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 a Marie Hordern. Join us each
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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. We begin this
Speaker 2: sour stock steady after notching one of the best days
Speaker 2: of the year so far. Cameron Dawston and new Weege
Speaker 2: Welsh writing, our key message to clients is get comfortable
Speaker 2: being uncomfortable. We see volatility continuing even as we bounce
Speaker 2: off of over sold low sentiment levels. Cameron joins us,
Speaker 2: Now from what camera's good to see you.
Speaker 1: Good to see you.
Speaker 2: Let's talk about your conversations with those clients. What they're
Speaker 2: telling you. Are they're freaking out? Are they bear us?
Speaker 2: What's the response?
Speaker 3: Clients are still very common. We think it's because if
Speaker 3: you look at a seventy thirty portfolio of AQUI versus
Speaker 3: the IG you're still up about one percent for the years. So, yes,
Speaker 3: we have seen this weakness within US equities, But if
Speaker 3: you are a diversified investor, for the first time in
Speaker 3: a while, you actually feel good about having non US exposure,
Speaker 3: which has helped to dle some of the pain that
Speaker 3: you have seen within the concentrated US markets.
Speaker 2: How far out are they willing to extrapolate that recent
Speaker 2: underperformance US versus Europe? Are they starting to wonder whether
Speaker 2: this could be a multi year game or is it
Speaker 2: a short term game.
Speaker 3: We're certainly asking that question, meaning are we going to
Speaker 3: see a repeat of the two thousand to two thousand
Speaker 3: and seven period where it truly was a multi year
Speaker 3: period of non US underperformance versus the rest of the world.
Speaker 3: We think it really depends on two key factors. You
Speaker 3: have to see continued dollar weakness. You have to see
Speaker 3: much further downside in the dollar to suggest that capital
Speaker 3: will leave the US and go to the rest of
Speaker 3: the world. And you have to see it backed up
Speaker 3: by earnings. So if you look here to date, all
Speaker 3: of the outperformance of Europe has been driven by valuation expansion.
Speaker 3: It's gone from thirteen and a half times to fifteen times.
Speaker 3: Earning sestiments have actually gotten cut. So if you think
Speaker 3: that this is going to last more than just a
Speaker 3: couple of months or a couple of quarters, you have
Speaker 3: to believe in the earning story.
Speaker 4: So how do you understand that multiple shift? How do
Speaker 4: you understand the idea that we've seen a weakening in
Speaker 4: the dollar and a sellof in the s and P
Speaker 4: five hundred for one of the longest periods that we
Speaker 4: have in the past few decades. If it isn't necessarily
Speaker 4: some fundamental shift, what is it.
Speaker 3: We have to appreciate that we went into this year
Speaker 3: with a massive record dollar long position.
Speaker 1: If you looked at.
Speaker 3: Futures trading, you had a huge position where everybody was
Speaker 3: long to their eyeballs the dollar. That has now reversed
Speaker 3: and you actually see traders being slightly short the dollar.
Speaker 3: So we think that the dollar could actually find some
Speaker 3: stability here. Maybe in the short term you see some
Speaker 3: mean reversion in some of those trades. The last two days,
Speaker 3: Europe has been underperforming the US, So it's very alluring
Speaker 3: to try to ascribe a narrative to price action to say,
Speaker 3: inter view US exceptionalism, the US exceptional in story is over.
Speaker 3: We think it's actually a lot more about dollar positioning,
Speaker 3: at least in the short term.
Speaker 4: Yeah, you've said this question in your notes, which I
Speaker 4: thought was great. Is at the end of US exceptionalist
Speaker 4: or just a positioning unwined? It seems like maybe it's
Speaker 4: a little bit of the latter. I am curious what
Speaker 4: this means going forward. Then if this gives a sense
Speaker 4: that not only the will there be stability to the dollar,
Speaker 4: but also say to the Magnificent seven, which have unwound
Speaker 4: at a disproportional pace.
Speaker 3: Well, and we do think the weakness of the mag
Speaker 3: seven was a function of its strength at the end
Speaker 3: of the year. MAG seven outperforms so much in December
Speaker 3: that was not justified by the fundamentals earning sessments were
Speaker 3: getting cut.
Speaker 1: It was all valuations. So this is all just these.
Speaker 3: Positioning shifts moving around. We've now gotten to the point
Speaker 3: where positioning is a bit more balanced. You've gone from
Speaker 3: the ninety eighth percentile in US positioning to the twenty
Speaker 3: six percentile. That does set you up for a little
Speaker 3: bit of a relief rally. The question is Europe is
Speaker 3: still trading at fifteen times versus the US at twenty times.
Speaker 3: What's the driver to potentially see those multiples converge further.
Speaker 4: You know, you said get used to being uncomfortable. There
Speaker 4: are a lot of people say I don't want to
Speaker 4: be uncomfortable. I want to have some sort of forward
Speaker 4: indicator to get an edge at a time where it
Speaker 4: seems like there's a lot of noise in nothing else.
Speaker 4: What are you looking for to change materially to get
Speaker 4: some conviction one way or another.
Speaker 3: We have to start from the basis that indicator economics
Speaker 3: and what used to work in prior cycles does not
Speaker 3: work in the post COVID world, which means that we
Speaker 3: can't look to things like the tend to curve of
Speaker 3: telling us if we're having a recession. We can't look
Speaker 3: at those sentiment indicators because they've been so misleading.
Speaker 1: One of the things over the last two years that.
Speaker 3: We've been saying is that watch what they do, not
Speaker 3: what they say, meaning that you cannot look at sentiment
Speaker 3: and soft data and extrapolate it into hard data. We
Speaker 3: think it's actually more important to look at what the
Speaker 3: equity market is saying about the consumer for example, So
Speaker 3: look at equal weight discretionary versus staples.
Speaker 1: If discretionary is.
Speaker 3: Underperforming staples, the equity market is sniffing out that there's
Speaker 3: trouble in River City with the consumer. If it continues
Speaker 3: to be in an up trend, then the equity market
Speaker 3: is telling you a message of it's okay, watch what.
Speaker 1: They do, not what they say.
Speaker 5: Are you also using that same logic when it comes
Speaker 5: to policy makers in Washington?
Speaker 3: Not necessarily there has been followed through in what they've
Speaker 3: been saying. And I think that that was one of
Speaker 3: the follies going into this year, thinking that it was
Speaker 3: all just rhetoric coming out of DC and that we
Speaker 3: wouldn't see policy follow through. But we certainly are seeing it,
Speaker 3: at least to an extent. Yes, we have the flip
Speaker 3: flop and the ping pong about how much we're actually
Speaker 3: going to see tariffs enacted, but there are real policies
Speaker 3: being enacted, which is weighing on activity that we see today.
Speaker 2: April second is increasingly difficult to understand. The Financial Times
Speaker 2: just put out this report that a president is considering
Speaker 2: a two step tariff regime on April second. According to
Speaker 2: people familiar with the matter among proposals, and I'm citing
Speaker 2: this story directly. Now his team has been discussing as
Speaker 2: a plan to launch so called Section three oh one
Speaker 2: investigations into trading partners, so that's unfair trading practices, while
Speaker 2: simultaneously using ready invoked emergency powers to apply immediate tariffs
Speaker 2: in the interim.
Speaker 6: So you could see a.
Speaker 2: Couple of phases of this, which is a reason why
Speaker 2: the people like Max Counter of HSBC or worried that
Speaker 2: this uncertainty will linger beyond April second. And I'm Marie,
Speaker 2: this is something you've talked about repeatedly. There are things
Speaker 2: you can do on day one and April second, there
Speaker 2: are other things you'll have to wait.
Speaker 5: To execute on right If you want to use Section
Speaker 5: three three eight or IEPO, you can maybe use national
Speaker 5: security lever and you can have a tariff that day
Speaker 5: in an executive order. If you want to look at
Speaker 5: something that is more long term, if you need public feedback,
Speaker 5: then you would take weeks or months. But what the
Speaker 5: Financial Times is saying, and it's something I think makes
Speaker 5: sense for how Trump likes to enact policy. You might
Speaker 5: see both on that day come out with something really
Speaker 5: sharp because he wants to deliver, but then at the
Speaker 5: same time it's a little bit more nuanced when it
Speaker 5: comes to maybe specific countries or sectors.
Speaker 2: Camera This makes April second really tough because is it
Speaker 2: going to be a clearing event maximum uncertainty, move beyond it,
Speaker 2: move on by stocks, or will it just get more confusing.
Speaker 3: I think that Peter Cheer earlier this week was really
Speaker 3: wise in saying that if we get clarity, is that
Speaker 3: actually a bad thing in the sense that the current
Speaker 3: EPs estimates do not contemplate the kind of tariff regime
Speaker 3: that's even the tariff light that is being presented, which
Speaker 3: means that we do think that there is downside to
Speaker 3: earning sestments if we get the clarity that people could
Speaker 3: actually start putting it into numbers. We see this arrested
Speaker 3: development and decision making. It's the if you choose not
Speaker 3: to decide, you are still making a choice. Businesses are
Speaker 3: sitting on their hands and not making decisions, and that
Speaker 3: could result, we think, in lower earnings estiments, which we
Speaker 3: think challenges the valuations of equities even further.
Speaker 2: Bad thing for who and bad for witch aquacies the
Speaker 2: United States or the outperformance we've seen in Europe and
Speaker 2: elsewhere in China.
Speaker 3: I don't think that the European rally has been pricing
Speaker 3: in the risk of tariffs being escalated, which just means
Speaker 3: that you're seeing all of this strength and rerating, which
Speaker 3: is more of a positioning flip than necessarily thinking that
Speaker 3: Europe is going to do better because of the tariffs.
Speaker 3: So if we actually see them enacted, we think it's
Speaker 3: more of money leaving global act versus shifting from one
Speaker 3: place to another.
Speaker 1: I'm with you.
Speaker 2: I love the piece from p over the weekend. Careful
Speaker 2: what you wish for if you get the clarity, you
Speaker 2: get the certainty is that when we start to fully
Speaker 2: appreciate the kind of damage it could do to the economy.
Speaker 2: And I'm not talking about the United States, I'm talking
Speaker 2: about the rest of the world, which.
Speaker 4: Is something that people were pricing in at the end
Speaker 4: of last year and everybody seemed to ignore because they
Speaker 4: were all benumbed by the idea of Germans spending money
Speaker 4: and that seemed to take everyone's idea of what tariffs
Speaker 4: would do to the rest of the world out of
Speaker 4: the mines.
Speaker 2: Cameron, good to see you as always. Great to catch up.
Speaker 2: Cameron Dawson, their Avenue Edge, twelve Banks for America cunning
Speaker 2: their growth out looks for the United States and the World.
Speaker 2: Rights and the Growth Revision seek to capture the impact
Speaker 2: of the policy uncertainty shock on spending in CAPEX in
Speaker 2: the coming months, as well as a more hawkish tarist stance.
Speaker 2: Claudia Irigozan of Bank of America joins us now for more.
Speaker 6: Cladia. Good to see you, sir, Thank you.
Speaker 2: First question, hardest question on earth to put out a
Speaker 2: forecast in this environment? How difficult is that?
Speaker 6: It's extremely difficult. But and to be honest, some times,
Speaker 6: uncertainty it's worse than bad news because that impacts the
Speaker 6: decision of companies, irreversible decisions to invest or not. So
Speaker 6: the optional value of waiting is higher when you don't
Speaker 6: know what's going to happen and you can see the Fed.
Speaker 6: The FED is exactly in the same position. They cannot
Speaker 6: move the needle until they figured out what's going to happen.
Speaker 2: So, without of mind, how bad key one going to be?
Speaker 6: Actually it's not going to be that bad. Generally data
Speaker 6: was bad. February data was much better. So probably generally
Speaker 6: was a one off. We mark to market the first quarter,
Speaker 6: we expect probably something between one and a half and
Speaker 6: two percent, So the first half is going to be
Speaker 6: around one and a half one point seven and the
Speaker 6: second half is going to be around two percent, which
Speaker 6: is to try and grow. It's not that bad really.
Speaker 4: At the same time, I think what a lot of
Speaker 4: people are worried about is that tariffs are going to
Speaker 4: keep the inflation picture a little bit stickier than otherwise.
Speaker 1: Than otherwise was on track for Atlanta.
Speaker 4: FED President Rafael Biostik yesterday speaking with our Michael McKee,
Speaker 4: saying that he moved to one rate cut projected for
Speaker 4: this year because he thinks that the path of this
Speaker 4: inflation is going to be very bumpy and not moved
Speaker 4: dramatically and in a clear way to the two percent target.
Speaker 4: Do you agree that that now seems further out of reach.
Speaker 6: Yeah. We had the view that the inflation was sticky
Speaker 6: and was going to continue to remain sticky even before
Speaker 6: the title shock, and we expect the PC inflation around
Speaker 6: three percent, which is too high for the FED to
Speaker 6: feel comfortable cuddion rates. With all that uncertainty, that is
Speaker 6: basically upside risk to inflation. So we have the call
Speaker 6: that the FED will remain a whole for the foreseeable
Speaker 6: future and inflation will remain sticky. Absolutely.
Speaker 4: So it raises this question when you talk about a
Speaker 4: growth slow down. A muhammadal Area and was on this
Speaker 4: program and he asked this question.
Speaker 1: And I've given a.
Speaker 4: Lot of thought to it slowing to what if it's
Speaker 4: not recession. If growth slows to a certain place, does
Speaker 4: it become really difficult for the United States to sustain
Speaker 4: the deficit that it has and continue with the growth
Speaker 4: that it has. If you have inflation that is sticky,
Speaker 4: it's not stiflation, but it doesn't feel great.
Speaker 6: It's a staflationary flavor. Let me put it away. If
Speaker 6: you have the level of uncertainty that you have over
Speaker 6: the last three weeks for another three months, that will
Speaker 6: have a permanent effect on investment decisions and on consumption.
Speaker 6: So this administration can change the way communicates to the market.
Speaker 6: Because the market has no political color. They just price
Speaker 6: what they see and the correction in the market is
Speaker 6: the market telling we don't like these policies or we
Speaker 6: don't understand this policy. So at least communication could be
Speaker 6: more transparent for the market to understand that if this
Speaker 6: is a short and pain for learning game. Usually markets
Speaker 6: rally when the net present value of a project is positive.
Speaker 6: So communication is going to be key. And I notice
Speaker 6: in the last three or four days that communication is
Speaker 6: more careful at least well.
Speaker 5: Trump has talked about being flexible at least when it
Speaker 5: comes to terrorists. When it comes to your inflation forecast,
Speaker 5: it's very hawkish. Do you use some of these tariffs driven.
Speaker 6: For you to have a sense if you have an
Speaker 6: increase of one percent in effected tatifs, that gives you
Speaker 6: between seven, maybe ten or more than ten basis points
Speaker 6: increasing PC. So tariffs the twenty percent is from China,
Speaker 6: that gives you two and a half points of increasing
Speaker 6: effective tittifs, So that gives you already twenty points or
Speaker 6: so on PC. And then if you do reciprocity, you
Speaker 6: can have another half a point in increasing in effected tititis.
Speaker 6: So you can have a sense the things get more
Speaker 6: heity when you say, okay, I'm going to also take
Speaker 6: into account when I do reciprocity VAT then it's a
Speaker 6: completely different discussion.
Speaker 5: And digital services, tax and currency exchanges. They're looking at
Speaker 5: everything across the that's the executive order called for. What
Speaker 5: I'm hearing from you is it's not so much the tariffs,
Speaker 5: it's the uncertainty.
Speaker 1: Can we have an uncertainty driven recession?
Speaker 6: Well, you really really have to keep this uncertainty letter
Speaker 6: for a while. Three weeks easy enough for showing up
Speaker 6: in the soft data. As we were discussing before, Still
Speaker 6: consumption data remains strong. Our cregit card data shows that
Speaker 6: the consumption is resilient. You had massive wealth effects over
Speaker 6: the last year and a half. Consumers heah their interest
Speaker 6: rate exposure big time when interstrate collapsed, the refinance their mortgages.
Speaker 6: So the balance sheet of the private sector is fine.
Speaker 6: The balance sheet of the public sector is not fine,
Speaker 6: and that remains to be seeing how it's going to
Speaker 6: be addressed.
Speaker 2: It's interesting listening to the administration the last twenty four
Speaker 2: houns when they talk about challenges to the economy, they
Speaker 2: kind of brush to a side the terror story. They
Speaker 2: will accept, though the doge and the rebalance of the
Speaker 2: economy away from government spending towards the private sector could
Speaker 2: be damaging. And we heard that from Stephen Merron, the
Speaker 2: chair the Council of Economic Advices, just yesterday speaking to
Speaker 2: blimp Back News. I don't think there's going to be
Speaker 2: a material short term pain from the tariffs. I think
Speaker 2: the short term pain is coming from the re orientation
Speaker 2: of the economy from the government to the private sector.
Speaker 2: How do you even the THA think about DOGE and
Speaker 2: what it could do to your outlook.
Speaker 6: I think it's too early to tell. There are a
Speaker 6: lot of things that the administrations say we're going to
Speaker 6: do it, and it's not easy to implement. The execution
Speaker 6: risks are still high. But dogs is another example in
Speaker 6: which uncertainty. It's not enough to characterize this economy. You
Speaker 6: have to add to to uncertain the confusion. So we
Speaker 6: can agree that tardies will be two twenty percent higher
Speaker 6: or not in April. Second, we can agree on the
Speaker 6: probority distribution of that random event, but we can disagree
Speaker 6: and people disagree a lot on the effect of that
Speaker 6: on the economy.
Speaker 5: When it comes to doughg is your concern and the
Speaker 5: effect of the economy on the labor market and potentially
Speaker 5: the business contracts that you have the private sector doing
Speaker 5: with the US government.
Speaker 6: It's still when you quantify it, it's still relatively minor
Speaker 6: and very concentrated on some geographical areas the DC et cetera.
Speaker 6: But it's going to impact on sentiments, right, so it
Speaker 6: creates uncertainty of where we are going. So if you
Speaker 6: have a master plan that has different pars energy, immigration,
Speaker 6: physical consolidation chart, if you got to put it together
Speaker 6: and explain to the market, this is what we have
Speaker 6: in mind. If you do it piecemeal, you create confusion.
Speaker 5: Well, they have a master plan, but they're doing a
Speaker 5: piecemeal in the sense that they're dressing tariffs first. By
Speaker 5: the end of the year, they want an extension of
Speaker 5: TCGA and they want deregulation along the way. If you
Speaker 5: take the Trump administration's economic policy together, do you think
Speaker 5: it's a fair outcome?
Speaker 6: What we have in our forecast is an economy that
Speaker 6: eventually will continue running the wrong potential. I think policies
Speaker 6: can have the right the thea would be great, but
Speaker 6: implementation rates are very high. If you impose studies in
Speaker 6: the morning and removing in the afternoon, even if you
Speaker 6: end up with at the end, that transition doesn't help.
Speaker 2: It's difficult to plan with that bad job.
Speaker 6: That's for Claudia. It's good to see.
Speaker 2: It's good to catch up and get your thoughts from
Speaker 2: the team over.
Speaker 6: A Bank of America.
Speaker 2: Claudia Rigo isn't there to extend the conversation joining us
Speaker 2: around the table here in New York. Let me control
Speaker 2: the pimp cod Let's be good to see you.
Speaker 1: Good to see you.
Speaker 2: Attempting to read the tea leaves in Washington is a
Speaker 2: dangerous game, but we're going to play it just quickly.
Speaker 2: Do you think maybe, based on the comments in the
Speaker 2: last twenty four hours, the President in this White House
Speaker 2: are realizing some of the legal constraints around what they
Speaker 2: can and can't do on aight Pril second.
Speaker 7: Yeah, And what we know about his trade advisors, jameson
Speaker 7: Greer in particular, who's his US trade presentative. He is
Speaker 7: particularly focused on the legality and the durability of these
Speaker 7: terriff actions. We remember that April second was the first
Speaker 7: sort of the date that was set out in the
Speaker 7: executive order in the first week of the administration that
Speaker 7: really was supposed to clarify kind of the trade agenda.
Speaker 7: It was before the Canada Mexico terriffs, before the Columbia threats,
Speaker 7: before the aluminum steel tariffs. So I think in some
Speaker 7: ways this should, I think provide some coherence in terms
Speaker 7: of the trade agenda. But again, the legality I think
Speaker 7: is very crucial here. One thing that we were talking
Speaker 7: to clients about is is this just an announcement of
Speaker 7: future tariffs. Is this sort of forward guidance, if you will,
Speaker 7: for tariffs or is this actually an announcement that tariffs
Speaker 7: are rolling on on April second? And I think that
Speaker 7: actually has to interplay with the legality. If this is
Speaker 7: being used under AEPA, then he can do this day one.
Speaker 7: If this is more of a broader investigation, then that
Speaker 7: will take several months.
Speaker 1: Well, the ft is saying it's both. There's going to
Speaker 1: be two tiers.
Speaker 5: Potentially we get some pars day one and then longer
Speaker 5: term they're going to look into some trade and balances.
Speaker 5: I love that you talk about mind numbing process because
Speaker 5: I actually think it's important whether or not they use AIPA,
Speaker 5: whether or not they use three thirty eight. Can you
Speaker 5: walk us through what they potentially have a menu of
Speaker 5: to enact on April second.
Speaker 7: Yeah, I mean, as we've discussed before, the executive branch
Speaker 7: just has wide discretion in terms of what they can
Speaker 7: do on tariffs.
Speaker 1: You know, latterly.
Speaker 7: So of course they don't need to go through Congress
Speaker 7: for any of these things. These are authorities that they
Speaker 7: already have, but they do depend in terms of timing.
Speaker 7: So Section three oh one, for instance, that's an investigation
Speaker 7: that usually looks into a country as specific country's practices.
Speaker 7: That investigation can take months.
Speaker 1: This is the.
Speaker 7: Authority that they that the Trump one point zero put
Speaker 7: tariffs on China. So if it's an announcement of a
Speaker 7: three oho one investigation, then again you're kind of giving
Speaker 7: the market some for guidance about what to expect. If
Speaker 7: they use IIPA, if they use section three three eight
Speaker 7: the of the ter EFFACTA from nineteen thirty.
Speaker 1: Then just up to fifty percent, then those can go
Speaker 1: on day one.
Speaker 7: So I think this is where Jamison Grier, though, who
Speaker 7: is a trade attorney by background again US trade representative,
Speaker 7: I think he's going to be very focused on the
Speaker 7: legality of all of this, the durability, and the fact
Speaker 7: that he doesn't want to be fighting this in courts, right,
Speaker 7: he wants this to stay. This is supposed to be
Speaker 7: part of a broader kind of either national security and
Speaker 7: economic agenda.
Speaker 1: And again he's going to be focused on.
Speaker 5: So you're outlining how they may be able to get
Speaker 5: there legally.
Speaker 1: What countries do you think they're going to go after?
Speaker 7: Yeah, I mean if you just look at the trade
Speaker 7: deficit and this president, people may agree with him or
Speaker 7: may disagree with him, and he's been incredibly consistent about
Speaker 7: his focus on the goods trade deficit in particular. And
Speaker 7: if you look at those countries with the biggest goods
Speaker 7: trade deficit, it's China, it's the European Union, it's Mexico,
Speaker 7: and it is Canada. And then he's also going to
Speaker 7: be looking at the tariff rates. And this is where
Speaker 7: I think it does get a little bit complicated. I
Speaker 7: think that reciprocity broadly in terms of the administration, they
Speaker 7: agree on this with this idea of reciprocal tariffs, but
Speaker 7: how do you calculate that tariff? Does that include things
Speaker 7: like the value add attacks in Europe, in which case
Speaker 7: that reciprocal tariff that we would impose on Europe be
Speaker 7: much higher than what the stated tariff level is. So
Speaker 7: I think there are a lot of obviously a lot
Speaker 7: of open questions about what this actually means, but I
Speaker 7: do think we will get some clarity next Wednesday. I
Speaker 7: think the big question is does the market like that clarity?
Speaker 4: Well, the market seems to like the lack of clarity
Speaker 4: or just tea leaves that they've been getting over the
Speaker 4: past couple of days. Have we gotten any further clarity
Speaker 4: or any more of a sense of what the framework
Speaker 4: looks like over the different speeches that we've heard over
Speaker 4: the past few days, kind of in tandem with what
Speaker 4: the market sniffing out.
Speaker 7: Yeah, and again, is this intentional kind of a softening
Speaker 7: or walking away from some maybe the more draconian measures,
Speaker 7: or is this maybe just a byproduct of the fact
Speaker 7: that this was supposed to be really the big reveal,
Speaker 7: if you will, of the sort of administration's trade policy,
Speaker 7: and it wasn't supposed to be necessarily sort of so
Speaker 7: DRACONI I don't think. I think it was supposed to
Speaker 7: be part of a broader economic strategy, and so I
Speaker 7: think some of that we're just sort of seeing that
Speaker 7: kind of fleshed out.
Speaker 4: How much do you think the sequencing of this matters,
Speaker 4: where they want to get this out of the way
Speaker 4: and then pencil in certain revenues from these tariff plans
Speaker 4: to then bring to the tax discussion that is very
Speaker 4: much going to come to the four in the remaining
Speaker 4: months of the year.
Speaker 7: And we've been using this framework with our clients, the
Speaker 7: vegetables and the dessert and we knew that the Trump
Speaker 7: issue with that depends on what you read steam vegetables
Speaker 7: and desserts and ice cream sundays.
Speaker 1: How that, thank you.
Speaker 7: But we've had a lot of steam vegetables right without salt,
Speaker 7: and we have not had a lot of the ice
Speaker 7: cream Sundays. And so I do think this is and
Speaker 7: this was sort of what we expected that there was
Speaker 7: going to be this kind of push and pull in
Speaker 7: terms of economic policy, but in terms of the market,
Speaker 7: they've had a much more vegetables than dessert to use the.
Speaker 1: Labor the metaphor.
Speaker 7: So I do think there's going to be a quick
Speaker 7: pivot to what are the things that they can do
Speaker 7: from a growth agenda perspective. And then I think the
Speaker 7: big question, I think for the markets and for bond
Speaker 7: holders is what is the deficit impact, because I you know,
Speaker 7: I'm I'm skeptical that a lot of these sort of
Speaker 7: spending cuts that have been penciled into the kind of
Speaker 7: framework that is being proposed in the House in particular,
Speaker 7: will actually be enacted into a law. I think that
Speaker 7: those things are very difficult, easy to said to do, easy,
Speaker 7: you know, easier said to do than actually to do.
Speaker 2: You call DOGE douts, what happens with.
Speaker 7: Does you know I do have door shouts? Now this
Speaker 7: is an active discussion within the walls of him go.
Speaker 7: So this is my more my personal view. But if
Speaker 7: you actually look at and this is again my numbing process,
Speaker 7: but actually quite important, anything that is the commerce is
Speaker 7: already appropriated, it's spending that that they've already appropriated that
Speaker 7: gets then kind of cutter are paired back by DOGE,
Speaker 7: that does not go to the Treasury General account, that
Speaker 7: does not go to pay off the deficit that by
Speaker 7: law goes with basically a checking account within that agency
Speaker 7: and has to sit there for five years. This I
Speaker 7: don't think necessarily the market you know, understands that means
Speaker 7: that again these make goods sort of sexy headlines, if
Speaker 7: you will, But in terms of actual deficit reduction, you know,
Speaker 7: we haven't we don't haven't seen that yet, and you
Speaker 7: have to get that enacted by Congress and.
Speaker 6: Codified into le me.
Speaker 2: It's good to see you it's always great to catch up.
Speaker 2: Let me cancel there of Pincoke breaking things down on
Speaker 2: both the trade front and the tax front. President Trump
Speaker 2: reiterating his call for the Federal Reserve to cut interest rates,
Speaker 2: Sonald Desire, Franklin Sempleton sticking with her call for at
Speaker 2: most one rate cup this year rising. While tariffs and
Speaker 2: immigration have come up front, concrete action on deregulation and
Speaker 2: tax policy is expected to follow, and these are the
Speaker 2: two elements that should help tilt growth and conveying inflation.
Speaker 2: Son I'll joined us now for more, so now good
Speaker 2: to see you. That's a more constructive view on US growth,
Speaker 2: a lift to growth at the end of the year
Speaker 2: potentially well, I don't.
Speaker 8: Know whether we wait until the end of the year,
Speaker 8: but a slightly more constructive view than perhaps some in
Speaker 8: the market have taken. At the end of the day,
Speaker 8: we've had a couple of months of definitely freezing up
Speaker 8: as everyone looks at the sequencing being exactly the opposite
Speaker 8: of what they would have liked to have seen, which
Speaker 8: was the nice stuff first, and we didn't get it,
Speaker 8: and we all expected it, and instead we got the complications,
Speaker 8: the uncertainty, the changes by the Fridays to the Mondays
Speaker 8: on what policy would be, which is which gives very
Speaker 8: little visibility and markets aren't like that.
Speaker 2: And yeah, even with that, bondio's to north of four
Speaker 2: percent across the curve. Yes, so where will they be
Speaker 2: as we work our way through the rest of twenty
Speaker 2: twenty five.
Speaker 8: So I'm not actually changing my call for fair value
Speaker 8: on the tenure to be between four seventy five and
Speaker 8: five here, and that is because I would anticipate that
Speaker 8: we aren't actually at the point of an actual recession.
Speaker 8: We're seeing a freezing up of growth, which and then
Speaker 8: there's likely to be a catch up if we actually
Speaker 8: see the tax cuts and deregulations which were promised to us,
Speaker 8: because those are growth positive. Now we can discuss the
Speaker 8: long term impact on debt sustainability, et cetera, et cetera
Speaker 8: of expanding tax cuts. But from the market's perspective and
Speaker 8: this year, next year, it's positive before we get that.
Speaker 4: What you're saying right now explains to me why yesterday,
Speaker 4: on a day of maybe relief that there wasn't necessarily
Speaker 4: another terraf anoalynced to potential softening in some of the terms.
Speaker 4: We saw the biggest one day rally in high held
Speaker 4: bonds going back to August of last year. It speaks
Speaker 4: to the exactly what you're talking about, that people are
Speaker 4: betting that we are not going to get a recession
Speaker 4: and that risk your credit will do better.
Speaker 8: I think essentially that is correct, because every time I
Speaker 8: see the headlines on imminent recession, I look at those
Speaker 8: fixed income risk assets, and as far as I'm concerned,
Speaker 8: there's cognitive dissonance. Nobody's throwing out their risk assets on
Speaker 8: the back of a recession, which if it were coming,
Speaker 8: you would not see high yield spreads where they are.
Speaker 1: You just couldn't.
Speaker 8: And the fact is that the market participants are betting
Speaker 8: on someone coming in an easing pressure on that tenure yield,
Speaker 8: which I think is probably not appropriate. The Fed can't
Speaker 8: do it, and despite discussions from Scott Lessened, there's an
Speaker 8: absolute limit as to what he can do unless that
Speaker 8: deficit comes in.
Speaker 1: Okay, let's talk about that.
Speaker 4: He actually came out and he had made a lot
Speaker 4: of noise before he became Treasurer Secretary about Jennet Yellen
Speaker 4: and her issuing war on the front end as being
Speaker 4: a liability and not turning it out.
Speaker 1: Then he came out and he said that he was
Speaker 1: going to.
Speaker 4: Keep that schedule of issuance in The market rallied because
Speaker 4: there was a sense that he was sensitive to how
Speaker 4: issuance would end up affecting bond yields. Why do you
Speaker 4: think that's not enough at a time when that seemed
Speaker 4: to be the biggest concern for.
Speaker 8: People, Well, I think it shouldn't be the biggest concern
Speaker 8: for people. That's number one, because actually what should be
Speaker 8: the biggest concern for people is the sheer quantum of
Speaker 8: the US fiscal deficit, which is enormous. And if we
Speaker 8: get any piece of the additional tax cuts which Trump
Speaker 8: promised President Trump promised Trump campaign, true, that deficit is
Speaker 8: set to expand further. And I see so little appetite
Speaker 8: for doing anything on what needs to be done to
Speaker 8: constrain that deficit, which would be on significant pieces of expenditure.
Speaker 8: And I'm not talking about doci, I'm talking about the
Speaker 8: stuff entitlements.
Speaker 1: That's the bottom line.
Speaker 8: We're looking at twice the level of expenditure here in
Speaker 8: the US that in terms of the deficit that we
Speaker 8: had pre COVID, and most of that's coming from entitlement spending.
Speaker 8: So no, I don't think that it was purely a
Speaker 8: supply issue which was driving those yields up and down.
Speaker 1: Given the deficit.
Speaker 5: As a restraint, do you think that we only get
Speaker 5: an extension of TCJA then, and none of the extras
Speaker 5: that Trump did promise on the campaign trail.
Speaker 8: That's a really tough call because he hasn't talked as
Speaker 8: much on taxes as he's spoken on everything else, which
Speaker 8: we wish you wouldn't keep speaking about in terms of
Speaker 8: tariffs and so on and so forth, but he hasn't
Speaker 8: spoken as much. However, just I think a week or
Speaker 8: ten days ago, he did and raise the idea of
Speaker 8: a full depreciation of capex within the first year. Now,
Speaker 8: clearly that is unlikely to happen, but even a further
Speaker 8: reduction in the amount of time that capex can be depreciated,
Speaker 8: I think would be viewed as a positive, in part
Speaker 8: because nobody would see it as truly permanent, so you
Speaker 8: could see an immediate reaction of firms stepping in to
Speaker 8: do planned capex. It happened last time around, because there's
Speaker 8: no true belief that under a different administration some of
Speaker 8: these benefits wouldn't be taken away. So yeah, I think
Speaker 8: some of them directionally probably have to happen beyond that
Speaker 8: main piece.
Speaker 2: Some people have been surprised by these sacred thing They
Speaker 2: might also have been surprised by how other countries have
Speaker 2: responded to this, specifically Germany, Germany and Europe robatico want
Speaker 2: a spending spray, an unexpected spending spray. How has that
Speaker 2: changed your outlet for fixed income?
Speaker 1: So here's the thing.
Speaker 8: I think maybe a dozen years from now, we're all
Speaker 8: going to look back and say, okay, so the last
Speaker 8: fiscal non reprobate standing was pushed down and we all cheered.
Speaker 8: Germany was literally the only country amongst the developed advanced
Speaker 8: economies which wasn't spending as if it was going out
Speaker 8: of style.
Speaker 1: Here's the thing.
Speaker 8: Mechanically, yes, growth goes up, but the multiplier attached to
Speaker 8: defense spending is incredibly small.
Speaker 1: So it's not as if this is going.
Speaker 8: To trigger a wave of structural reform innovation which puts
Speaker 8: Germany onto this incredibly better growth path into the I
Speaker 8: don't know, indefinite future, which is what you'd want to see.
Speaker 8: The last thing is I think it's highly unlikely that
Speaker 8: we're going to see it just actually being able to
Speaker 8: absorb those funds into the German economy or any other economy.
Speaker 8: It's not the it's not the flick of a switch.
Speaker 8: You can't suddenly ask Porsche to start making thanks. It
Speaker 8: doesn't happened that quickly, is all.
Speaker 1: I just think these things take time.
Speaker 8: So some of what we've seen in the reaction of
Speaker 8: the market seems to be somewhat over.
Speaker 2: We don't want Porsche building tags son, I'll desire Franklin
Speaker 2: several sent not buying the happy talk out of Germany.
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