Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
Speaker 2: geopolitics from our global headquarters in New York City. We
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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. Here's the take
Speaker 2: from Monica to censor of JP Morgan Private Bank, writing,
Speaker 2: We've been constructive on risk assets the last couple of years,
Speaker 2: and we remain cautiously optimistic. We believe the volatility, though
Speaker 2: is back. Trade policy remains rightly the primary source of
Speaker 2: investor uncertainty. Monica joins us now for more. Monica, good morning,
Speaker 2: Good morning. How do you respond to the latest announcement.
Speaker 3: It's very frustrating. It is very hard in my seat
Speaker 3: to try to predict what's going to happen, and that's
Speaker 3: what my job is, help people figure out the future
Speaker 3: and how to invest around that and you just hear
Speaker 3: all this noise and just doesn't feel like liberation Day
Speaker 3: is going to be clarity day. And so I think
Speaker 3: a week from now, we're still going to have a
Speaker 3: lot of questions. There will still be uncertainty, there will
Speaker 3: still be volatility, and so the most important thing for
Speaker 3: many people I work with is just diversify, have a plan,
Speaker 3: and get ready for more bumps.
Speaker 4: You still see a path though for the s and P.
Speaker 4: Five hundred to go to sixty four fifty by the
Speaker 4: end of the year, that that still is your base case.
Speaker 4: At the high end of that range is.
Speaker 3: Predicate on earnings growth, and this is the challenge, like
Speaker 3: what does this do to corporate spending behavior, consumer behavior?
Speaker 3: We don't know yet. We're still we had a really
Speaker 3: strong quarter last quarter earnings. We'll see in a few
Speaker 3: weeks as we start to get their earnings again if
Speaker 3: this continues.
Speaker 4: What do you make of Neil Kashkari's point that the
Speaker 4: uncertainty and the kit to consumer sentiment that we're seeing
Speaker 4: around the sort of on and off tariff announcements itself
Speaker 4: will be potentially more punitive to growth than even the
Speaker 4: tariffs themselves. What point do you say Okay, this has
Speaker 4: gone on long enough that you can't make it up
Speaker 4: by providing some clarity on Liberation Day postponed.
Speaker 3: Yeah, I think the next few weeks are going to
Speaker 3: be critical because if we don't get any sort of
Speaker 3: calming around these headlines, I do think you start to
Speaker 3: worry with this seeping more permanently into consumer psyche investor psyche.
Speaker 3: Right now, investors are saying this might just be a
Speaker 3: negotiating tactic. It's noise, it's not gonna it's transitory, to
Speaker 3: use that tricky word. But the longer this goes on,
Speaker 3: the more I agree with him that this will have
Speaker 3: a permanent impact on people. Most clients I work with
Speaker 3: are still saying, I can deal with this. Let's just
Speaker 3: wait out the next few weeks and then I'll move
Speaker 3: and then I'll decide.
Speaker 2: Just to ask a least's line of questioning, are we
Speaker 2: putting so much faith in the Fed's ability to respond
Speaker 2: to downside risk of growth with a potential inflation we
Speaker 2: spill over?
Speaker 3: At this point, we still believe the FED put is there,
Speaker 3: But again, there's just so many moving pieces, and I
Speaker 3: need to see the most important thing for me in
Speaker 3: the equity call is how their earnings look. The other
Speaker 3: question then becomes one evaluation because with this much uncertainty,
Speaker 3: is anyone willing to pay twenty times for you?
Speaker 5: How much?
Speaker 3: I think that's the concern. It could be eighteen or
Speaker 3: seventeen and then suddenly you're down fifteen.
Speaker 5: We'll just pick upon that the valueition point. How much?
Speaker 5: If this story, have we already discounts it in the US?
Speaker 3: I think we think we've discounted what we see right now,
Speaker 3: which is the chaos. Right so you've had valuations come in.
Speaker 3: But again, if this is more persistent and this continues
Speaker 3: into the summer, then I think there's a real question
Speaker 3: about is twenty times the right number? And that's what
Speaker 3: our valuation is predicated on that kind of multiple, you
Speaker 3: have to start questioning that if we're still grappling with
Speaker 3: these kind of headlines come May in June.
Speaker 4: At the end of last year, people are questioning valuations
Speaker 4: on a bond yield a basis saying if bond yields
Speaker 4: continue to remain sticky or go higher, then it starts
Speaker 4: to raise the risk reward and going from bonds to stocks.
Speaker 4: At this point, what you're seeing is that bonds on
Speaker 4: a day like yesterday actually lost value, yields rose, And
Speaker 4: it goes to the question of toggling between inflation and growth.
Speaker 4: At what point does that become a hampering factor to
Speaker 4: valuations as well?
Speaker 3: I think it is. I think that's sort of where
Speaker 3: you're already starting to see. And the big risk of
Speaker 3: the outside of earnings is one of growth, and we
Speaker 3: are trying to put a pencils aroun around what does
Speaker 3: this look like from a terror standpoint, How does that
Speaker 3: impact growth in a year when we're talking about kind
Speaker 3: of two percent real GDP growth, this could be significant
Speaker 3: if these are permanent, if they are broader, if you
Speaker 3: see retaliations from you know, counterparts around the world, and
Speaker 3: that's just a little bit scary because two percent growth
Speaker 3: is one thing. One percent is very different. And then again,
Speaker 3: what does that still over due to earnings and everything else?
Speaker 4: At that point, what does diversification mean?
Speaker 3: You know, for years, equities were the game in town,
Speaker 3: right it was all growth rates were low. You had
Speaker 3: the AI tailwind, and by the way, that still exists,
Speaker 3: but the challenge and becomes people are probably still too
Speaker 3: far over their skis in broad risk assets, probably too
Speaker 3: focus on the US I still have a lot of
Speaker 3: people who have too much probably private exposure. They haven't
Speaker 3: been a lot of exits, and so like I'm seeing
Speaker 3: a lot of risk and in one bucket, we've been
Speaker 3: really advocating move into some safer parts, move into fixed income.
Speaker 5: I continued a.
Speaker 3: Ton of calls on gold goal is of twenty eight
Speaker 3: percent last year. People still want to buy more because
Speaker 3: of saying, how do I diversify outside the US, how
Speaker 3: do I have something that's a buffer my portfolio? And lastly,
Speaker 3: hedge funds looking for uncorrel returns. I couldn't get anyone
Speaker 3: to talk about hedgehness for years. Now they want to
Speaker 3: talk about hedgehunes again. So it's it's interesting since I
Speaker 3: was old as new, like this playbook became very boring
Speaker 3: for a while. Now you have all the tools again.
Speaker 2: Yeah, and you've seen some spill over the places like Europe,
Speaker 2: even China as well. Equity markets there have stout as
Speaker 2: pick up. Do you think mainply we're whistling past the
Speaker 2: graveyard and places like Europe.
Speaker 3: I you know, just saying Europe is cheap is a
Speaker 3: dangerous game. But there are certainly pockets where I think
Speaker 3: there's opportunity, and so even in the US this has
Speaker 3: become a stock pickers market, So I would argue the
Speaker 3: same thing. In Europe. We still are constructive on Japan.
Speaker 3: There's still you know, evaluation story there, you have reforms
Speaker 3: still continuing. So I think you should be looking more
Speaker 3: outside of the US. Again, most of my clients are
Speaker 3: still heavily weighted to the US from an equity perspective.
Speaker 3: Also on the fixed income side, we're looking at em
Speaker 3: credit to try to gain get diversification outside of the
Speaker 3: US dollar.
Speaker 5: Lacey.
Speaker 2: European equities down today with down a half of one
Speaker 2: percent on the Docks, but that's where the app performance
Speaker 2: has been over the previous few months.
Speaker 4: Yeah, but to your point, the reason why the Dacks
Speaker 4: is down is in part because German auto manufactures are
Speaker 4: going to be very hard hit by some of these
Speaker 4: twenty five percent tariffs and are going to have to
Speaker 4: really shift some of their supply chains. Considering how much
Speaker 4: of their business is done in the United States. Have
Speaker 4: we fully priced the hit to the rest of the
Speaker 4: world from tariffs implemented in the United States.
Speaker 2: This is the argument that Michael Hahnt of Bank of
Speaker 2: America made on Friday going into the weekend that the
Speaker 2: sell off that we've seen in US secuaries was more
Speaker 2: about deep Seak and Doge than it was about tariffs.
Speaker 2: That for him and many others too, we haven't seen
Speaker 2: the tariff trade really realized just yet.
Speaker 4: And we don't really have a full understanding of what
Speaker 4: the terariff trade really means because it's got a lot
Speaker 4: of hair on it right now with the uncertainty as
Speaker 4: well as some of the tip for tag and what
Speaker 4: negotiations there are. I remember when this week was supposed
Speaker 4: to be a negotiation week and suddenly now is something else.
Speaker 5: It was the Europeans were here.
Speaker 2: That makes us square here I know, people were hopeful,
Speaker 2: and here we are. Monica is good to see you.
Speaker 2: Thanks for dropping by. Monica is sents her there, JP
Speaker 2: Morgan Private Bank. Don Schneider of Piper Sandler writing the
Speaker 2: announcement of the twenty five percent tariff on autoast today
Speaker 2: shows Trump is to get on with the broader trade agenda.
Speaker 2: Auto tariffs are a core part of the industrial policy
Speaker 2: and revenue agenda. Much more to come. Don't join us
Speaker 2: now for more done? How much more to come? Over
Speaker 2: the next week or so.
Speaker 6: I think a meaningful amount is coming, even if it's
Speaker 6: not over the next week. I mean, what we've seen
Speaker 6: so far is about a half a percent of GDP
Speaker 6: in tariff revenue that's been announced.
Speaker 1: We have now the.
Speaker 6: Highest effective teriff rate since we've had since the nineteen forties,
Speaker 6: when you add up to twenty percent tariffs on China,
Speaker 6: twenty five percent on steel and aluminum and derivative products,
Speaker 6: twenty five percent on autos, and then reciprocal tariffs are forthcoming.
Speaker 6: I think we've heard those are going to be dialed
Speaker 6: back considerably, but it's important to keep in mind that
Speaker 6: we have all of the products specific tariffs that are
Speaker 6: still coming, whether it ranges from pharmaceuticals, semiconductors, copper lumber.
Speaker 1: So there's much more to come.
Speaker 5: Don't We've seen this movie before.
Speaker 2: Only a month ago auto tariffs Canada, Mexico and then
Speaker 2: we found out they were exempt under usm and I
Speaker 2: was watching that news conference yesterday desperately waiting for a
Speaker 2: journalist to ask the question.
Speaker 5: The question never came.
Speaker 2: Have we got a decent understanding of whether those auto
Speaker 2: exports from those countries to the United States are exempt
Speaker 2: under USMCI?
Speaker 6: It sounds like a pro portion of when will be
Speaker 6: the value added that's attributable to US production, if it's
Speaker 6: still coming from Canada Mexico will will be exempt. Takes
Speaker 6: time to implement that. My sense is where at least
Speaker 6: I group things into kind of four different buckets. China
Speaker 6: is its own trade war, Canada and Mexico is another.
Speaker 6: Product specific tariffs is another, and then finally reciprocal terrafts
Speaker 6: I think with in the case of Canada and Mexico,
Speaker 6: Trump's end goal, I think is to rewrite the USMCA
Speaker 6: on much more favorable terms to the US and he's
Speaker 6: in particular fixated on auto production. So you know, just
Speaker 6: like what happened previously, you had twenty five percent terraffs
Speaker 6: in Canada Mexico that then said, well, it's only going
Speaker 6: to be twenty five percent on non USMCA compliant goods.
Speaker 6: Maybe that ends up being something like thirty percent of
Speaker 6: all goods end up being tariffed under those rates.
Speaker 1: I think that's still you know, a.
Speaker 6: Bargaining chip going forward that eventually those can either roll
Speaker 6: off and be replaced by reciprocal tariffs or by a
Speaker 6: rewrite of US MCA.
Speaker 4: Do you think there's still room for negotiation, given that
Speaker 4: President Trump said yesterday about the tariffs on autos in particular,
Speaker 4: this is permanent one.
Speaker 6: I think, you know, there's two objectives. One is used
Speaker 6: tariffs to achieve non trade concessions, and they can range
Speaker 6: you know, a lot of different things you see from
Speaker 6: federal legal immigration, whether it's digital service taxes, even the
Speaker 6: acquisition of TikTok. But then the other is true revenue
Speaker 6: and industrial policy. And I think anytime Trump is threatening
Speaker 6: tariffs on a product, there really isn't much negotiation to
Speaker 6: be had. He's saying clearly, this is a critical industry.
Speaker 6: We can't be reliant on other sport. We have to
Speaker 6: make it in the US. So I think in the
Speaker 6: case of product teriffs, there there aren't really going to
Speaker 6: be any exemptions where there's no real negotiations either.
Speaker 4: I'm glad you went there, don Yesterday there was also
Speaker 4: this from President Trump. I view it as reducing taxes
Speaker 4: and also reducing debt. Talking about the tariffs and the
Speaker 4: revenue from them. Within a fairly short period of time,
Speaker 4: I think we're going to have a balance sheet that's
Speaker 4: going to be outstanding from a practical point of view
Speaker 4: don how much could to revenue from terrafs head toward
Speaker 4: offsetting the deficit that is set to potentially climb by
Speaker 4: three trillion dollars of the next decade.
Speaker 6: Here, so I think about it. Last year, we had
Speaker 6: have six and a half percent of GDP deficit. Six
Speaker 6: point four of that is our primary deficit excluding interest
Speaker 6: costs three interest costs are three point one percent. If
Speaker 6: all we did was extend the twenty seventeen tax cuts,
Speaker 6: by the end of Trump's term, we had that seven.
Speaker 1: And a half percent of GDP deficit.
Speaker 6: So there's structural upward pressure on spending from entitlements while
Speaker 6: revenues stay flat as the share of GDP and interest
Speaker 6: costs continue to grow.
Speaker 1: What we he's announced so far is basically.
Speaker 6: A half a percent of GDP and tariffs that may
Speaker 6: go up to maybe seventy basis points maybe higher that
Speaker 6: will subtract for growth basically.
Speaker 1: One for one. So you will reduce economic growth.
Speaker 6: His tax and economic package, muiltch, you will include spending
Speaker 6: increases on defense, border security, spending cuts on things like medicaid,
Speaker 6: and then tax cuts. I think leaves us with roughly
Speaker 6: six and a half percent of GDP. Deficit, and then
Speaker 6: tariffs give us a little downside from there, so we're
Speaker 6: kind of getting pulled maybe closer to six percent if
Speaker 6: there's not that big of a growth hit. So I
Speaker 6: don't think this fundamentally changes the trajectory of the deficit.
Speaker 6: We're going to muddle along and it's kind of six
Speaker 6: percent of GDP deficit area for the next couple of years.
Speaker 4: Does it give more breathing room down to some of
Speaker 4: the Republican representatives who been pushing back against some of
Speaker 4: the proposals and some of the debt ceiling extension and
Speaker 4: raising the debt ceiling on concerns about an expanding deficit.
Speaker 4: I mean, can they point to some of the revenue
Speaker 4: that was being raised by tariffs as an offset to
Speaker 4: justify their vote.
Speaker 1: I don't think so. I mean, of course you could.
Speaker 6: I think the people who are most concerned about the deficit,
Speaker 6: you know, say Freedom Caucus members, what they're really concerned
Speaker 6: about is spending. They want spending cuts, and you know
Speaker 6: they're not necessarily going to be placated by tariff revenues
Speaker 6: or likewise, consider Rand Paul in the Senate, you know, libertarian,
Speaker 6: he is very he doesn't want to vote for a
Speaker 6: debtlimiting pre six, et cetera. And he doesn't like tariff.
Speaker 6: So I think for the members that it really is
Speaker 6: important to help who are most concerned about the deficit.
Speaker 6: Tariff revenue doesn't really help. And I'd say secondarily, if
Speaker 6: we are using tariffs as a tool to bring, you know,
Speaker 6: on shoring and production back to the US, generating a
Speaker 6: lot of revenue from that would be suggestive of US
Speaker 6: not on shoring that production and continuing to buy from overseas.
Speaker 6: So if they truly do work, they wouldn't generate a
Speaker 6: lot of revenue.
Speaker 2: I don't I appreciate the update and your reaction to
Speaker 2: the announcement yesterday afternoon.
Speaker 5: Dun Schneider that of.
Speaker 2: President Trump's executive order sending shares of GM Ford a
Speaker 2: stellantislower This morning, Danives of Webbush writing, in our view,
Speaker 2: these initial tariffs, if they hold in their current form,
Speaker 2: would be a hurricane like headwind to foreign and many
Speaker 2: US auto makers and ultimately push the average price of
Speaker 2: cars of five K to ten K. Dan joins us
Speaker 2: now for more, Dan, welcome to the program. Let's just
Speaker 2: start with the basics from the top. Who's most exposed
Speaker 2: in the United States.
Speaker 7: Well, I mean four GM stilanas, right.
Speaker 8: I mean, I think part of the problem there is
Speaker 8: that even if you make it in the US, I
Speaker 8: mean you're talking a lot of times forty to fifty
Speaker 8: parts could be from outside the United States. And I
Speaker 8: think you have thirty thousand parts in a typical vehicle.
Speaker 8: So I think that's what when it comes to Detroit,
Speaker 8: I mean, this is a gut punge to the three
Speaker 8: one three if this actually holds in this forum.
Speaker 2: Let's assume it holds Dan. Where does it leave Tesla.
Speaker 2: Let's do some single name work it make for them?
Speaker 7: Well, even though their cars are built in US.
Speaker 8: In terms of Texas in California, when it comes to parts.
Speaker 7: I mean, you still have a good amount.
Speaker 8: Of parts that come from outside the US, and I
Speaker 8: think that that's what must talk about it.
Speaker 7: And in terms of downstream, no one is unexposed. When
Speaker 7: it comes down to this.
Speaker 8: You have half the cars that have been imported into
Speaker 8: the US twenty twenty four are imported from outside the US,
Speaker 8: but the ones that are made in US they still
Speaker 8: I mean, you have forty percent of engines that are
Speaker 8: basically essentially have parts built from Japan and Korea. And
Speaker 8: that's why what I can tell you is talking to
Speaker 8: many in Detroit last night, Europe overnight. I mean, the
Speaker 8: view is that this isn't almost i'll say, a non starter.
Speaker 8: It would be a backbreaker for the auto industry globally.
Speaker 4: What you see right now is some estimates talking about
Speaker 4: forty percent of total operating profits for Hyundai and Kiya combined,
Speaker 4: for example, is one kind of here that some auto
Speaker 4: manufacturers would be taking if this were the final negotiation,
Speaker 4: if we took President trumpet his word that this is
Speaker 4: a permanent one, that there is no room for negotiation.
Speaker 4: How barisshed would you be on the names of auto manufacturers?
Speaker 8: Okay, I mean if this held and it wasn't in Penal,
Speaker 8: and it was in pen and it actually got enacted,
Speaker 8: it would be an army getting Like you know, I
Speaker 8: think tariff for the auto industry. Others could could sort
Speaker 8: of would be less exposed. But at least my old
Speaker 8: point is is that it would take three to four
Speaker 8: years to build a new factory.
Speaker 7: So the reality is in terms of this and.
Speaker 8: Actually how US car companies meet parts, it's just I
Speaker 8: view it as untenable and that sort of the street
Speaker 8: reaction you see more exposed to GM four to whittle
Speaker 8: on Tesla. I think investors are looking at this being like, look,
Speaker 8: the supply chain basically almost makes this impossible to actually
Speaker 8: get some of these parts, even from US built parts
Speaker 8: because there's no factories, which is.
Speaker 4: The reason why I keep going back to this is
Speaker 4: permanent one In response to someone asking President Trump is
Speaker 4: their room to negotiate? Where is the room to negotiate
Speaker 4: on the edges? Based in the rhetoric that you've heard.
Speaker 7: Look, and I think that continues to be the uncertainty.
Speaker 8: I think maybe the overall mark reaction is okay, there
Speaker 8: still needs to be some sort of negotiation because the
Speaker 8: reality is, Hey, building in the US, but fifty percent
Speaker 8: parts are from Fearn, and there's sometimes there's parts that
Speaker 8: you can't even get in the US.
Speaker 7: How do you build a factor It takes three years.
Speaker 8: So I think that's part of the you know, the
Speaker 8: devil's in the details here. It sounds great, but I
Speaker 8: think that's why the reality is, especially when it comes
Speaker 8: to GM ford stillanis. I mean, there's so many scenarios
Speaker 8: that they've sort of been, you know, going through, but
Speaker 8: the reality is this cannot happen overnight. I mean would
Speaker 8: take years. I mean ouron it would take three years
Speaker 8: to move ten percent of the supply chain fully within
Speaker 8: the US, within the auto industry.
Speaker 2: Down that word negotiation. Let's break some life into that
Speaker 2: negotiation between who. There was this interesting moment in the
Speaker 2: briefing when the President was asked about Tesla and Elon Musk,
Speaker 2: had you spoken to him?
Speaker 5: And the President said no, I hadn't.
Speaker 2: That would be a conflict of interest, which begs the question,
Speaker 2: who's speaking on behalf of Tesla, who's doing the negotiating,
Speaker 2: who's doing the lompying of the US government?
Speaker 8: And remember, like you know, there was that letter that
Speaker 8: Tesla had that was unsigned, and I think that book
Speaker 8: it adds another complexity for Musk and Tesla because with
Speaker 8: everything we talk about with Dige and all the political
Speaker 8: blowback and the third rail issue and everything we've seen
Speaker 8: in Tesla, the reality is when it comes to negotiation
Speaker 8: or at least having sort of you know, someone that
Speaker 8: has to save for Tesla, they're actually at a disadvantage
Speaker 8: because of Musk in this situation.
Speaker 7: That's the irony of it all.
Speaker 2: You've said it on the story. Still bullish on the name,
Speaker 2: but sow it on the story. What needs to happen
Speaker 2: over the next month to turn this around for the stalk.
Speaker 7: I mean must needs to take a step back. I
Speaker 7: thought last week.
Speaker 8: Was a huge step in the right direction in terms
Speaker 8: of the all hands meeting. We've talked about arm's length,
Speaker 8: in terms of when it comes to Douge. You need
Speaker 8: to balance in terms of being CEO of Tesla and
Speaker 8: Douge because you know, it's a moment of truth from
Speaker 8: Musk and Tesla and this is a political symbol that
Speaker 8: Tesla's become. It's a third rail issue and that continues
Speaker 8: to be our view. It's about balance, not him getting
Speaker 8: out of Douge. There needs to be a balance. But
Speaker 8: last week was a step in the right direction. Now
Speaker 8: we need to see more wood to chop ahead next
Speaker 8: four to six weeks.
Speaker 4: Tesla is a perfect microcosm of a larger point that
Speaker 4: we've been wondering, which is can you put this Jennie
Speaker 4: back in the bottle? Once you come out with some
Speaker 4: of these terriffs are the ramifications in other countries, the
Speaker 4: retaliation is going to get a bit ahead of themselves,
Speaker 4: get out of control. And I wonder what you're hearing
Speaker 4: as you travel around the world and talk with CEOs
Speaker 4: and investors about how much this has permanently affected people's
Speaker 4: opinion toward certain US companies and their willingness to give
Speaker 4: the benefit of the doubt to the US tech sector.
Speaker 7: Yeah.
Speaker 8: Look, and I think part of the problem is if
Speaker 8: you're actually looking at supply chain, let's just talk with
Speaker 8: the reality, right, If you're looking at changes in the
Speaker 8: supply chain nine to twelve, eighteen months ahead, you have
Speaker 8: to start that now.
Speaker 7: So part of the problem is you can't just start
Speaker 7: and stop it. So I look, I do.
Speaker 8: Think this, and I've seen it, you know, across the
Speaker 8: easier over the last you know, called a month I
Speaker 8: started in Europe, the last six weeks I've seen Detroit.
Speaker 7: I mean, this is kind of.
Speaker 8: It's caused chaos, But the reality is the enactment of
Speaker 8: it is almost impossible because it comes down to if
Speaker 8: you have no parts in the US, how could you.
Speaker 7: Now go into the US? It will take three years
Speaker 7: to build a factor.
Speaker 8: So the average car will go up ten thousand, twelve thousand,
Speaker 8: some could be lower.
Speaker 7: But that's the reality is the consumer.
Speaker 2: I Dan appreciate the update. Dan Isay of Wood at
Speaker 2: Bush on the lysis of the auto sector. Amanda Lanam
Speaker 2: a black crock with a snap for more, not a picture.
Speaker 2: Amanda wants to see a man a good morning.
Speaker 5: It's good to see you.
Speaker 9: Thank you having me.
Speaker 2: What do you make of this difference between Chair and
Speaker 2: Powell one you've heard from the officials out of the
Speaker 2: last week is the running Is there some daylight between
Speaker 2: the two groups.
Speaker 9: Well, I think it absolutely underscores the uncertainty. And going
Speaker 9: back to the point you were raising the disconnect between
Speaker 9: the sentiment data and the hard data, I think part
Speaker 9: of it is the growth backdrop is much weaker now
Speaker 9: versus a few years ago. Real wages for consumers have declined,
Speaker 9: so their purchasing power has declined. The labor market is
Speaker 9: not as tight, and so I think that's actually what's manifesting.
Speaker 9: Because I agree with you one of the questions we
Speaker 9: get is how could consumer sentiment be so bad? But actually,
Speaker 9: if you look at the labor market purchasing power, I
Speaker 9: think it helps explain that we see room for the
Speaker 9: hard data to catch down to the softer sentiment data,
Speaker 9: and we also see room for credit fundamentals to catch
Speaker 9: down to what has been a pretty negative revision or
Speaker 9: earning testament and company guidance. And I think it underscores
Speaker 9: the uncertainty. I don't think we have conviction on the
Speaker 9: path of policy in many respects, and so it makes
Speaker 9: it difficult to have conviction on inflation.
Speaker 4: It seemed like last week, just to build on the
Speaker 4: point that John was making, it seemed like last week
Speaker 4: people heard fedshare J Powell essentially lean into the idea
Speaker 4: that they would prioritize any kind of downshift and growth
Speaker 4: over any increase in inflation.
Speaker 5: Do you think that that was an.
Speaker 4: Incorrect interpretation or do you think that maybe that is
Speaker 4: his opinion and isn't the mainstream of the Federal Reserve.
Speaker 9: I think during the press conference it was couched with
Speaker 9: a lot of uncertainty. He did say, we're not quite
Speaker 9: sure if we'll be able to look through this. I
Speaker 9: agree with you. What was actually striking to me was
Speaker 9: Atlanta FED President Raphael Bostic's interview with Mike earlier this week,
Speaker 9: where he talked about companies are actually planning on raising
Speaker 9: crisis and they're not expecting a hit to their sales
Speaker 9: volumes and so It remains to be seen how the
Speaker 9: consumers will deal with that, but I think there are
Speaker 9: some inflationary pressures in the system, and I think a
Speaker 9: lot of FED officials are telling you that they want
Speaker 9: to watch that very closely.
Speaker 4: There's a larger point here, and we keep coming back
Speaker 4: to it, this idea of have people had the idea
Speaker 4: of a FED put that is now obsolete in a
Speaker 4: very different environment. The idea that if growth slows, the
Speaker 4: FED can engage with some sort of stimulus by cutting rates.
Speaker 4: Is that fundamentally being challenged at a time where people
Speaker 4: are raising their inflation forecasts and lowering their growth forecasts.
Speaker 9: I think the reaction function is constrained, is the way
Speaker 9: that I would phrase it. And I think they really
Speaker 9: do need to see deterioration in labor demand in the
Speaker 9: labor market before they actually further normalized policy, never mind
Speaker 9: ease policy. And so I think that's really the delicate
Speaker 9: balance that we're in right now, is that they are
Speaker 9: attuned to downside risks and growth, but I think they
Speaker 9: are hesitant, and I think even President Bastik said this,
Speaker 9: They didn't actually want to get ahead of it until
Speaker 9: the growth data actually materialize. That's the risk, and again
Speaker 9: I think it's hard to discount the wide range of
Speaker 9: sentiment data that has come through. You had referenced the
Speaker 9: CEO and CFO surveys. The real risk is that if
Speaker 9: the C suite starts behaving like there is going to
Speaker 9: be a significant downturn in growth, whether that's capex or
Speaker 9: investment hiring, and almost becomes a self fulfilling prophecy that
Speaker 9: the sentiment is so bad so it paralyzes folks, whether
Speaker 9: those are consumers or corporates, and you actually have the
Speaker 9: material growth slowdown that we're hoping to avoid.
Speaker 2: And then these Thursday mornings starts to sound a lot
Speaker 2: different when we get jobless claims at eight thirty Eastern time.
Speaker 5: You said catch down.
Speaker 2: Let's build on the catchdown, not just a hard day
Speaker 2: to down to self, but also the catchdown and credit
Speaker 2: as well. How you've spread is still pretty tight around
Speaker 2: three intred basis points what degree of catchdown even the
Speaker 2: team looking for.
Speaker 9: So I agree with you. Credit valuations have not kept
Speaker 9: track with either of the deterioration in sentiment in the
Speaker 9: equity market or just more broadly, so I think there's
Speaker 9: some room to widen there. The median is for sixty right,
Speaker 9: So should we argue that there's more uncertainty in this
Speaker 9: current environment relative to the median of the post financial
Speaker 9: crisis era?
Speaker 5: I think absolutely.
Speaker 9: Now there are to be clear, there are some important
Speaker 9: counteracting forces that would keep that widening from being that extreme.
Speaker 9: The technicals are still incredibly strong. Most investors that we
Speaker 9: talk to are waiting to buy the dip and buy
Speaker 9: the widening, So to me, that says that most widening
Speaker 9: episodes may be short lived. The new issue technicals are
Speaker 9: really favorable. Not a lot of new money, most of
Speaker 9: it's refinancing. So there are some really important, nuanced technical
Speaker 9: factors that will kind of act as a bit of
Speaker 9: a mitigating factor on widening. But we are absolutely expecting
Speaker 9: for some widening to come through.
Speaker 2: Do those technical factors reach the volume of the canary
Speaker 2: and the canal mine?
Speaker 5: Well?
Speaker 9: I think market structure shifts do alongside those technical factors,
Speaker 9: and so typically corporate credit is a very growth sensitive
Speaker 9: asset class and it should respond more swiftly to growth detereriation.
Speaker 9: We've had the growth of the private credit market, which
Speaker 9: on net we think is a positive for funding access
Speaker 9: because private credit has shown an ability and willingness to
Speaker 9: step in in periods of market volatility, importantly, something that's
Speaker 9: not discussed a lot. For example, the COLO market very
Speaker 9: rating sensitive buyer, and it comprises almost two thirds of
Speaker 9: purchases in the leverage loan market. They can't hold a
Speaker 9: lot of triple c's and sometimes they shy away from
Speaker 9: B minus even when the growth is when growth is chopping.
Speaker 9: So there are technical reasons like that that sometimes prevent
Speaker 9: the syndicated market from operating as you would expect. That
Speaker 9: opens a door for areas like private credit to step in.
Speaker 9: It doesn't mean that that's bad risk. It just means
Speaker 9: that the technicals are not cooperating, and so that is
Speaker 9: new the cycle.
Speaker 4: To build on what John's asking, are we looking in
Speaker 4: the canary in the wrong place, that the idea of
Speaker 4: hyaled spreads, traditionally as a leading indicator for risk acids
Speaker 4: has no longer the same kind of telltale effect, and
Speaker 4: that really it's private markets that we need to be
Speaker 4: looking at. Are we seeing signs of stress in private
Speaker 4: markets in any capacity?
Speaker 9: You aren't really seeing a lot large degree of stress
Speaker 9: in private markets either. I think what that means is
Speaker 9: that the nature of the shock is not emanating from
Speaker 9: the credit market, whether that's liquid or private credit. It's
Speaker 9: actually emanating from consumer spending policy uncertainty in some regards,
Speaker 9: and so I think that's probably the difference in this
Speaker 9: environment is that if the nature we're coming from the
Speaker 9: credit market, if it were over levered companies that we're
Speaker 9: doing shareholder friendly actions, doing m and A and levering
Speaker 9: themselves up, perhaps that would be the early signal from
Speaker 9: the credit market. But that's actually not what's happening here.
Speaker 9: It's the nature of the stress is not coming from
Speaker 9: the corporate market. It's coming from uncertainty and a potential
Speaker 9: slowdown and consumer spec.
Speaker 2: You get the sense this market won't really take these
Speaker 2: headlines seriously until we see it in the hard data.
Speaker 5: I think we.
Speaker 9: Are seeing signs of it being taken seriously. So, for example,
Speaker 9: we're seeing certain sectors underperform even though index level credit
Speaker 9: spreads are tight. As you noted, we are seeing some underperformance,
Speaker 9: I would say on the margin. Investors realize that the
Speaker 9: administration is focused on raising revenue and so tariffs are
Speaker 9: a means to do that. And so again we don't
Speaker 9: dismissed the sentiment data nor the potential for significant policy shifts.
Speaker 9: Our colleagues in the Black Rock Investment Institute expect an
Speaker 9: average effective ter free of ten percent, which is well
Speaker 9: above where we are now.
Speaker 2: Amanda, appreciate your time. I's always it's got to see
Speaker 2: a fantastic Amanda linam there of Black Crab. This is
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