WEBVTT - First Eagle Looks Outside the US for Returns 0:00:01.040 --> 0:00:05.280 It's getting trickier for investors to navigate markets. Every day 0:00:05.400 --> 0:00:08.320 there are new announcements from the White House that threaten 0:00:08.440 --> 0:00:12.360 to upend global trade and potentially even the Central Bank. 0:00:13.200 --> 0:00:16.040 Especially for those making bets for the long term, it's 0:00:16.079 --> 0:00:16.759 tough to predict. 0:00:17.400 --> 0:00:22.360 This has significant ramifications for Asian currencies and bonds. Governments 0:00:22.400 --> 0:00:26.119 are forced intervene more, and the US dollar, once a 0:00:26.239 --> 0:00:29.920 source of stability, is now seen as less safe. Meanwhile, 0:00:30.080 --> 0:00:33.760 the nation's debt levels and fiscal situation that prompted at 0:00:33.760 --> 0:00:37.800 downgrading its credit rating also threatens assets long term. Should 0:00:37.840 --> 0:00:40.160 investors look outside the US towards Asia. 0:00:42.800 --> 0:00:46.320 You're listening to Asia Centric from Bloomberg Intelligence. I'm Kat 0:00:46.400 --> 0:00:47.520 Dmitri in Hong Kong. 0:00:47.800 --> 0:00:49.559 I'm John Lee, also in Hong Kong. 0:00:49.880 --> 0:00:52.879 And this week we're speaking with Adana Apio. She's an 0:00:52.880 --> 0:00:57.080 economist and portfolio manager at First Egal Investment Management, which 0:00:57.120 --> 0:01:00.720 oversees one hundred and sixty one billion dollars in assets. 0:01:01.480 --> 0:01:04.040 She joins us very early in the morning from New York. 0:01:04.280 --> 0:01:07.080 Thank you for joining us today, Donna. 0:01:06.440 --> 0:01:09.440 Thank you so much for having me. Really looking forward 0:01:09.480 --> 0:01:09.760 to this. 0:01:10.720 --> 0:01:15.399 So, Donna, as we just mentioned tariffs, trade, this is 0:01:15.400 --> 0:01:18.240 something that investors need to be thinking about every minute 0:01:18.280 --> 0:01:21.000 of every day. You're a long term investor, how do 0:01:21.120 --> 0:01:25.640 you think about tariffs and trade impacting your investments right now? 0:01:26.520 --> 0:01:29.400 I think the challenge with tariffs, as you first highlighted, 0:01:29.480 --> 0:01:31.480 is that, of course, every day there's a new announcement, 0:01:32.080 --> 0:01:35.960 and you're constantly wondering what are other people thinking about 0:01:36.040 --> 0:01:39.399 these announcements, and then thinking about, you know, from my 0:01:39.560 --> 0:01:44.520 perspective as both an economists, currency analysts, sovereign analysts, thinking about, 0:01:44.840 --> 0:01:47.240 you know, what does this mean for the economy, and 0:01:47.280 --> 0:01:50.800 then what does that sort of translate into asset prices? 0:01:51.120 --> 0:01:54.560 So many steps there. Obviously, we heard the news about 0:01:55.600 --> 0:01:58.440 or the tweet about the Japan framework the other day 0:01:58.840 --> 0:02:01.160 the Japan dealed, and so maybe there's a fair amount 0:02:01.160 --> 0:02:05.200 of optimism because there are signs that there is some 0:02:05.280 --> 0:02:08.720 flexibility on the sectoral tariffs this. You know, the negotiations 0:02:08.760 --> 0:02:12.720 to date have largely been about the reciprocal tariffs. I 0:02:12.760 --> 0:02:16.799 don't really like using that words since they aren't technically reciprocal, 0:02:16.840 --> 0:02:22.040 but about the reciprocal tariffs with the sectoral tariffs being 0:02:22.040 --> 0:02:25.200 in place. But what we saw from the broad outlines 0:02:25.240 --> 0:02:27.679 of the Japan deal, and it's rumored to be part 0:02:27.720 --> 0:02:32.000 of the deal with the EU is that there's flexibility 0:02:32.000 --> 0:02:34.840 on the sectoral side for auto So I think that 0:02:35.040 --> 0:02:38.440 is what is providing some good news and maybe a 0:02:38.440 --> 0:02:43.320 bit more certainty. That said, I am still very skeptical 0:02:43.800 --> 0:02:46.440 that we sort of have heard the last about tariffs. 0:02:46.440 --> 0:02:49.359 I think it's still not sure exactly where tariff levels 0:02:49.400 --> 0:02:53.680 will settle. We have uncertainty about how the US courts 0:02:53.800 --> 0:02:58.000 will handle the reciprocal or ie EPA tariffs when they 0:02:58.040 --> 0:03:01.360 start the arguments surrounding at the end of the month. 0:03:02.240 --> 0:03:05.400 And then you know, there's still talk of new sectoral 0:03:05.440 --> 0:03:10.320 tariffs that the administration is looking at pharma, perhaps semiconductors, 0:03:10.520 --> 0:03:14.120 you know, so there's other potential sort of knives to fall. 0:03:14.200 --> 0:03:18.840 So I realized the market is happy to see some flexibility, 0:03:18.919 --> 0:03:22.679 and I'm happy to see some flexibility on the sectoral tariffs, 0:03:22.720 --> 0:03:25.000 but I'm not convinced this is sort of the end 0:03:25.000 --> 0:03:28.440 all when it comes to tariffs. So that's step one. 0:03:28.760 --> 0:03:31.160 You know, some news, maybe a little more certainty, but 0:03:31.200 --> 0:03:33.400 still a lot of open questions for me. But then 0:03:33.440 --> 0:03:37.120 the question is how does it affect the economy. We 0:03:37.280 --> 0:03:41.480 have some initial signs. If you look at Q two data, 0:03:42.200 --> 0:03:46.520 the US collected about sixty five billion in tariff revenue, 0:03:47.040 --> 0:03:50.720 which was about a nine percent effective teriff freight for June. 0:03:51.760 --> 0:03:55.320 What we see in the data is that it doesn't 0:03:55.440 --> 0:03:59.480 appear that foreign exporters into the US are paying much 0:03:59.480 --> 0:04:03.240 of the tarraf Yes, instead, most of it's being absorbed 0:04:03.320 --> 0:04:08.080 by the US. Some seems to be having been passed 0:04:08.120 --> 0:04:12.080 on to consumers, and consumers in terms of inflation in 0:04:12.160 --> 0:04:14.960 certain sectors we see it showing up, but for the 0:04:15.000 --> 0:04:18.840 most part at this point, and again it's early days 0:04:18.880 --> 0:04:23.120 in tariffs, it seems that firms are absorbing the tariffs. 0:04:22.960 --> 0:04:26.280 And that there'll be US firms like US importers. 0:04:25.880 --> 0:04:28.919 US importers exactly, US importing firms. 0:04:29.240 --> 0:04:32.360 Yeah, because you're referring there probably to the export prices 0:04:32.400 --> 0:04:35.719 from Asia in particular, where we haven't really seen a 0:04:35.720 --> 0:04:38.119 lot of movement, and then US import prices have also 0:04:38.160 --> 0:04:40.960 been relatively flat, which kind of just shows you, Okay, 0:04:41.000 --> 0:04:43.920 importers are paying this, and you know, certain sectors like 0:04:43.960 --> 0:04:46.400 maybe japan autos are absorbing in exactly. 0:04:46.480 --> 0:04:50.320 But importantly, it seems like US consumers have yet to 0:04:50.440 --> 0:04:54.760 feel the brunt of the tariffs. You're an economist, are 0:04:54.760 --> 0:04:59.200 you surprised that the American inflation data has been relatively 0:04:59.240 --> 0:05:01.479 benign so far? Well, do you think it's just a 0:05:01.520 --> 0:05:04.279 matter of time before we start seeing this rise. 0:05:05.320 --> 0:05:08.840 I think it's a matter of time. We do see 0:05:08.880 --> 0:05:14.000 the tariff impact in certain sectors, so core goods X autos. 0:05:14.000 --> 0:05:18.240 For now we are seeing a material increase, but that 0:05:18.400 --> 0:05:22.159 is being swamped by the very good sort of decline 0:05:22.160 --> 0:05:26.279 that we've been seeing in housing, rents inflation that are 0:05:26.360 --> 0:05:29.920 much larger component of inflation series, and that really swamp 0:05:29.960 --> 0:05:33.000 what's going on. It's sort of the goods side of 0:05:33.080 --> 0:05:37.000 the inflation data. So that's the good news. But as 0:05:37.040 --> 0:05:39.400 I said, since it seems like for now, given the 0:05:39.480 --> 0:05:45.200 uncertainty the early days of the tariffs, the US firms 0:05:45.240 --> 0:05:48.279 importing firms have absorbed those tariffs. I think the question 0:05:48.400 --> 0:05:50.760 is over time, what happens At some point do they 0:05:50.800 --> 0:05:54.040 begin to pass those on to other firms to end consumers. 0:05:54.680 --> 0:05:58.719 Do they need to cut other costs to support their margins, 0:05:59.120 --> 0:06:03.119 you know, canceling and vement projects, potentially firing workers. That's 0:06:03.240 --> 0:06:05.960 the unknown, and so I think it's going to take 0:06:06.040 --> 0:06:08.760 time to work through the system. So maybe it shows 0:06:08.839 --> 0:06:12.160 up through prices, maybe it shows up through more growth, 0:06:12.200 --> 0:06:15.600 through weaker investment, weaker employment. But I think we have 0:06:15.680 --> 0:06:18.920 to wait for thousands of individual firms to make their 0:06:18.960 --> 0:06:23.440 decisions about how they're going to handle this. It's perhaps 0:06:23.440 --> 0:06:25.839 helpful that they're getting maybe a little more certainty that 0:06:25.880 --> 0:06:30.839 maybe the equilibrium tariff rate might be around fifteen percent. 0:06:30.920 --> 0:06:34.080 Maybe that's something we can sort of the sign maybe 0:06:34.080 --> 0:06:36.960 we're getting from these deals. You know, compared to the 0:06:37.000 --> 0:06:41.400 pre tariff level or pre April level of about one 0:06:41.440 --> 0:06:44.039 and a half percent, that's a huge increase. And so 0:06:45.440 --> 0:06:47.200 you know, I think we have to wait for firms 0:06:47.200 --> 0:06:50.880 to make their decisions. So as an economist, you know, 0:06:50.960 --> 0:06:52.800 we always want to plug in our models and this 0:06:52.839 --> 0:06:54.680 sort of gets to the asset prices and all that. 0:06:54.720 --> 0:06:57.560 But the real world is far more complex than our 0:06:57.640 --> 0:07:01.000 models correct. And so you know, thinking about like the pandemic, 0:07:01.480 --> 0:07:04.040 none of us had lived through a global pandemic before 0:07:04.120 --> 0:07:06.800 we weren't sure what the impacts on the economy would be. 0:07:07.279 --> 0:07:10.960 None of us have lived through a massive increase in 0:07:11.120 --> 0:07:14.240 terrorists from the largest economy in the world, the biggest 0:07:14.560 --> 0:07:17.280 sort of importer in the world. I think we have 0:07:17.320 --> 0:07:19.640 to be humble that we're just not sure what the 0:07:19.680 --> 0:07:21.600 impacts are going to be and the timeframe. 0:07:22.440 --> 0:07:24.920 Don I don't want to bash on economists, but I 0:07:24.960 --> 0:07:29.760 do remember at the beginning of the pandemic, most economists 0:07:29.840 --> 0:07:34.200 said that COVID will be deflationary. There was supposed to 0:07:34.200 --> 0:07:37.120 be a lot of job losses, especially in the SME sector, 0:07:37.680 --> 0:07:41.080 and you were supposed to see deflation. The opposite occuld 0:07:41.200 --> 0:07:44.960 it ended up being massively inflationary. Is there a chance 0:07:45.000 --> 0:07:47.480 that this time around the economists could also be wrong. 0:07:47.960 --> 0:07:51.800 All economists are expecting tariffs to lead to inflationary pressure, 0:07:51.800 --> 0:07:53.040 but we're still not seeing that yet. 0:07:53.880 --> 0:07:56.840 It's definitely possible. I think the mistake in the pandemic 0:07:57.080 --> 0:08:02.560 was underestimating the supply side effects, and also there were surprises, 0:08:02.600 --> 0:08:06.280 I think underestimating the degree of monetary and fiscal response 0:08:06.840 --> 0:08:10.600 that was just outsize compared to anything we see, especially 0:08:10.600 --> 0:08:13.240 in the US, especially in the US, and then of 0:08:13.240 --> 0:08:16.560 course the unknown of the Russia's invasion of Ukraine and 0:08:16.600 --> 0:08:19.040 the spike and energy prices, so there were a lot 0:08:19.080 --> 0:08:23.280 of factors there here. You know, I think you're absolutely right, 0:08:23.840 --> 0:08:26.400 firms are going to have to decide how to respond. 0:08:26.560 --> 0:08:31.680 If the end consumer can't absorb the price increases, then 0:08:31.800 --> 0:08:35.120 there'll be less more of a demand shock. Firms may 0:08:35.400 --> 0:08:38.559 cut back production more. We may see more reductions and investment, 0:08:39.000 --> 0:08:41.840 we may see job losses. So it is possible that 0:08:41.880 --> 0:08:45.719 it ends up being more weighs more on growth, and 0:08:45.800 --> 0:08:50.000 so therefore the inflationary effects in certain products are more 0:08:50.040 --> 0:08:54.040 than swamped by the sort of weaker growth outlook. The 0:08:54.120 --> 0:08:56.840 other challenge to me that I'm watching is, at the 0:08:56.880 --> 0:09:01.240 same time we're having something that's receiving less attention, but 0:09:01.320 --> 0:09:04.880 another bold experiment with our immigration policies, which it would 0:09:04.960 --> 0:09:07.960 also tend to be in the direction of higher prices 0:09:08.360 --> 0:09:11.760 weaker growth. So, you know, the combination of these two 0:09:12.040 --> 0:09:14.000 is why I think it can be very difficult, you know. 0:09:14.040 --> 0:09:16.240 I think also why you see the Federal Reserve is 0:09:16.280 --> 0:09:19.800 waiting for data to decide how to respond, and they 0:09:19.800 --> 0:09:22.600 face the same uncertainty that we do. Is this inflationary, 0:09:23.360 --> 0:09:26.600 is it more of a growth shock, is it stagflationary? 0:09:27.040 --> 0:09:28.480 We kind of have to wait and see. 0:09:28.600 --> 0:09:34.439 Well, since you brought up the FED, I wonder as 0:09:34.440 --> 0:09:38.760 an economist, as an investment manager, how do you factor 0:09:38.920 --> 0:09:42.439 in everything that's happening with the FED into your decisions, 0:09:42.520 --> 0:09:45.360 because of course we're in a moment in time where 0:09:45.400 --> 0:09:49.120 the FED is being highly politicized. There could be a 0:09:49.200 --> 0:09:52.000 shift in leadership. Maybe it depends on the day and 0:09:52.040 --> 0:09:56.080 who's talking from the administration. How do you consider that 0:09:56.400 --> 0:10:00.800 and even begin to think about, for example, inflation forecasting, 0:10:01.000 --> 0:10:03.400 if something could change so rapidly. 0:10:04.559 --> 0:10:07.120 Yeah, it is challenging. And I worked at the New 0:10:07.200 --> 0:10:10.040 York FED for almost fifteen years. Personally, I find it 0:10:10.160 --> 0:10:14.240 very disheartening to see the attacks on an institution that 0:10:14.360 --> 0:10:18.760 is really committed to its public service mandate and to 0:10:18.880 --> 0:10:21.720 remaining a political and sort of acting in the best 0:10:21.720 --> 0:10:26.439 interest of the US economy. Whereas I would have thought 0:10:26.960 --> 0:10:29.920 there's very little chance of the FED losing its independence, 0:10:30.760 --> 0:10:34.800 I'm increasingly worried about the political noise surrounding the FED, 0:10:36.240 --> 0:10:40.720 and it's another factor that could be weighing on inflation forecasts, 0:10:41.080 --> 0:10:44.520 And certainly it is coming into my thinking about inflation 0:10:44.720 --> 0:10:49.160 inflation forecasts, medium term inflation expectations. We don't see it 0:10:49.160 --> 0:10:52.679 in market pricing yet, but I know it certainly is 0:10:52.720 --> 0:10:56.600 affecting our views on the way we are investing in 0:10:56.640 --> 0:10:57.559 our portfolio. 0:10:57.840 --> 0:10:58.559 In what ways. 0:10:59.320 --> 0:11:03.120 You know, added quite a lot to inflation linked treasury 0:11:03.120 --> 0:11:05.760 bonds in our portfolios over the last year or so, 0:11:06.720 --> 0:11:12.120 especially more recently, given that the factors we're discussing terrorists, 0:11:12.400 --> 0:11:16.800 immigration changes, now more attacks on the FED at least 0:11:16.800 --> 0:11:22.120 a bias you towards perhaps easier policy all else equal, 0:11:23.040 --> 0:11:26.680 that that should be inflationary over the medium term. At 0:11:26.679 --> 0:11:28.720 some point that should start to show up more in 0:11:28.800 --> 0:11:31.319 markets and in inflation statistics. 0:11:32.440 --> 0:11:35.760 Asia Centric is produced by Bloomberg Intelligence, where more than 0:11:35.800 --> 0:11:39.640 five hundred experienced analysts and strategists work around the clock 0:11:39.720 --> 0:11:43.200 to bring you timely, world class research. Our coverage spans 0:11:43.240 --> 0:11:47.559 two hundred market industries, currencies, commodities, and industries, as well 0:11:47.559 --> 0:11:50.600 as over two thousand equities and credits. To learn more 0:11:50.600 --> 0:11:54.800 about Bloomberg Intelligence, visit bi go on the Bloomberg terminal. 0:11:55.360 --> 0:11:57.840 If you like what you hear, don't forget to subscribe 0:11:57.880 --> 0:12:02.880 and share. And Sticking with the US, are you worried 0:12:03.000 --> 0:12:07.200 about the fiscal position of the government. The US spends 0:12:07.360 --> 0:12:10.600 more money on interest expense than the defense budget. 0:12:10.960 --> 0:12:11.120 You know. 0:12:11.200 --> 0:12:14.280 The US also lost its Triple A credit rating recently. 0:12:14.720 --> 0:12:15.760 What's your views there? 0:12:16.040 --> 0:12:18.880 We also have the Big Beautiful Bill. Don't forget about that. 0:12:20.360 --> 0:12:20.800 Exactly. 0:12:21.320 --> 0:12:24.200 I've been concerned about the US fiscal position for a while. 0:12:24.320 --> 0:12:27.199 There are a number of structural, sort of medium term 0:12:27.760 --> 0:12:32.480 trends aging the challenges we have with our entitlements that 0:12:32.520 --> 0:12:35.520 are growing as a share of the budget, that sort 0:12:35.559 --> 0:12:39.920 of paint a worrisome picture. However, more recently, you know, 0:12:39.960 --> 0:12:44.440 with higher interest rates, that makes the situation much more troubling, 0:12:44.480 --> 0:12:47.240 as you're going to be rolling from lower cost debt 0:12:47.280 --> 0:12:51.320 into higher cost debt. And of course the passage of 0:12:51.360 --> 0:12:54.960 the One Big Beautiful Bill, by our estimates, should add 0:12:55.000 --> 0:12:58.880 to the deficit over time. The challenges with the bill 0:12:59.000 --> 0:13:03.160 is it's some deceptive. It's much larger than sort of 0:13:03.160 --> 0:13:08.680 traditionally scored because the tax cuts are front loaded, the 0:13:08.760 --> 0:13:13.160 tax hikes and expenditure cuts are backloaded. And I have 0:13:13.280 --> 0:13:17.680 my doubts. And that change really happens after twenty twenty eight, 0:13:17.800 --> 0:13:21.000 So after the next administration comes in, you'll have a 0:13:21.000 --> 0:13:24.640 new president, new Congress. At that point, are they going 0:13:24.679 --> 0:13:28.360 to suddenly tighten fiscal policy dramatically? I think we've learned 0:13:28.440 --> 0:13:31.200 over time that no politician wants to take that on. 0:13:32.160 --> 0:13:35.800 So it's actually a much more expensive expansive bill than 0:13:35.840 --> 0:13:40.920 written on paper and reduces the flexibility. As you said, 0:13:41.600 --> 0:13:45.760 interest expenses growing, the discretionary parts of the budget are 0:13:45.760 --> 0:13:49.800 being squeezed, discretionary spending being squeezed. At the same time 0:13:49.880 --> 0:13:53.880 the sort of entitlements, the mandatory spending keeps growing, and 0:13:53.960 --> 0:13:57.760 then you've reduced your tax intake further. So again, as 0:13:57.760 --> 0:14:00.200 a sovereign analyst, these are all sorts of things that 0:14:00.240 --> 0:14:02.600 you don't want to see when a government puts together 0:14:02.640 --> 0:14:06.839 a budget. I am definitely nervous about the fiscal trajectory. 0:14:07.679 --> 0:14:10.600 And when I look across sort of the long end 0:14:10.640 --> 0:14:13.360 of the yield curve, there is concern. You know, we 0:14:13.440 --> 0:14:16.360 hear from US Treasury, the Treasury Secretary that they want 0:14:16.400 --> 0:14:19.080 to skew issuance to the shorter end of the curve. 0:14:19.160 --> 0:14:21.680 They want to reduce long term rates. When you look 0:14:21.840 --> 0:14:24.200 sort of across in the past twenty years or so, 0:14:24.440 --> 0:14:27.720 long term bond yields are still not that high, considering 0:14:28.280 --> 0:14:31.760 the level of debt, the uncertainties in the economy, and 0:14:31.840 --> 0:14:34.960 so there's always the chance that long term rates rise 0:14:34.960 --> 0:14:38.000 from here. Additionally, when you look at the term premia, 0:14:38.320 --> 0:14:41.520 which is the difference between long term bond yields and 0:14:41.560 --> 0:14:46.040 the expected path of short rates. The term premia has increased. 0:14:46.200 --> 0:14:48.640 It used to be negative. It was negative for many 0:14:48.720 --> 0:14:52.600 numbers of years. It's become positive, which I think is 0:14:52.600 --> 0:14:56.120 a healthy development, suggesting that you're getting paid for taking 0:14:56.200 --> 0:14:59.960 some duration risk. But it's still below sort of historical 0:15:00.160 --> 0:15:04.280 averages of term premia, even though, as you highlighted, sort 0:15:04.320 --> 0:15:07.200 of the credit quality, the credit standing of the United 0:15:07.240 --> 0:15:09.920 States has deteriorated, so you know, we see scope that 0:15:09.960 --> 0:15:12.800 there could be further increases in term premia. And when 0:15:12.840 --> 0:15:15.760 you couple that with questions about the FED and their 0:15:15.800 --> 0:15:19.000 commitment to inflation fighting, that's sort of another risk for 0:15:19.040 --> 0:15:20.920 the long end of the yield curve. 0:15:21.480 --> 0:15:23.800 So what does this all mean. It sounds like it's 0:15:23.800 --> 0:15:25.920 going to be more inflation in the US. Does this 0:15:26.080 --> 0:15:29.880 mean that you underweight US assets versus the rest of 0:15:29.920 --> 0:15:32.280 the world, any in particular Asia, And what's your views 0:15:32.320 --> 0:15:33.320 also on the US dollar? 0:15:34.080 --> 0:15:37.440 So at First Eagle, we invest for the long term. 0:15:37.480 --> 0:15:43.200 We build globally diversified portfolios, and so valuations really are 0:15:43.360 --> 0:15:47.080 guiding north star. We try to invest in businesses or 0:15:47.160 --> 0:15:51.480 assets when we think they're below our estimate of intrinsic 0:15:51.560 --> 0:15:56.360 value or fair value. Because US markets have been expensive 0:15:56.440 --> 0:16:00.520 for extended period time, equity markets, credit markets, the dollar 0:16:00.640 --> 0:16:04.080 has been overvalued for an extended period of time. That 0:16:04.160 --> 0:16:06.640 has meant that we've been adding much more to the 0:16:06.680 --> 0:16:12.240 portfolios overseas. Internationally, emerging markets were hit quite hard during 0:16:12.240 --> 0:16:15.720 the pandemic, and so again it's not surprising that you know, 0:16:15.800 --> 0:16:18.400 if we can find a good business or a sovereign 0:16:18.720 --> 0:16:20.840 or an asset that we like that we want to own, 0:16:21.120 --> 0:16:23.680 that we take advantage. When it's unloved by the market, 0:16:23.720 --> 0:16:28.160 that's typically when we will enter into positions. So, yes, 0:16:28.440 --> 0:16:32.280 we have been shying away from US assets adding more 0:16:32.520 --> 0:16:35.840 international assets to the portfolio for a number of years. 0:16:36.080 --> 0:16:39.360 I will say, not all sectors of the US markets 0:16:39.360 --> 0:16:42.480 are loved, and so again we'll use flexibility. So when 0:16:42.520 --> 0:16:45.560 we see a very nice business that we believe is 0:16:45.600 --> 0:16:48.200 trading below its fair value, you know, we will enter 0:16:48.240 --> 0:16:51.640 those positions. So then coming to currencies, you know, we 0:16:51.720 --> 0:16:54.720 have to think about the impact of taris on the economy, 0:16:54.800 --> 0:16:56.880 and then we think about the impact of currencies, and 0:16:56.920 --> 0:16:59.520 the thing, you know, if you had asked me this 0:16:59.600 --> 0:17:03.000 question out my outlook for the dollar in December, I 0:17:03.040 --> 0:17:07.200 would have said, well, we're unsure about tariffs, but all 0:17:07.240 --> 0:17:12.639 else equal, everything in equilibrium. A good economist answer means 0:17:12.680 --> 0:17:15.960 that the dollars should appreciate to offset the change in 0:17:16.000 --> 0:17:20.000 relative prices coming from tariffs. And indeed we did see 0:17:20.040 --> 0:17:23.760 that in the twenty eighteen nineteen period, when tariffs were 0:17:23.800 --> 0:17:28.600 mainly focused on China, the China dollar exchange rate really shifted. 0:17:28.640 --> 0:17:32.400 The dollar appreciated and offset quite a lot of the tariffs. 0:17:32.920 --> 0:17:35.680 This time around, of course, we've had the exact opposite again, 0:17:35.760 --> 0:17:38.399 proving that economists can be wrong and are often wrong. 0:17:39.119 --> 0:17:42.840 And the dollar has depreciated, and so I think you 0:17:42.960 --> 0:17:45.760 have to start to bring in you know, not everything 0:17:45.800 --> 0:17:49.600 else is equal. What else is happening? Our investors losing 0:17:49.640 --> 0:17:53.680 confidence in the dollar in US assets? And is that 0:17:53.840 --> 0:17:58.000 changing behavior? Is there more concerns about growth in the 0:17:58.119 --> 0:18:00.680 US versus the rest of the world. Is there more 0:18:00.680 --> 0:18:03.240 concerned about inflation in the US compared to the rest 0:18:03.280 --> 0:18:03.800 of the world. 0:18:05.320 --> 0:18:10.040 I wonder if the first trade war offers some guidance 0:18:10.080 --> 0:18:14.040 for this trade war or if it's just completely uncertain. 0:18:14.119 --> 0:18:17.200 And the reason I ask that is because there are 0:18:17.240 --> 0:18:20.360 a lot of differences in the way the world economy 0:18:20.400 --> 0:18:23.960 is right now, we also have a trade war against 0:18:24.200 --> 0:18:27.360 much of the world as opposed to just primarily one 0:18:27.480 --> 0:18:31.520 country being China. And the other thing that I've been 0:18:31.520 --> 0:18:34.800 talking to some economists about is when it comes to 0:18:34.840 --> 0:18:38.480 inflation in the US, we now have a situation where 0:18:38.520 --> 0:18:43.440 supply chains are potentially going to become even more complex 0:18:43.720 --> 0:18:48.440 and inefficient, and the potential for companies to start offloading 0:18:48.600 --> 0:18:52.280 those even higher costs throughout the world, not just in 0:18:52.320 --> 0:18:55.800 the US. So I wonder how you're thinking about this 0:18:56.320 --> 0:18:57.440 trade war versus the. 0:18:57.440 --> 0:19:02.760 Last Yes, And I think the mistake, certainly, my mistake 0:19:02.920 --> 0:19:07.600 is perhaps I initially viewed Trade War two point zero 0:19:07.640 --> 0:19:10.280 in the same lens as the original one, which was 0:19:10.359 --> 0:19:12.000 largely focused against China. 0:19:12.000 --> 0:19:14.040 Everyone did yeah, yeah. 0:19:13.720 --> 0:19:17.080 You know, against China until the board came out, and 0:19:17.160 --> 0:19:20.240 I think there was a collective gasp of oh, my goodness, 0:19:20.240 --> 0:19:24.160 this is this is a different beast. The first trade 0:19:24.160 --> 0:19:28.000 war was largely focused against China, and the effective tariff 0:19:28.080 --> 0:19:31.040 rate went from one and a half percent to about 0:19:31.160 --> 0:19:35.120 three percent in the US, so doubled. But now we're 0:19:35.119 --> 0:19:38.439 talking fifteen to twenty percent. I mean, it's just a 0:19:38.480 --> 0:19:43.240 different order of magnitude, and then over time that effective 0:19:43.240 --> 0:19:45.760 tariff rate sort of crept back down to you know, 0:19:45.800 --> 0:19:50.280 in the twos as firms reoriented supply chains, as Chinese 0:19:50.280 --> 0:19:54.000 firms changed the sort of structure of their exports to 0:19:54.040 --> 0:19:56.760 the US through third countries, and so you could see 0:19:56.760 --> 0:20:01.600 how over time businesses were sort of optimizing around those tariffs. 0:20:02.520 --> 0:20:06.359 A trade war against everybody. Again, as an economist, you know, 0:20:06.760 --> 0:20:10.159 free trade, it's like a core tenant and part of 0:20:10.200 --> 0:20:14.199 the religion of an economist, sort of comparative advantage gains 0:20:14.240 --> 0:20:17.920 from trade, and so we're conducting war against everybody else. 0:20:18.280 --> 0:20:21.400 It is likely to make the US first and foremost 0:20:21.560 --> 0:20:25.240 less competitive, grow more slowly. There have been studies done 0:20:25.280 --> 0:20:28.320 on the first trade war, you know, for instance, washing 0:20:28.320 --> 0:20:31.320 machines and dryers where there were high tariffs and posed 0:20:31.680 --> 0:20:34.720 there were studies that were done that showed that US 0:20:34.760 --> 0:20:39.080 firms raise their prices just as much as imports. Studies 0:20:39.119 --> 0:20:42.399 done on the steel industry where steel tariffs were quite high, 0:20:42.680 --> 0:20:47.560 that US steel using firms importing firms became much less 0:20:47.560 --> 0:20:52.080 competitive after them position. So there's a number of reasons 0:20:52.080 --> 0:20:54.280 to believe that this is going to make the US 0:20:54.560 --> 0:20:59.040 less competitive grow less quickly, and it will be bad 0:20:59.080 --> 0:21:01.280 for the global economy, both because the US is such 0:21:01.280 --> 0:21:04.280 a large consumer, so a weaker US obviously not great 0:21:04.320 --> 0:21:07.199 for the rest of the world. And to the extent 0:21:07.320 --> 0:21:11.560 that the US is poor consumes less, perhaps there's some 0:21:11.600 --> 0:21:14.879 shifting of production. It also begins to hit other economies, 0:21:14.880 --> 0:21:17.480 and of course Asia, which is the world's largest exporter, 0:21:18.160 --> 0:21:20.400 especially to the US, will be hit by that. So 0:21:20.480 --> 0:21:24.080 everybody else is worse off. To your point about complexity, 0:21:25.000 --> 0:21:26.760 and I think again this sort of gets at in 0:21:26.800 --> 0:21:30.320 the US. We haven't seen really the results yet. Firms 0:21:30.520 --> 0:21:33.560 unsure of how to respond. You're not sure where ultimate 0:21:33.720 --> 0:21:36.679 teriff rates end up. You know, it's hard enough for 0:21:36.720 --> 0:21:40.200 a supply chain manager to deal with suddenly much higher 0:21:40.200 --> 0:21:43.440 tariffs on China, but suddenly you have to look at, 0:21:44.440 --> 0:21:48.600 you know, terif rates around the world different industries. Yeah, 0:21:48.640 --> 0:21:51.520 I think it's going a lot of wasted time in 0:21:51.600 --> 0:21:54.200 this space, you know. I know there was a lot 0:21:54.200 --> 0:21:58.640 of hope with this administration that they pursue a deregulatory agenda, 0:21:58.720 --> 0:22:04.080 but they are creating a massive regulatory burden surrounding trade. 0:22:04.560 --> 0:22:07.520 Both for the government who suddenly has to enforce a 0:22:07.560 --> 0:22:10.399 wide range of tear of schedules and for firms that 0:22:10.440 --> 0:22:14.040 suddenly are going to be faced with this difficult optimization 0:22:14.240 --> 0:22:17.960 problem of how to rejigger supply chains in an ever 0:22:18.040 --> 0:22:18.760 changing world. 0:22:19.840 --> 0:22:23.879 Don I'd love to bring the discussion to Asia, given 0:22:24.080 --> 0:22:27.800 everything that we've said, is there any particular Asian you know, 0:22:27.960 --> 0:22:31.280 sovereign or country that you think could outperform in this 0:22:31.359 --> 0:22:32.280 type of environment. 0:22:33.320 --> 0:22:36.320 So two points one, I think countries that are less 0:22:36.480 --> 0:22:40.320 export dependent perhaps tend to fare a bit better. So 0:22:40.400 --> 0:22:44.320 maybe that's an India and Indonesia just you know, they're 0:22:44.600 --> 0:22:49.960 less open to trade and less exposed to the US market. Additionally, 0:22:49.960 --> 0:22:53.480 to the extent you know, again we haven't really seen 0:22:54.080 --> 0:22:58.120 the details of any of these deals yet, there's still 0:22:58.160 --> 0:23:02.399 more tweet form than full of trade agreements. But also 0:23:02.840 --> 0:23:06.400 to the extent that they do reduce tariffs, a country 0:23:06.440 --> 0:23:10.840 like India or Indonesia again that have relatively high tariff rates, 0:23:11.119 --> 0:23:13.640 to the extent they help bring down their own domestic 0:23:13.640 --> 0:23:16.160 tariff rates because again, as an economist, we think lower 0:23:16.200 --> 0:23:19.199 tariff rates are actually very good for your economy and 0:23:19.280 --> 0:23:23.280 your business sector to improve sort of the competitive landscape. 0:23:23.320 --> 0:23:25.560 And so you know, that could be an added bonus. 0:23:26.080 --> 0:23:29.160 But also when I think about the rest of Asia, 0:23:29.880 --> 0:23:33.240 it is looking like that perhaps everybody is going to 0:23:33.240 --> 0:23:38.119 face about a relatively similar teriff rate. With respect to 0:23:38.160 --> 0:23:40.000 the US, we seem to be sort of in the 0:23:40.040 --> 0:23:43.320 fifteen to twenty percent, So in that case, maybe the 0:23:43.359 --> 0:23:49.240 relative competitiveness doesn't change among Asian economies or between Asia 0:23:49.280 --> 0:23:52.440