Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
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Speaker 2: Terminal and the Bloomberg Business app. Stephen Main, the chair
Speaker 2: of the White House Council of Economic Advisors, joins us
Speaker 2: now for more. Stephen, welcome back to the program, my friend.
Speaker 2: Let's talk about the President's message for House Republicans a
Speaker 2: little bit later this morning. What's top of mind?
Speaker 3: Good morning, Thanks for having us.
Speaker 4: Well, what's top of mind is the Council of Economic
Speaker 4: Advisors just published a paper it's available on our website
Speaker 4: talking about all the good stuff this tax bills are
Speaker 4: going to do.
Speaker 3: It's going to boost GDP relatives.
Speaker 4: Not passing the bill by about four point two to
Speaker 4: five point two percent is going to create seven million
Speaker 4: jobs and it's going to boost take home pay for
Speaker 4: a typical family of four by eight to thirteen thousand dollars.
Speaker 4: So these are really big effects relatives not passing the bill.
Speaker 4: It's imperative that we get this bill over the line.
Speaker 5: Steve, though, when I'm talking to individuals in Congress and
Speaker 5: then reading your white paper, you have a fifteen percent
Speaker 5: corporate tax rate in your white paper right now that's
Speaker 5: not being discussed in Congress. Do you think the President
Speaker 5: is going to bring that issue forward today?
Speaker 4: You know, I can't I can't prejudge the outcome of
Speaker 4: exactly what these talks will do, but that fifteen percent
Speaker 4: corporate rate on domestic manufacturing will help at the margin.
Speaker 4: But it's not the it's not the core of the
Speaker 4: proposal that you know. There were those numbers that I
Speaker 4: gave you will be pretty similar. If that doesn't make
Speaker 4: it into the final version, maybe it'll be a hair lower.
Speaker 4: But you have to keep in mind, there's a lot
Speaker 4: of stuff going into this bill, and any single one
Speaker 4: of these, any single one of these measures isn't enough
Speaker 4: to sort of, you know, change those numbers a lot.
Speaker 4: Because all these measures to combine together to improve the
Speaker 4: investment opportunities in America, to encourage firms to invest in,
Speaker 4: encourage firms to bind to invest, new equipment, new factories,
Speaker 4: all the stuff.
Speaker 5: There's a ton that's going into this bill, and that
Speaker 5: is why it's even so challenging for Speaker Johnson to
Speaker 5: get all these different factions on board. Something else you
Speaker 5: don't have in your paper, though, is what's going on
Speaker 5: in salt. Do you expect the salt cap to raise, say,
Speaker 5: thirty K forty K?
Speaker 4: Yeah, so I do expect there to be salt relief.
Speaker 4: The President has expressed support for this, and I think
Speaker 4: the President will deliver salt relief to American households. I
Speaker 4: don't know exactly what the number will shake out, and
Speaker 4: as you know, you know, this is how negotiations happen.
Speaker 4: One side says what it wants, the other side says
Speaker 4: what it wants. And the President is one of the
Speaker 4: best negotiators in history, and he's shown over a career
Speaker 4: spanning decades that he can forge hundreds of deals, and
Speaker 4: I think he'll forge another one right in front of us.
Speaker 1: Now.
Speaker 6: There is a good element in this that you're focusing
Speaker 6: on growth, and I do think that that is important.
Speaker 6: You can't cut too much.
Speaker 2: You have to offer some sweeteners.
Speaker 6: To keep growth going, to keep the revenue side of
Speaker 6: things going. I do wonder, though, how much of a
Speaker 6: constraint to debt side really is, given the fact that
Speaker 6: looks like things are getting a little yippie again in
Speaker 6: the bond market.
Speaker 3: Thanks.
Speaker 4: So, I'm so glad you mentioned that, because the truth
Speaker 4: is that we do have a plan for deficit reduction
Speaker 4: and we will deliver lower deficits. It just happens that
Speaker 4: some of those things fall outside of the scoring process.
Speaker 4: How CBO scores the bill because of the rules that
Speaker 4: Congress gave it. And so, for example, we're going to
Speaker 4: get better growth as a result of this bill, as
Speaker 4: a result of deregulation, as a result of the trade
Speaker 4: deals we're negotiating. We get growth to three percent. That
Speaker 4: generates four trillion dollars additional revenues over the ten year
Speaker 4: win budget window above the CBO baseline. That doesn't go
Speaker 4: into the scoring process because CBO doesn't account for improvements
Speaker 4: and economic growth. We're going to bring in hundreds of
Speaker 4: billions of dollars of revenue through tariffs, right, that's another
Speaker 4: point off the deficit. We're going to bring interest rates
Speaker 4: down through expanding the supply side of the economy, through
Speaker 4: more effective tax rates, through deregulation, through pushing the supply
Speaker 4: side out to meet the demand side, we get interest
Speaker 4: rates back to where they were pre COVID. That's another
Speaker 4: point off the deficit. And then there's cuts to waste, fraud,
Speaker 4: and abuse, some of which are in the bill, some
Speaker 4: of which are beingcomplished by those that's another fifty two
Speaker 4: hundred basis points off the deficit worth of GDP. So
Speaker 4: I just gave you three to four percent of GDP
Speaker 4: off the deficit. None of it falls into the scoring
Speaker 4: system that the CBO is doing part of the yet
Speaker 4: the conversation is for some reason dominated by CBO.
Speaker 6: Well, part of the reason why it's not being scored
Speaker 6: is because there are a lot of contingencies before you
Speaker 6: get to all of these realities. And I'll just pick
Speaker 6: out once, since we were talking about the bond market,
Speaker 6: the idea that yields go down as you increase the
Speaker 6: supply side of the economy, there's a pretty bumpy path
Speaker 6: to get there. Do you have enough faith in that
Speaker 6: that you ignore USGG three thirty eight year index GP,
Speaker 6: that you ignore the thirty year yield, you ignore the
Speaker 6: ten year yield in the near term and just have
Speaker 6: faith that longer term it will work out.
Speaker 3: Yees.
Speaker 4: So, look, you know, we're still dealing with the lingering pressure,
Speaker 4: the lingering inflation pressures due to President Biden's reckless fiscal policies.
Speaker 4: But we are bringing those inflation pressures down through pushing
Speaker 4: out the supply side of the economy. We've had now
Speaker 4: three inflation reports in a row below expectations. Core inflation
Speaker 4: on an annual basis is running the lowest level since
Speaker 4: March of twenty twenty one. And as we continue to
Speaker 4: control inflation, it will provide scope for interest rates to
Speaker 4: come down.
Speaker 3: I have no doubt about that.
Speaker 5: Well, Steve, you know, the American people are concerned about
Speaker 5: prices going up, the latest being Subaru. They're going to
Speaker 5: be increasing their vehicle prices citing quote market conditions aka
Speaker 5: concerns about what's going on with trade and tariffs. How
Speaker 5: can you say you're delivering on inflation when actually companies
Speaker 5: are warning that prices are going higher.
Speaker 3: Yeah.
Speaker 4: So, look, you know, imports are only fourteen percent of
Speaker 4: the economy. The ability of the ability of those types
Speaker 4: of things to really move the needle on inflation are limited,
Speaker 4: and what we saw in the tariffs in twenty eighteen
Speaker 4: twenty nineteen was zero macroeconomic evidence of inflation. What we've
Speaker 4: seen so far since the tariffs have been in and
Speaker 4: don't forget, we've been introducing tariffs since day one of
Speaker 4: this administration, and what we've seen as tariffs have started
Speaker 4: to come up has been no real meaningful macroeconomic effect
Speaker 4: in inflation. And so while there can be volatility in
Speaker 4: the short run, I do believe that US importers have flexibility.
Speaker 4: But where they get stuff from they can make stuff
Speaker 4: at hellme home, they can import from other countries that
Speaker 4: treat us better, that rate trade deals with US as
Speaker 4: opposed to countries that treat us worse, and that flexibility
Speaker 4: gives them leverage. That leverage allows them to force the
Speaker 4: burden of the tariffs on the other party on other countries. Now,
Speaker 4: in the fullness of time, that'll happen. But in the
Speaker 4: short run, can there be volatility in prices and economic
Speaker 4: activity just as there were in financial markets, Yeah, it
Speaker 4: can happen, But over time we have the leverage and
Speaker 4: that will allow us to force the burden of the
Speaker 4: tariffs onto other countries.
Speaker 5: When you think about tariffs, do you think they're going
Speaker 5: to be revenue raising or do you think that we're
Speaker 5: going to get deals so the revenue raising won't be
Speaker 5: as high. And do you have a number within the
Speaker 5: White House that you're discussing which how much you want
Speaker 5: to get in terms of revenue raises to offset this
Speaker 5: tax bill.
Speaker 3: Sure?
Speaker 4: So, first of all, what we've seen with some of
Speaker 4: the deals we've made so far is that there's still
Speaker 4: a ten percent tariff in place, and in the case
Speaker 4: of China, there's other tariffs too, the fentanyl tariffs, the
Speaker 4: tariffs from the first term as well, And so even
Speaker 4: if we strike deals, odds are will still be collecting
Speaker 4: some tariff revenue. But even if we end up bringing
Speaker 4: those tariff rates below or down to zero, you know
Speaker 4: that means more economic activity. If we're writing deals because
Speaker 4: we're succeeding in opening foreign markets to our exports, allowing
Speaker 4: American firms to sell into foreign markets the way we
Speaker 4: allow foreign firms to sell into our market, that means
Speaker 4: more economic activity here because of more exports. And if
Speaker 4: there's more economic activity, more exports coming out of America
Speaker 4: going to foreign markets. That's more income that gets taxed
Speaker 4: at the personal level, at the corporate level, and that's
Speaker 4: lots more revenue too. So either way you slice it,
Speaker 4: we get revenue from tariff's or we get revenue from
Speaker 4: higher GDP because we're selling more to other countries.
Speaker 2: Sounds like when win Steven les Typer ends up that way.
Speaker 2: Steven Marin there the White House Council of Economic Advisors
Speaker 2: chair joining us now here in New York City, the
Speaker 2: former Wealth Bank President David mount Pass, David and Moonic
Speaker 2: good Mornington more than a decade of warnings August twenty eleven,
Speaker 2: Standard of Pause August twenty twenty three, Fitch May twenty
Speaker 2: twenty five. We've ignored them for the best part of
Speaker 2: a decade. Should we stop paying attention?
Speaker 3: Absolutely?
Speaker 1: The fiscal situation is a real mess. I've written about
Speaker 1: it that the spending is out of control. So the
Speaker 1: question is how do you bring control to a Washington
Speaker 1: that really wants to grow. You know, the lobbyists right
Speaker 1: now are in seventh heaven because of the complexity, and
Speaker 1: so you have this system that is able to borrow
Speaker 1: and tax like crazy, and so then Washington sees that
Speaker 1: and says we should just spend double whatever we can
Speaker 1: bring in, and that's what they're doing.
Speaker 3: Now. Whose fault is that.
Speaker 1: Everybody wants to point fingers at everybody else. I think
Speaker 1: we've got to see a fundamental change in the spending system.
Speaker 1: Does started that, and now this Reconciliation Bill is the
Speaker 1: extension of that and enactment into law. Notably, it includes
Speaker 1: regulatory reform, which is going to help a lot with growth.
Speaker 5: But David until Washington sides to go and really look
Speaker 5: at Social Security. That's the biggest piece of the pie
Speaker 5: when it comes to spending. Really everything else is on
Speaker 5: the margins. Is this administration willing to go there?
Speaker 1: I don't think so, and I don't think they should.
Speaker 1: I think you have to build credibility with the public.
Speaker 1: Why would you go after Social Security? People put their
Speaker 1: money into it, and they then retirement is a really
Speaker 1: important part of people's lives and their children's lives as
Speaker 1: they watch. Don't do that age be raised. I don't
Speaker 1: think it's timely for that question to come on. You
Speaker 1: really have to show that you can cut some programs,
Speaker 1: downsize government, and set up a system where you actually
Speaker 1: make decisions so they're arguing about the fraud and waste
Speaker 1: in medicaid. I think that's a useful discussion of how
Speaker 1: can you get quite a bit of savings from a
Speaker 1: program that was expanded drastically.
Speaker 5: You talk about how this administration has to have trust
Speaker 5: with the constituents. Well, President promised a number of policy
Speaker 5: provisions on the campaign trail, lifting the salt tax, which
Speaker 5: was capped under his first administration, making sure that things
Speaker 5: like he did say he doesn't really want to touch medicaid,
Speaker 5: definitely doesn't want to touch medicare. How do you build
Speaker 5: that trust if these are some of the issues that
Speaker 5: are on the chopping block.
Speaker 1: I think by going to the hill and talking with members,
Speaker 1: but then also clear communication from the administration and from
Speaker 1: all around the country of people saying we want the
Speaker 1: government to stop spending so much money and then make
Speaker 1: decisions and start I've advocated start with small decisions and
Speaker 1: then make them bigger and bigger. Sometimes I've talked about
Speaker 1: it that you need to make three major spending decisions
Speaker 1: per week all the way through twenty twenty five, and
Speaker 1: so I think they're doing that sum in this reconciliation bill.
Speaker 3: It's really long.
Speaker 1: I don't know if you've looked at the bill, but
Speaker 1: it's intensely complicated.
Speaker 6: Well, you talk about that and how it's a daydream
Speaker 6: for a lot of lobbyists. I'm wondering if you speak
Speaker 6: to people in Washington, DC and get a sense of
Speaker 6: what kind of constraint bond yields are at a time
Speaker 6: where bond vigilantes are getting very excited.
Speaker 1: I think that was the big issue at the beginning
Speaker 1: of the Clinton administration. You know, spending had been growing,
Speaker 1: and so so you had the idea that I want
Speaker 1: to be reincarnated as the bond market because it's so important.
Speaker 1: I do think we've changed a lot since then. For one,
Speaker 1: the FED is buying lots of bonds, so that changes
Speaker 1: the dynamic in the bond market. The US economy is
Speaker 1: fundamentally really strong, and so I think we could have
Speaker 1: lower interest rates on the short end and the long
Speaker 1: end with if they could begin to think about the
Speaker 1: spending side and actually pull it down. So I'm not
Speaker 1: one that thinks there's so much a limit or a
Speaker 1: higher yield that we're that we're that we're going to
Speaker 1: have to see. I think more we have to see
Speaker 1: the growth come out of the regulatory changes.
Speaker 6: I'm ashaw you advocate for monetizing the debt in some capacity,
Speaker 6: given the fact that the Fed is buying bonds, albeit
Speaker 6: at a slowing pace, and has been known to do that.
Speaker 1: You know, I'm not a fan of qees. So since
Speaker 1: the beginning, I've said it was a shift in duration.
Speaker 1: The government was basically buying duration to cover up the
Speaker 1: lack of growth, and that took us from twenty ten
Speaker 1: all the way through twenty twenty one. So a giant problem,
Speaker 1: but that it's correctable. Is not a big step for
Speaker 1: the US FED to say it's going to downsize its portfolio.
Speaker 1: That would reduce that problem. That's already going on in Europe. Look,
Speaker 1: the ECB is selling off its bond portfolio or reducing
Speaker 1: the size of its portfolio fast and it hasn't hurt
Speaker 1: their yields, and so I think that's a lesson. So
Speaker 1: that shouldn't be the issue right now. The issue is
Speaker 1: the Fed is huge, it's doing regulatory control, it's not
Speaker 1: talking much about spending. It didn't talk during the Biden
Speaker 1: administration about the blowout and spending, and the interest rates
Speaker 1: as a result end up being higher than they should be.
Speaker 1: The models. You know, the models within the FED are
Speaker 1: not working at all. They're based on their fifty year
Speaker 1: old models, economic models of how the economy works, so
Speaker 1: that needs to be really rewritten.
Speaker 2: It's been ridiculous for quite a while, running a six
Speaker 2: percent Lodget deficit, thank you, with unemployment close to four percent,
Speaker 2: just absolutely ridiculous.
Speaker 3: And everybody knows that.
Speaker 1: And then they say, well, my politicians should stand up
Speaker 1: and go after social Security. That's not really the answer
Speaker 1: to me. You've got to make suicide name programs that
Speaker 1: we don't need. The public will support that and then
Speaker 1: build on it, and there's some of that in the
Speaker 1: Reconciliation bill. It's good to have President Trump engaged on it.
Speaker 2: David Mountpass is going to see you, sir, as always.
Speaker 2: As David said, the system is so large in Washington.
Speaker 2: You start to push against it, it pushes back pretty quickly.
Speaker 6: That's the reason why we've seen year after year people
Speaker 6: say the same issue and never remedy it because it
Speaker 6: is political service.
Speaker 2: Let's stick with the economy. Towson's slock Apollo writing, the
Speaker 2: list of headwinds is growing. The trade war is making
Speaker 2: products more expensive in Walmart, student loan payments and restarting,
Speaker 2: and the Moody's down grade is pushing up borrowing costs
Speaker 2: for consumers and for firms. Towson joins us now for
Speaker 2: more Torston, good morning. A lot to worry about, and
Speaker 2: FED official has just told us to take summer off,
Speaker 2: basically that they'll get back together in September. Consider what
Speaker 2: to do. Do you think they need to do something
Speaker 2: before then?
Speaker 7: I don't think they need to do a thing before,
Speaker 7: but I do think that the list of worries is
Speaker 7: indeed growing. It used to be the case for the
Speaker 7: last several months that we've been worrying mainly about the
Speaker 7: trade war. What is coming from the trade war, very
Speaker 7: importantly is what Jamie Diamond pointed out yesterday.
Speaker 3: Name it.
Speaker 7: Now we're going to see the negative effects of tariffs
Speaker 7: on earnings and therefore also on the economy. The yield
Speaker 7: budget LAP is quantified that the impact on GDP this
Speaker 7: year will be minus zero point seven. Normally GDP growth
Speaker 7: this too, So if I subtract minus zero point seven,
Speaker 7: that brings you so still one point three. That's not
Speaker 7: a recession, but it certainly something that will be pushing
Speaker 7: point rate up. In the same calculation by roughly half
Speaker 7: of percent.
Speaker 3: His point. So the first thing is tariffs.
Speaker 7: We are still waiting to see the actual effects of tariffs,
Speaker 7: both on earnings and on the economy. And the things
Speaker 7: that are being added now more recently is student loan
Speaker 7: payments are restarting, is beginning to hit people's credit scores.
Speaker 7: That's about nine million people now who potentially will have
Speaker 7: a hit to their credit scurse, and therefore we'll have
Speaker 7: challenges going out buying a house, going out buying a car,
Speaker 7: going out buying a wash on dryer.
Speaker 3: And third, and finally the downgrade.
Speaker 7: Yes, the market reaction yesterday may be more mild, and
Speaker 7: yes we did go from the US being hyper exceptional
Speaker 7: to just being exceptional. But it's certainly a risk with
Speaker 7: the fiscal discussion and in rates markets that we are
Speaker 7: also adding on to the layer in terms of the
Speaker 7: issues that we see.
Speaker 2: The stress and the buyer now pay later dates as well,
Speaker 2: and you've seen that build for a number of months.
Speaker 2: The question I would ask, the brutal reality is low
Speaker 2: income workers haven't had a good run for a long
Speaker 2: long time. That's been true even when people came on
Speaker 2: this program and said the economy was good. Do you
Speaker 2: see the stress mind grasing up income levels at all?
Speaker 3: That is exactly what's going on.
Speaker 7: So your saw Klana yesterday say that they were reporting
Speaker 7: that buy Now, Pay Later was seeing more weakness among consumers,
Speaker 7: and the issue is exactly that it's migrating up towards
Speaker 7: middle income households. You're seeing this also more broadly in
Speaker 7: for example, in the housing data. The Santa weekly data
Speaker 7: for traffic for home builders is beginning to slow.
Speaker 3: Down, and this spring selling season.
Speaker 7: Has basically been much weaker than the spring selling season
Speaker 7: we've seen for the last few years. So also the
Speaker 7: weakness in the housing market is leading indicator telling you
Speaker 7: that the middle income consumer is also beginning to look monstrous.
Speaker 2: So you don't.
Speaker 6: Necessarily see recession, but this downside to growth that comes
Speaker 6: at a time of pricing pressure something that looks a
Speaker 6: bit like stagflation. And I wonder some people say, well,
Speaker 6: if it's not a recession, then it's pretty good. Is
Speaker 6: this actually a worst case scenario for risk assets because
Speaker 6: there isn't a very obvious reaction function from the fat
Speaker 6: reserve from policy makers to respond to the fundamental underlying
Speaker 6: weakness in consumers.
Speaker 7: Exactly because inflation if that is now going up. We've
Speaker 7: heard all the stories from Walmart now super various. Of course,
Speaker 7: retailers are saying prices will be moving higher over the
Speaker 7: coming quarters.
Speaker 3: That's what everyone expects.
Speaker 7: This is a textbook definition of a trade will, namely
Speaker 7: higher prices because imports of containers that come in to
Speaker 7: Los Angeles.
Speaker 3: Of course, things will become more expensive.
Speaker 7: And that is exactly challenging the fed's room for maneuvering
Speaker 7: because they will have to keep rates higher for longer
Speaker 7: in response to almost no matter what growth is doing.
Speaker 7: If growth, of course gets into a deep recession, they
Speaker 7: will be cutting. But if growth is just weakening, and
Speaker 7: that is the expectation from the contentus, that's what we're
Speaker 7: seeing in the data, then you will have this stackflation situation,
Speaker 7: which is very uncomfortable from a FED perspective because inflation
Speaker 7: higher for longer says the fetch you would be hiking,
Speaker 7: But growth slowing down says the fetch should be cutting.
Speaker 7: So this becomes a question for the FED, do they
Speaker 7: like apples and oranges, Do they put more weight on
Speaker 7: inflation being high or do the more weight on growth
Speaker 7: slowing down?
Speaker 6: Something that that John was talking about Jamie Diamond yesterday
Speaker 6: talking about this complacency in markets, particularly with risk assets,
Speaker 6: given the fact that yes, you have these tariffs, but
Speaker 6: you also have this kind of backdrop that does pressure
Speaker 6: the consumer. Do you think that risk assets really are
Speaker 6: not pricing in this type of backdrop at a time
Speaker 6: when you've seen big rebounds in this wake of any
Speaker 6: kind of selloffs.
Speaker 3: I think the stock market is backward looking at the moment.
Speaker 3: The stock market is not taking.
Speaker 7: Into account the fact that we have these three different
Speaker 7: folds that are now pushing the economy down. First of all,
Speaker 7: we have tariffs weighing on earning terrrists weighing on GDP,
Speaker 7: Terry's pushing you on Tornmada. We have also student loan
Speaker 7: problems that will hit people's ability to borrow. And finally,
Speaker 7: we also had the movies downgrade. Yes, again, that might
Speaker 7: just be a thing in marguts where we said, oh
Speaker 7: this just went and came away, and well we suddenly
Speaker 7: no longer an issue, but it is certainly something that
Speaker 7: this conversation, the direction of travel when it comes to
Speaker 7: the fiscal discussion is only one way, namely that we
Speaker 7: will see that levels go up, and there's more and
Speaker 7: more discussion around what does that mean not only for
Speaker 7: rates but also.
Speaker 3: For the dollar.
Speaker 7: And note also, yes, by the way that the dollar
Speaker 7: went down even though rates went on a round trip,
Speaker 7: still telling you that there is something here to think
Speaker 7: about in terms of the bigger picture, not only in
Speaker 7: terms of what rates are doing. And where the dollar
Speaker 7: goes down, of course we get even more inflation and pressure,
Speaker 7: and that complicates the job for the faired even further.
Speaker 5: Torstan, you keep talking about downside risks. Do you see
Speaker 5: any upside risk to policy proposals right now in Washington?
Speaker 7: I do think that the stock markets focus on deals
Speaker 7: when it comes to trade deals. We do see, of
Speaker 7: course that there could be some good change, that we
Speaker 7: could get some deals of course over the coming weeks
Speaker 7: and months ahead. But the issue here is that the
Speaker 7: policy has already been implemented.
Speaker 3: Let's not forget that.
Speaker 7: That is, but average tariff rates went from in January
Speaker 7: three percent to now eighteen percent.
Speaker 3: So that's a fairly dramatic shock.
Speaker 7: Remember in twenty seventeen eighteen, from first term tariff rates
Speaker 7: went from two to three and now we went from
Speaker 7: three to eighteen. That's a very significant impact, which is
Speaker 7: exactly why this earning season gave this outcome that companies
Speaker 7: are having a hard time giving forward guidance. Companies are having,
Speaker 7: of course a lot of challenges. We're dealing with higher tariffs.
Speaker 7: That's why ford More Company had losses of one and
Speaker 7: a half billion, Apple losses of nine hundred million. It
Speaker 7: really is significant how these coming motions of what will
Speaker 7: happen to earnings and GDP are not being priced in
Speaker 7: into markets at the moment.
Speaker 2: In your office at your headquarters, on the calendar, what's circled,
Speaker 2: what dates which month?
Speaker 7: So what's most important is back to when the square
Speaker 7: the circle is. To what you said without the FIT meeting,
Speaker 7: it is very important how the FIT communicates about this.
Speaker 7: So far, if i'm C members have said we have
Speaker 7: a weight and C mode, because it's fair to say
Speaker 7: John Williams said this, and Power also has been talking
Speaker 7: about this. It's fair to say, let's wait and see
Speaker 7: what the data actually is going to turn out like.
Speaker 7: But if I turn on my Bloomberg excreing that side ECFC,
Speaker 7: go and look at what is the consensus expectation to
Speaker 7: inflation this year, it's going up.
Speaker 3: What's the consensus expectations of GDP growth, it's going down.
Speaker 7: As an investor, this should be the number one thing
Speaker 7: to look at when I do asset that location. So
Speaker 7: the answer to your question is the incoming data does
Speaker 7: it play out as the consensus and the textbook would predict,
Speaker 7: namely that inflation is going to go up and GDP
Speaker 7: is going to go down? And I would expect that
Speaker 7: is exactly what we're looking at.
Speaker 2: Over the inflation short lived or persistent. They say they
Speaker 2: need time. New York Fed President John Williams said, maybe
Speaker 2: by September. Is that enough time to know whether it's
Speaker 2: one or not the other?
Speaker 3: Well, hold on.
Speaker 7: So there are two very important aspects of that. Bet
Speaker 7: Hammack said in a speech here two weeks ago at
Speaker 7: the HUA Institution that she is already seeing companies that
Speaker 7: are not impacted by tariffs also raising prices because competitors
Speaker 7: are raising prices. And the second thing, also, let's think
Speaker 7: about it the following. If it ends up being the
Speaker 7: case that you will have imports that are significantly lower,
Speaker 7: and therefore you will have less variety on the shelves,
Speaker 7: that means that I may not be able to buy
Speaker 7: a white shirt and a right color. And if that's
Speaker 7: the case, then the price of all the shirts that
Speaker 7: are left will be going up. So that means that
Speaker 7: it's not only about this one time lift in changing
Speaker 7: the sticker and what is the price of my shirt,
Speaker 7: But it's also that if there is less variety, if
Speaker 7: there's less goods coming in, and if we're trying to
Speaker 7: avoid and prevent goods from.
Speaker 3: Coming in, it will mean that the goods that are.
Speaker 7: Left might see a more permanent increase in inflation.
Speaker 3: So that's why this is not just.
Speaker 7: A temporary feature in terms of thinking about inflation. It
Speaker 7: is something that potentially could have more longer lasting impact.
Speaker 2: Just don't buy a gray shirt. Can't stand a gray shirt.
Speaker 2: You united that gray shirts? I just find no one
Speaker 2: makes a great shirt. Looks you are gray. No one
Speaker 2: makes a gray shirts. Not the tight color. Sometimes, just
Speaker 2: like white shirts look sharp, blue looks precisely, it looks dirty. Yeah,
Speaker 2: it looks like there we go.
Speaker 3: I don't clean it shirt.
Speaker 2: It's going to see of Apollo. Thank you, sir Misra
Speaker 2: of JP Morgan rites. And the tax cuts will get
Speaker 2: extended and the spending cuts won't likely happen. Physical term
Speaker 2: premium should rise more steeper curve higher cost of capital
Speaker 2: to create dispersion in growth and returns. Prayer's whether it's
Speaker 2: around the table, prayer, good morning. How much risk is
Speaker 2: in the so called risk free asset.
Speaker 8: So it depends on what you define by risk credit risks.
Speaker 8: There is no credit risk. I mean the US issues
Speaker 8: and see we will pay back our debt. The duration risk,
Speaker 8: which is really a function of term premium or I
Speaker 8: don't want a bond geek out here, but risk premium
Speaker 8: that's much higher. So you're looking out the curve. There's
Speaker 8: a lot of risk in those ten y or thirty
Speaker 8: year bonds. We look at Japan, so I think if
Speaker 8: there's a global rise in rates, if we're ignoring, I mean,
Speaker 8: I think the whole mood is downgrade.
Speaker 2: We knew about it. It was lagging.
Speaker 3: I hear you.
Speaker 8: But you know, in the words of Hemingway, you know,
Speaker 8: how do you go bankrupt? And not that I'm saying
Speaker 8: that the US is going bankrupt, but you know it's
Speaker 8: gradually and then suddenly, And I think we at that
Speaker 8: point where the market says, you know what we have
Speaker 8: to look out for fiscal sustainability. Congress is not doing
Speaker 8: its bit, so the bond market has to force Congress
Speaker 8: to do its bit, and so I think that's why
Speaker 8: the long end is scary, because how high do rates
Speaker 8: have to go before the administration or Congress says, you
Speaker 8: know what, we don't have the political will, but the
Speaker 8: market's forcing our hand. I'm not sure what that level is.
Speaker 8: I don't think the bottom mark is very beautiful right now.
Speaker 8: It's in the hippie state, so you know. That's why
Speaker 8: I think when you ask about risk, the long end
Speaker 8: has risk. The front end is being dragged with the
Speaker 8: long end. That's where I think there's opportunity because I think,
Speaker 8: I mean, we're trying to move away from trade, but
Speaker 8: we're still in that pause. Effective taraphrate is still high.
Speaker 8: There's uncertainty. I think the FED will be late, but
Speaker 8: at some point they're going to cut a lot, you know,
Speaker 8: more aggressively when they start. So the front end, I
Speaker 8: like the long and that's where that risk comes in.
Speaker 2: Let's unpack some of this. You use the important word global.
Speaker 2: It's global. What's making it global at the moment? So
Speaker 2: some of it is I.
Speaker 8: Think US rates do tend to drive the rest of
Speaker 8: the world. I think there's some element of that we've
Speaker 8: seen it in other you look at the Taper tantrum,
Speaker 8: even when it's a US domestic issue, you do see
Speaker 8: that impact whose investors are global. But the other thing
Speaker 8: is the rest of the world. If the US is
Speaker 8: forcing the rest of the world to do more fiscal stimulus,
Speaker 8: either because of trade defense, you name which issue, you
Speaker 8: could have a lot more supply in the rest of
Speaker 8: the world. And then if I'm a foreign investor I'm Japanese,
Speaker 8: I can look at the highest Japanese rate, or I
Speaker 8: can look at the US and say, you know what,
Speaker 8: I don't even know what's going to happen with the dollar.
Speaker 8: Maybe the dollar is gill obal valued. I'd rather hold
Speaker 8: the US. So I think when it's a global rate trise,
Speaker 8: it does tend to have more legs, which is why
Speaker 8: that to your risk question earlier, that risk in the
Speaker 8: long end is higher because this is a global bond
Speaker 8: sell off, and I wouldn't fade that. I don't think
Speaker 8: there's a cross market trading. I think it's a steepener
Speaker 8: trade globally.
Speaker 6: Well, just to build on that and something that Edyar
Speaker 6: Danny was talking about, how global bond vigilantes are grabbing
Speaker 6: their pitchforks and marching into the streets and pushing back
Speaker 6: against some of the fiscal stimulus and just some of
Speaker 6: the recklessness. Some people would say that these developed markets
Speaker 6: have been with their budgets. How much does the risk
Speaker 6: if you will, really lie in the developed markets in
Speaker 6: a new way, its sovereign debt markets that totally upends
Speaker 6: investing logic of the past couple decades.
Speaker 8: I think it is a developed market issue, and I
Speaker 8: think some of this goes back to if you see
Speaker 8: how much friskal still has happened during COVID, it was
Speaker 8: much more in the developer now was not.
Speaker 3: As much in Europe. But we're going to get a
Speaker 3: lot more.
Speaker 8: Defense spending, infrastructure spending. But the US spent a lot
Speaker 8: of money. Part of that exceptional story was the fact
Speaker 8: that we had significant fiscal expansion. And now I think
Speaker 8: the market's saying, you know, no, mask What I struggled
Speaker 8: with is risk assets are ignoring this.
Speaker 3: So if things slow.
Speaker 8: Down, we've just the FED is telling us actually very
Speaker 8: clearly that we're not going to be in there quickly.
Speaker 8: We might be constrained because of inflation risk. Now the
Speaker 8: fiscal site's telling you there may not be a lot
Speaker 8: of fiscal put either, So I think the risk asset
Speaker 8: complex is a little complacent. But to your point, I
Speaker 8: think the bond vigilantes are awake.
Speaker 3: Do they take over?
Speaker 8: I think it's a bit of a dance between the
Speaker 8: hard data and the bond vigilantes, and we have to
Speaker 8: see what who wins.
Speaker 6: I keep thinking about it at your DNA, and he
Speaker 6: can't decide whether it's going to be a stock market
Speaker 6: melt up or a bond market meltdown. And it seems
Speaker 6: like the risks right now are the potential for ongoing growth,
Speaker 6: also with inflation and fiscal irresponsibility on one side. So
Speaker 6: the duration risk is the big one, or it becomes
Speaker 6: a growth scare and suddenly the credit risk becomes the
Speaker 6: key component. Are you saying that the credit risk component,
Speaker 6: the growth scare is the one that we should prioritize,
Speaker 6: which will ultimately cure the other side, at least for
Speaker 6: most of the duration in terms of where the risk
Speaker 6: is perceived.
Speaker 8: I think that's like the trillion llar question here. I mean,
Speaker 8: the hard data is going to be so muddied by
Speaker 8: front loading. Maybe there's still frontloading happening because we're in
Speaker 8: that pause period. We're in an uncertain period. I do
Speaker 8: think if I step back and look at fundamentals, I
Speaker 8: think we're slowing. We've taken that tail risk of recession
Speaker 8: off the table, but what is our base case below
Speaker 8: trend growth? And so I do think if you ask
Speaker 8: me to pick one, I would say the growth side
Speaker 8: is likely to continue to weaken. We'll be looking at details.
Speaker 3: To companies pass on.
Speaker 8: I mean, this is a consumption tax ultimately, whether it's
Speaker 8: a corporates eat it or or consumers have to eat it,
Speaker 8: it's going to start to hurt demand.
Speaker 2: So I think growth slows down.
Speaker 8: But to your point, I don't think we can ignore
Speaker 8: if we get a bill and it's still not done.
Speaker 8: The Senate has to work. I mean, I'm focused on
Speaker 8: the Senate. They don't like even the Medicaid work requirements.
Speaker 8: So if you get salt, you get a lot more
Speaker 8: fiscal stimulus, and we realize it's all front loaded, then
Speaker 8: I think you can get that long end. But there
Speaker 8: is a self limiting aspect to that long end, Like
Speaker 8: I don't know if it's four and a half five percent,
Speaker 8: I think every other market's going to pay attention to it.
Speaker 8: The economy is going to slow down because the long
Speaker 8: end is what actually drives the economy. So there's a
Speaker 8: limiting aspect. I just don't know if we're there yet.
Speaker 8: And if the hard data remains muddied and all we
Speaker 8: get is the soft data hard data disconnect, you can
Speaker 8: get the front end being stuck and the long end
Speaker 8: taking over. I think that's the risk scenario, which is
Speaker 8: why you know it's nervous to be in the long end.
Speaker 2: Think you're supposed to have.
Speaker 8: Steepeners and if you own risk assets, you're supposed to
Speaker 8: buy that front end because that's the only place where
Speaker 8: you can have confidence that the FED can come in
Speaker 8: and somewhat control.
Speaker 2: Preyermisra IF, JPMOK and Asset Management Prayer. Thank you. This
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