed the race of note as well.
Speaker 2: List Young tell us that of sie flying States shoots off.
Speaker 2: Miszoo says the US fundamentals are healthy. He runs the following.
Speaker 2: The underlying strength of the business cycle is evident in
Speaker 2: the heart attanks of releases. They will dominate in the
Speaker 2: longer run. Steve joins us now for more stave good morning,
Speaker 2: morning to thank you sir, A lot of paint become
Speaker 2: almost bearish. Give us the constructive take of the US economy.
Speaker 6: Well, I think there are a lot of people who've
Speaker 6: been wanting to call recession. Okay, when you think about it,
Speaker 6: since twenty twenty two, we're now in our seventh recession theme.
Speaker 6: Each one has not pail that paired out, and I
Speaker 6: don't think this one will either. The concept that DOJE
Speaker 6: is going to create some kind of major lapse and
Speaker 6: employment growth on the government side of the equation that
Speaker 6: the private sector will not be able to absorb over time,
Speaker 6: I think is just incorrect to the extent that people
Speaker 6: worried about the fact that we're reducing immigration and where
Speaker 6: all the work is going to come from. Well, now,
Speaker 6: if you have a transfer from public sector to private
Speaker 6: sector employment, maybe it's actually a healthy thing that takes
Speaker 6: place in terms of the economy. A leads terms of
Speaker 6: the transition. The thing you do have to worry about
Speaker 6: is negatives usually come before positives. So yes, you're in
Speaker 6: this environment now where a lot of the soft data
Speaker 6: has turned negative, a lot of people have turned negative,
Speaker 6: and therefore everyone's willing to jump on the recession story again.
Speaker 6: As I said, this is the seventh recession story since
Speaker 6: twenty twenty two. Think about that seven in less than
Speaker 6: three years, and everyone's convinced each one is going to
Speaker 6: be there, and everyone wants shock and all type headlines.
Speaker 6: We saw a major investor in the marketplace they screaming
Speaker 6: about a global debt crisis. We saw Warren Buffett over
Speaker 6: the weekend talking about tarifs as basically a moral equivalent
Speaker 6: to war. Everyone's going for big headlines. The reality is,
Speaker 6: look at where the equity market is. We've taken out
Speaker 6: the Trump bump, that's basically what we've done. Look at
Speaker 6: the bond market. We're still well up from where we
Speaker 6: were in September, even though we're well off from the
Speaker 6: four eighty HI but four eighty has been a very
Speaker 6: very strong resistance level repeatedly. So I think what we're
Speaker 6: really looking at is consolidations within markets rather than really
Speaker 6: breaking out a new trends.
Speaker 2: We'll let policy define bad versus good. They're in the
Speaker 2: business of doing just that. Who's the angel, who's the devil?
Speaker 2: They can decide. We're interested in markets of betsa versus worse.
Speaker 2: It's growth is going to be bets are in twenty
Speaker 2: five versus twenty four three percent GDP down to two
Speaker 2: point five or up to three point five? What do
Speaker 2: you expect to think.
Speaker 6: Well, to be honest with you, I think if we're
Speaker 6: in that two point five to three area, you're the
Speaker 6: fifth year of above trend economic growth. That's never happened before,
Speaker 6: and I don't in the post war period. And I
Speaker 6: don't think that's a bad performance. It's certainly a performance
Speaker 6: that's consistent with where bottom up earnings expectations are for
Speaker 6: this year, which is around twelve and a half percent.
Speaker 6: And then when you look at all the negative headlines
Speaker 6: about earnings, our earnings revision tracker is minus twelve point
Speaker 6: six percent, which means twelve point six percent more companies
Speaker 6: are downgrading earnings and upgrading them. Twelve point six is
Speaker 6: basically correction phase. It's not contraction phase in a market.
Speaker 6: And I think these are the important fundamentals. The headlines
Speaker 6: are getting out of step with reality.
Speaker 1: Hold on a second, because it's a little bit of
Speaker 1: a straw man argupant. I've got to be honest, because honestly,
Speaker 1: there have been a number of headlines that have said recession,
Speaker 1: but when we talk to investors, most of them do
Speaker 1: not say that the recession is their base case. Most
Speaker 1: of them believe that this is a slowdown, but it
Speaker 1: is a market slowdown, and maybe it's catch up from
Speaker 1: some of the post COVID period that was inflated by
Speaker 1: some of the spending by the government. How do we
Speaker 1: measure whether this is something that is underpriced as a
Speaker 1: risk in the economy in markets the idea that the
Speaker 1: slowdown is more significant that people thought, even if it's
Speaker 1: not recession. Right, at what point is it not workable
Speaker 1: for you anymore?
Speaker 6: When you've got to get below trend gdpay and you've
Speaker 6: got to have an argument that you're going to sustain
Speaker 6: below trend gdpay. And we're sitting in an environment right
Speaker 6: now where the Federal Reserve is cutting strains one hundred
Speaker 6: basis points, the forward structure of rates is again anticipating
Speaker 6: fifty basis points more rate cuts. We've taken tenure note
Speaker 6: off the peak by sixty basis points. So all those
Speaker 6: factors are coming in against the balance sheets that are
Speaker 6: very very hell a liquidity that's still very ample in
Speaker 6: the system, excess savings globally that's being generated. Going to
Speaker 6: be looking for the best alternative. So I think you
Speaker 6: have to get to a sustained period below trends GDPAI,
Speaker 6: and I don't see that in the car.
Speaker 1: So this is ultimately comes down to a FED argument,
Speaker 1: This idea that if the FED cuts right now in
Speaker 1: response to a weakening trend, that you think it could
Speaker 1: be the policy error that could rejigger some sort of
Speaker 1: inflation or some sort of maybe positive growth shock. Is
Speaker 1: that what you're saying.
Speaker 6: If the FED were to cut again in this environment,
Speaker 6: I think you'll quickly see bond yields retrace theirself back
Speaker 6: to the four eighty level. Not so sure they break
Speaker 6: the four eighty level, but I think they'll push back
Speaker 6: because people will realize fundamentally this economy. As you said,
Speaker 6: a lot of the investors you talk to the same
Speaker 6: people the issuers I talk to, and the investors I
Speaker 6: talk to. All of these people are telling me business
Speaker 6: is really good. You know, things aren't a problem. And
Speaker 6: yet you have this negative headlines continuously beating on people,
Speaker 6: and I think as a result of that, you're holding
Speaker 6: down the expectations. If the federal deserve to come in
Speaker 6: and cut interest rates again, I think people will quickly
Speaker 6: rethink the story.
Speaker 5: Do you think the negative headlines, though, are actually creating uncertainty?
Speaker 5: People are on the sidelines.
Speaker 6: I think there are people who are sitting there saying,
Speaker 6: why do I get involved at this particular juncture by
Speaker 6: the same thing the investor side of the base on
Speaker 6: the issuer side of the base. Look at what they're
Speaker 6: doing in terms of the number of issues coming to market.
Speaker 6: They're willing to sell at these levels. They're telling you
Speaker 6: these levels are attractive, These spreads are attractive longer term.
Speaker 6: So I think what you have in here, and again
Speaker 6: the bond market investors have pulled us down from four
Speaker 6: to eighty to four to twenty five, so there's been
Speaker 6: a substantial move. So I think they've put a lot
Speaker 6: of money to work. I think we're just getting to
Speaker 6: the point now where so much negative news is and
Speaker 6: negative economic news and positive bond news. Think about what's
Speaker 6: priced into the bond market right now, seventh recession call.
Speaker 6: Not only that Besson's going to come up with something
Speaker 6: sleight of hand to reduce eight hundred billion dollars worth
Speaker 6: of borrowing this year. Doge is going to save this
Speaker 6: a trillion dollars every year for the next ten years.
Speaker 6: All of this is priced into the market.
Speaker 1: And where.
Speaker 6: Why aren't we at two percent?
Speaker 5: So contortion'slock puts it this way, we're in a modest
Speaker 5: stagflation shocked to the economy, not a recession. Do you
Speaker 5: see any stagflationary fears? Muhammad Alarian said the same thing
Speaker 5: to us this morning.
Speaker 6: Stagflation requires that you believe inflation is accelerating in an
Speaker 6: environment where the unemployment rate is rising. I don't see
Speaker 6: the unemployment rate rising.
Speaker 5: Four point one percent is.
Speaker 6: Still below the natural rate. I mean, where do we
Speaker 6: have to be three point four before they turn around
Speaker 6: say the labor market's tight. So the reality is the
Speaker 6: labor market's healthy and inflation is at three not at two.
Speaker 6: Is that the end of the world. No. Does it
Speaker 6: suggest bond yields are expensive, Yes, but it's not the
Speaker 6: end of the world in terms of average individuals out
Speaker 6: there in the country, two percent inflation versus three percent
Speaker 6: inflation not get a bank or them in a world
Speaker 6: where hourly earnings growth is going at four point one percent.
Speaker 6: And that's the other thing to look at in terms
Speaker 6: of the payroll numbers that come out on Friday, is
Speaker 6: that hourly earnings number and the unemployment rate. Besides the
Speaker 6: slowdown that we're probably going to see a employment one
Speaker 6: hundred and fifty thousand perore employment is very consistent with
Speaker 6: trend GDP. Question is how much of that is a
Speaker 6: function of weather. How much of that was a function
Speaker 6: of for as far as how much of that was
Speaker 6: a function of DOGE, we don't know. The reality is
Speaker 6: when you look at the moving average of these things,
Speaker 6: they're all doing fairly healthy, especially when you look got
Speaker 6: on a year of a year basis. There's still well
Speaker 6: with in areas that support growth to the economy.
Speaker 2: You acknowledge in the air term, though we might see
Speaker 2: some weak prints. Based on what you said at the
Speaker 2: start of the conversation, the destination might be good, and
Speaker 2: I agree with you. You could increase the dynamism of
Speaker 2: the American economy by removing the government allowing the private
Speaker 2: sector to step in. That all makes a lot of
Speaker 2: sense in the net term, though, how much weakness would
Speaker 2: you expect to experience in the next couple of months.
Speaker 2: You might describe it as a head fake if we
Speaker 2: get here, because we'll still end up somewhere good. But
Speaker 2: I'm trying to understand what you expect in the next
Speaker 2: few months.
Speaker 6: I mean to be honest with if we got to
Speaker 6: two percent GDP, I'd be fine with it what you
Speaker 6: saw in terms of the Atlanta FED numbers. When you
Speaker 6: think about we had this massive trade fics chock right,
Speaker 6: it didn't show up in wholesale or retail inventories, and
Speaker 6: everyone sits here and says, well, it can't be a
Speaker 6: manufacturing inventory as well. If you're manufacturing and you're pulling
Speaker 6: in a lot of intermediate product, we don't know the
Speaker 6: manufacturing inventory yet, we'll see them. Maybe the manufacturing inventories
Speaker 6: were very, very big. Maybe it's a big one time
Speaker 6: shock and manufacturing. Maybe this data all gets revised, Maybe
Speaker 6: the consumer numbers get revised. The reality is you're jumping
Speaker 6: on every little marginal change when the reality is the
Speaker 6: fundamental trend has been healthy. We've caused called seven recessions
Speaker 6: since twenty twenty two, and we've had an economy that
Speaker 6: is growing above trend for four years, going to be
Speaker 6: five years. Think about it. There's a disconnect between the
Speaker 6: logic and the reality.
Speaker 2: Steve, It's going to say and catch up as a
Speaker 2: west Thank you, sir, Steve A shits so of Miszilo.
Speaker 2: This is the Bloomberg Seventans podcast bringing you the best
Speaker 2: in markets, economics, angiopolitics. You can watch the show live
Speaker 2: on Bloomberg TV weekday mornings from six am to nine
Speaker 2: am Eastern, Subscribe to the podcast on Apple, Spotify, or
Speaker 2: anywhere else you listen, and as always, on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app.