WEBVTT - China Threatens Car Tariffs, Chip Giants' Kill Switch 0:00:02.480 --> 0:00:06.800 Bloomberg Audio Studios, podcasts, radio news. 0:00:09.640 --> 0:00:12.840 This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. 0:00:12.920 --> 0:00:15.400 You can join Brian Curtis and myself for the stories, 0:00:15.440 --> 0:00:18.520 making news and moving markets in the APAC region. You 0:00:18.600 --> 0:00:21.439 can subscribe to the show anywhere you get your podcast 0:00:21.520 --> 0:00:24.919 and always on Bloomberg Radio, the Bloomberg Terminal, and the 0:00:24.920 --> 0:00:26.080 Bloomberg Business app. 0:00:27.120 --> 0:00:30.280 A China trade lobby group says that China may consider 0:00:30.400 --> 0:00:34.920 raising temporary tearriffs to twenty five percent on imported cars 0:00:34.960 --> 0:00:38.199 with large engines. Joining us now for some discussion of 0:00:38.240 --> 0:00:42.320 this is Linda lu Bloomberg China Cars Reporter. So, Linda, 0:00:42.360 --> 0:00:44.680 you say in your story that we had two hundred 0:00:44.720 --> 0:00:47.800 and fifty thousand cars with engines more than two and 0:00:47.840 --> 0:00:52.000 a half liters imported into China twenty twenty three. I'm 0:00:52.000 --> 0:00:55.040 curious whether most of those come from the US and 0:00:55.240 --> 0:00:58.600 Europe And sounds like a big number, quarter of a million, 0:00:58.720 --> 0:00:58.960 is it. 0:01:00.080 --> 0:01:04.320 Yeah, it's interesting looking at this right now, we're trying 0:01:04.319 --> 0:01:08.280 to figure out from the custom stata which automakers will 0:01:08.319 --> 0:01:12.080 be impacted. But if you compare that to the number 0:01:12.200 --> 0:01:16.320 of electric vehicles that China exports, it's actually still smaller. 0:01:16.840 --> 0:01:20.200 China exported one point five million evs last year, with 0:01:20.360 --> 0:01:23.600 about six hundred and thirty eight thousand going to Europe 0:01:24.040 --> 0:01:27.880 and North America. Like with the US, which already had 0:01:27.959 --> 0:01:31.720 a high tariff, last year, they only received about fifty 0:01:31.760 --> 0:01:34.360 two thousand evs from China. 0:01:34.560 --> 0:01:39.280 So I'm imagining names like BMW, Audi, Mercedes, Benz and 0:01:39.319 --> 0:01:42.960 then from the US side, Cadillac some of the luxury models. 0:01:42.959 --> 0:01:44.280 Would that be a safe assumption. 0:01:45.200 --> 0:01:50.840 Yes, that's right. China now is such a big automaking country, 0:01:50.920 --> 0:01:55.840 they more than capable of essentially filling audio demand for 0:01:56.000 --> 0:02:00.440 cars domestically. But obviously there's some luxury models that are 0:02:00.440 --> 0:02:02.760 not made in China, and like you said, those brands 0:02:03.040 --> 0:02:06.160 would be the usual suspects when you're looking at imported 0:02:06.240 --> 0:02:07.160 cars into China. 0:02:08.000 --> 0:02:10.440 So this came from an interview from Leopin who is 0:02:10.440 --> 0:02:14.280 the chief expert of China Automotive Technology and Research Center. 0:02:15.000 --> 0:02:17.760 It was in the Global Times newspaper, and I think 0:02:17.800 --> 0:02:19.919 I'm not sure whether or not we would have picked 0:02:20.000 --> 0:02:22.240 up on it so much except for the China Chamber 0:02:22.240 --> 0:02:24.919 of Commerce to the EU talked about this and said 0:02:24.960 --> 0:02:28.560 that there would be implications, what would have to happen 0:02:28.600 --> 0:02:29.960 next for this to become policy. 0:02:30.919 --> 0:02:34.760 Yeah, we also were looking at the Global Times interview 0:02:34.840 --> 0:02:39.240 yesterday and not sure how much of an indication this 0:02:39.320 --> 0:02:43.360 is that China may eventually move to raise the tariffs. 0:02:43.720 --> 0:02:48.480 We're all really waiting to see whether an official director 0:02:48.600 --> 0:02:53.079 will come from one of China's government agencies, such as 0:02:53.560 --> 0:02:56.920 the Ministry of Commerce or Customs, where they will officially 0:02:57.280 --> 0:03:00.360 announce the raising of the tariffs. 0:03:00.400 --> 0:03:02.880 It feels like we're in a new phase of a 0:03:02.960 --> 0:03:05.200 trade war, wouldn't you say, when it comes to vehicles, 0:03:05.240 --> 0:03:10.440 particularly evs that are maybe exported from China to other markets, 0:03:10.440 --> 0:03:14.600 and now we're looking at possible punitive tariffs, temporary though 0:03:14.639 --> 0:03:19.040 they may be, that would target European and American manufactured 0:03:19.120 --> 0:03:20.120 luxury cars. 0:03:20.960 --> 0:03:26.040 Yes, I completely agree. And actually since the EU launching 0:03:26.160 --> 0:03:29.919 the anti subsidy investigation into Chinese evs, we've seen a 0:03:29.960 --> 0:03:33.440 whole series of tips for tat between China and the 0:03:33.480 --> 0:03:36.520 EU and obviously the US and January does ye China 0:03:36.600 --> 0:03:42.880 announced in anti dumping investigation into Brandy, which we think 0:03:43.000 --> 0:03:47.120 maybe a response to the EU investigation, and then with 0:03:47.280 --> 0:03:52.240 the US essentially quadrupling the imput tariffs for Chinese evs. 0:03:52.400 --> 0:03:56.280 Then in recent weeks we also saw China announcing another 0:03:56.320 --> 0:04:01.000 investigation into chemicals are being dumped from the EU. So 0:04:01.080 --> 0:04:03.600 there's a whole series of moves that I would say 0:04:03.880 --> 0:04:07.400 is really just developing this trade war. 0:04:08.040 --> 0:04:11.280 Behind the scenes here, Linda, how much is this affecting 0:04:11.360 --> 0:04:14.800 the status of some of the jvs in China that 0:04:14.880 --> 0:04:18.240 involves so many foreign companies, you know, pairing up with 0:04:18.360 --> 0:04:19.160 local companies. 0:04:19.839 --> 0:04:24.440 I would say with these tariffs, it's probably not going 0:04:24.480 --> 0:04:27.719 to have such a big impact on the jvs because 0:04:28.040 --> 0:04:31.600 a lot of their sales in China come from locally 0:04:31.640 --> 0:04:36.920 manufactured vehicles, and there the trenders in the Chinese market 0:04:36.960 --> 0:04:40.479 these days. The jvs such as General Motors, are the 0:04:40.520 --> 0:04:44.160 one with Ford, as well as the European joint ventures. 0:04:44.200 --> 0:04:48.760 They're all essentially suffering a hit to their sales because 0:04:48.800 --> 0:04:52.720 of China's fast transitioned to evs, and that's something they 0:04:52.760 --> 0:04:55.440 don't have strong offerings in and they're trying very hard 0:04:55.440 --> 0:04:56.000 to catch up. 0:04:56.279 --> 0:04:57.880 Linda, do you have a sense of what this may 0:04:57.960 --> 0:05:01.359 mean for Tesla, an American company with a factory in 0:05:01.400 --> 0:05:05.440 Shanghai making vehicles not only for the domestic market, but 0:05:05.520 --> 0:05:07.080 for exportation as well. 0:05:07.880 --> 0:05:11.400 Yeah, things could be dicey for Tesla because, as Elon 0:05:11.520 --> 0:05:15.080 Musk himself has said, the Shanghai factory is one of 0:05:15.120 --> 0:05:19.160 Tesla's most efficient and they turned out about half of 0:05:19.279 --> 0:05:25.119 Tesla's global deliveries last year. And so if the EU 0:05:25.240 --> 0:05:29.800 were to levy tariffs on Chinese made EV's going into 0:05:29.839 --> 0:05:33.839 the block, that could be a hit to Tesla. As 0:05:33.880 --> 0:05:38.920 for the US North American markets, I think Tesla's local 0:05:39.000 --> 0:05:43.159 factories there supply that market. But obviously with Chaye tensines 0:05:43.200 --> 0:05:45.760 getting worse, it's not going to be good for any 0:05:45.800 --> 0:05:48.799 business that's trying to do business over the world. 0:05:49.480 --> 0:05:51.520 And just because we're talking about two and a half 0:05:51.560 --> 0:05:55.640 leaders here on cars and these are larger engine cars, 0:05:55.680 --> 0:05:58.000 so are a lot of the jvs and local domestic 0:05:58.040 --> 0:06:01.880 manufacturers that produce these types of cars as well. 0:06:02.040 --> 0:06:05.960 Yes, I would say they produce a whole range of cars, 0:06:06.120 --> 0:06:10.200 you know, from very few efficient smaller vehicles to really 0:06:10.360 --> 0:06:12.320 beg gas guzzlers. 0:06:12.360 --> 0:06:15.640 So they would presumably benefit if some of the foreign 0:06:15.640 --> 0:06:18.800 models are closed out a bit by much higher costs. 0:06:19.320 --> 0:06:21.720 So that's something that we can watch, you know, in 0:06:21.800 --> 0:06:25.240 terms of investing Linda, thank you for joining us on 0:06:25.279 --> 0:06:29.680 the program. Linda lu Bloomberg China Cars Reporter, looking more 0:06:29.720 --> 0:06:34.200 closely at the potential here of extra tariffs on importing 0:06:34.279 --> 0:06:35.000 large cars. 0:06:41.839 --> 0:06:45.719 The world's most sophisticated chip making machines in Taiwan can 0:06:45.800 --> 0:06:50.160 be remotely disabled in the event China invades the island. 0:06:50.880 --> 0:06:53.560 This is a Bloomberg exclusive. We are told the remote 0:06:53.600 --> 0:06:57.040 shut off applies to a line of extreme ultraviolet machines 0:06:57.080 --> 0:07:01.039 made by ASML, and those machines are used by Taiwan 0:07:01.160 --> 0:07:06.960 Semiconductor Manufacturing Company or TSMC. Here's Bloomberg's Tom McKenzie from London. 0:07:07.480 --> 0:07:10.320 Essentially, this is a kill switch that would be applied 0:07:10.600 --> 0:07:15.200 to these ASML machines, these extreme ultraviolet lithography machines that 0:07:15.280 --> 0:07:17.800 process and produce, and they are essential to production of 0:07:17.840 --> 0:07:21.640 the most sophisticated chips that TSMC, that makes the biggest 0:07:21.640 --> 0:07:24.880 foundries over in Taiwan is dependent on. And TSMC's the 0:07:24.880 --> 0:07:27.840 biggest buyer of these euvs that are made and produced 0:07:27.840 --> 0:07:28.480 by SML. 0:07:28.560 --> 0:07:31.000 That is Bloomberg's Tom McKenzie. Now we are also told 0:07:31.040 --> 0:07:35.160 that American officials have privately expressed concern to both companies 0:07:35.200 --> 0:07:39.560 about what happens if Chinese aggression escalates into an attack 0:07:39.880 --> 0:07:44.840 on Taiwan. TSMC is responsible for producing the vast majority 0:07:44.840 --> 0:07:48.280 of the world's most advanced semiconductors ran well. 0:07:48.360 --> 0:07:51.080 Joining us now for some discussion of this is Peter Elstrom, 0:07:51.120 --> 0:07:55.840 Bloomberg Executive editor for Asia Technology. Peter, thank you for 0:07:55.960 --> 0:07:59.679 joining us. The two companies say they can disable these machines, 0:07:59.680 --> 0:08:01.680 and I suppose we have to take them at their 0:08:01.720 --> 0:08:05.080 word on this, but it will make people nervous, and 0:08:05.120 --> 0:08:08.000 it also raises the question of how much of this 0:08:08.160 --> 0:08:10.040 is priced in, And we saw trading in a stock 0:08:10.320 --> 0:08:12.760 didn't do all that much. But at least at the moment, 0:08:12.760 --> 0:08:16.080 there are no signs of invasion, so presumably there would 0:08:16.080 --> 0:08:18.560 be time. But are you hearing from people that they 0:08:18.600 --> 0:08:20.480 see a need to discount this further? 0:08:22.040 --> 0:08:24.440 Yeah, So this is to be clear that companies are 0:08:24.440 --> 0:08:29.520 not talking publicly about these capabilities, and the relationship is 0:08:30.040 --> 0:08:36.240 Taiwan Semiconductor makes the world's most advanced chips largely in Taiwan, 0:08:36.800 --> 0:08:41.319 and ASML supplies the most advanced equipment for making those chips. 0:08:41.480 --> 0:08:44.320 So what sources have been telling us is that there 0:08:44.360 --> 0:08:50.120 have been concerns about what happens if China gets more 0:08:50.200 --> 0:08:53.679 aggressive around Taiwan, if there's even an escalation into an 0:08:53.720 --> 0:08:57.760 attack on the island. Again, the story does not go 0:08:57.840 --> 0:09:02.319 into the prospects for that. We think that that obviously 0:09:02.360 --> 0:09:05.720 that is something that the companies are not involved and 0:09:05.720 --> 0:09:11.080 wouldn't know anything about. But ASML has been approached by 0:09:11.160 --> 0:09:15.360 the Dutch government about the possibility of what would happen then, 0:09:15.480 --> 0:09:19.439 and ASML has told those government officials that they are 0:09:19.640 --> 0:09:24.040 able to disable these machines remotely if something like that happens. Essentially, 0:09:24.080 --> 0:09:26.960 this is a remote kill switch so that they could 0:09:27.720 --> 0:09:31.960 stop these machines from producing advanced chips if something happens 0:09:32.640 --> 0:09:36.160 around Taiwan. More broadly, they'd be able to do that 0:09:36.200 --> 0:09:39.280 sort of thing. Also in addition to that, so it's 0:09:39.320 --> 0:09:44.440 an extra level of caution and security that I think 0:09:44.480 --> 0:09:47.480 the government in the Netherlands in the US would see 0:09:47.520 --> 0:09:51.199 as a sign of reassurance of these advanced chip making 0:09:51.240 --> 0:09:53.600 machines won't fall into long Peter. 0:09:53.720 --> 0:09:55.959 We stated that in our story. But what I was 0:09:56.000 --> 0:09:58.439 getting at is this discounted. I mean, are you hearing 0:09:58.440 --> 0:10:01.920 from people that that this is a serious concern or 0:10:01.920 --> 0:10:03.920 that no, it's not so much a serious concern. 0:10:04.240 --> 0:10:07.040 Well, that's sort of the question is sort of predicated 0:10:07.080 --> 0:10:09.959 on how likely is it that China actually takes some 0:10:10.120 --> 0:10:15.040 military action against Taiwan. I think the companies are not 0:10:15.440 --> 0:10:19.360 privy to the discussions at the most advanced levels of 0:10:19.480 --> 0:10:23.480 the US government or the Dutch government for that matter, 0:10:23.559 --> 0:10:26.600 So the companies are preparing for these kinds of contingencies 0:10:26.960 --> 0:10:29.720 not really knowing what the chances are that something like 0:10:29.800 --> 0:10:32.719 this would happen. Obviously, the tensions between the US and 0:10:32.800 --> 0:10:36.120 China have been escalating over the past few years, and 0:10:36.160 --> 0:10:40.120 there have been concerns about this. China continues to claim 0:10:40.160 --> 0:10:43.560 that Taiwan is a breakaway province and that eventually there 0:10:43.600 --> 0:10:48.240 should be some reunification of the two locations, and the 0:10:48.320 --> 0:10:50.319 US government has pushed back on that assertion. 0:10:50.559 --> 0:10:53.640 Peter, I remember a while back our colleagues in Washington, 0:10:53.720 --> 0:10:56.520 d C. At Bloomberg News reported that the Bide administration 0:10:57.280 --> 0:11:01.559 was looking at ways to potentially destroy this equipment should 0:11:01.640 --> 0:11:04.840 there be an invasion of Taiwan on the part of 0:11:04.920 --> 0:11:07.760 mainland China. And I think it's important to point out 0:11:08.320 --> 0:11:13.520 that under current export controls that China cannot access this 0:11:13.679 --> 0:11:16.600 very advanced technology that is produced by TSMC. 0:11:16.960 --> 0:11:21.040 Yeah, that's exactly right. Yeah, the US government's beginning with 0:11:21.440 --> 0:11:25.800 Donald Trump's first administration and then the Biden administration, have 0:11:25.920 --> 0:11:29.760 been tightening the restrictions on China's ability to get both 0:11:29.840 --> 0:11:33.040 chips and then the machines that actually make those chips. 0:11:33.240 --> 0:11:37.240 You're referring to a type of machine that ASML makes 0:11:37.280 --> 0:11:43.120 called extreme ultraviolet machines or UV machines. Those machines are 0:11:43.320 --> 0:11:46.760 used to make the most advanced semiconductors out there, including 0:11:46.760 --> 0:11:50.040 the chips that go into iPhones, the chips that Nvidia 0:11:50.160 --> 0:11:53.480 uses for AI training. China has never been able to 0:11:53.559 --> 0:11:57.079 buy those kinds of machines. Those have been prohibited, but 0:11:57.120 --> 0:12:00.320 more recently there have been tighter restrictions on others of 0:12:00.400 --> 0:12:04.280 chips and other kinds of machines that China and Chinese 0:12:04.280 --> 0:12:06.880 companies have been able to buy. So, yeah, that's an 0:12:06.920 --> 0:12:10.240 increasingly tightened restrictions. What we've seen in reaction to that 0:12:10.400 --> 0:12:13.280 is that China's investing a large amount of money into 0:12:13.400 --> 0:12:15.600 its own chip industry. It's trying to build up some 0:12:15.640 --> 0:12:19.360 of these domestic capabilities, and Smick, the leading maker in 0:12:19.520 --> 0:12:22.600 China of semiconductors, has made quite a bit of progress, 0:12:22.920 --> 0:12:25.120 as we saw last year with a chip that was 0:12:25.160 --> 0:12:28.120 found in Huawei smartphone. They've been able to reach seven 0:12:28.200 --> 0:12:30.880 nanimeter production, which is not at the cutting edge, but 0:12:30.960 --> 0:12:31.760 it's quite close. 0:12:32.480 --> 0:12:34.560 So one of the areas that we've covered here in 0:12:34.600 --> 0:12:37.520 this discussion this morning is is whether or not China 0:12:37.559 --> 0:12:39.959 could get its hands on this equipment. And we were 0:12:40.000 --> 0:12:41.959 talking about how there's a kill switch to it, and 0:12:42.520 --> 0:12:47.000 that's fine. What I think is even bigger really is 0:12:47.000 --> 0:12:51.199 is how much does this then disrupt TSMC and all 0:12:51.240 --> 0:12:53.560 the automated systems of the world and all the high 0:12:53.600 --> 0:12:56.280 tech companies that use these chips. I mean, this is 0:12:56.320 --> 0:12:58.839 what I was getting at by asking about how much 0:12:58.920 --> 0:13:02.840 is priced in about the impact on the entire semiconductor sector. 0:13:03.280 --> 0:13:07.640 Well, KSMC still is largely dependent on its base of 0:13:07.720 --> 0:13:11.560 production in Taiwan. That's where it makes the vast majority 0:13:11.559 --> 0:13:14.080 of its chips, and it certainly its most advanced chips. 0:13:14.360 --> 0:13:18.640 But you have seen the company begin to diversify geographically 0:13:19.360 --> 0:13:22.480 at the urging of governments around the world, including the 0:13:22.600 --> 0:13:27.400 US government. It's building a chip fabrication plant here in Japan, 0:13:28.080 --> 0:13:31.280 it's building another one in the United States. It may 0:13:31.320 --> 0:13:35.280 also build something in Europe at some point, So that does, 0:13:35.640 --> 0:13:39.560 I think to your point, that does create additional expenses 0:13:39.640 --> 0:13:43.800 because they need more plants in more different areas to 0:13:43.880 --> 0:13:47.080 kind of have the geographic diversity that would minimize the 0:13:47.160 --> 0:13:50.080 risks of anything happen to their Taiwan production plants. But 0:13:50.200 --> 0:13:53.280 make no mistake, what they have right now in Taiwan 0:13:53.640 --> 0:13:56.560 has not been replaced yet and probably won't be replaced 0:13:56.559 --> 0:13:59.480 for many, many years. The company's strategy for a long 0:13:59.520 --> 0:14:02.240 time was to make everything in Taiwan because they have 0:14:02.440 --> 0:14:05.800 their best equipment there, their most advanced equipment. They also 0:14:05.800 --> 0:14:10.120 have their best engineers. They can share knowledge about how 0:14:10.160 --> 0:14:12.920 to run the production lines, the whole production process that 0:14:13.040 --> 0:14:15.520 allows them to reach high yield so that they get 0:14:16.320 --> 0:14:18.520 a high percentage of their chips that are workable. At 0:14:18.520 --> 0:14:20.000 the end of that, when you start to do that 0:14:20.080 --> 0:14:23.040 in three different countries for four different countries, gets much 0:14:23.040 --> 0:14:25.920 more complicated. That's one of the strategic challenges for TSMC 0:14:26.160 --> 0:14:26.560 right now. 0:14:27.000 --> 0:14:30.640 Absolutely the impact could be you know, it just could 0:14:30.640 --> 0:14:33.760 be enormous. Peter, thanks so much for joining us. Peter Elstrom, 0:14:33.920 --> 0:14:45.760 Bloomberg Executive editor for Asia Technology. Six FED officials spoke 0:14:45.800 --> 0:14:48.960 in Unison today about keeping interest rates higher for longer. 0:14:49.120 --> 0:14:52.160 Governor Christopher Waller wants to see three to five months 0:14:52.160 --> 0:14:56.480 of good inflation data before considering cutting rates. In the meantime, 0:14:56.520 --> 0:14:59.880 Atlanta as Rafae Albostik said, the FED is actively re 0:15:00.120 --> 0:15:04.040 thinking it's view on the neutral rate. Here's Bloomberg's Michael McKee. 0:15:04.120 --> 0:15:06.840 Fed officials are speaking with one voice now that they 0:15:06.880 --> 0:15:09.640 don't think they're going to be cutting rates anytime soon. 0:15:09.840 --> 0:15:12.560 There's a slight disagreement about how many they might get 0:15:12.600 --> 0:15:15.400 in this year, if any at all, but they all 0:15:15.400 --> 0:15:17.200 seem resigned to the fact that this is going to 0:15:17.240 --> 0:15:19.440 be a long process and that the US is going 0:15:19.480 --> 0:15:22.080 to be the outlier. The ECB can go ahead first, 0:15:22.120 --> 0:15:24.480 maybe the Bank of England, but the FED is going 0:15:24.520 --> 0:15:26.080 to sit tight for several. 0:15:25.760 --> 0:15:30.400 Months Bloomberg's Michael McKee. In the meantime, ECB President Christine 0:15:30.440 --> 0:15:34.280 Legard is forecasting June rate cut for Europe if the 0:15:34.320 --> 0:15:37.760 price path holds. Joining us now. In our studios in 0:15:37.800 --> 0:15:41.400 Hong Kong is Carl Tannenbaum, chief economist at Northern Trust. 0:15:42.080 --> 0:15:46.960 Carl the implications of the economy and also the markets 0:15:46.960 --> 0:15:50.320 holding up pretty well with interest rates steady here at 0:15:50.360 --> 0:15:53.240 a pretty high level. Seems to be that the neutral 0:15:53.360 --> 0:15:56.200 rate has moved higher. Your thoughts on that and where we're. 0:15:56.080 --> 0:15:58.880 Heading, Well, first, good morning, Brian. It is not a 0:15:58.920 --> 0:16:02.120 surprise to me that the Fed formed a bucket brigade 0:16:02.200 --> 0:16:05.480 to pour cold water on the market's assumption that easing 0:16:05.520 --> 0:16:08.400 would come more approximately. This is the second round that 0:16:08.400 --> 0:16:11.480 we've had with over optimism from investors this year, and 0:16:11.520 --> 0:16:13.640 I think they want to make sure that their intentions 0:16:13.720 --> 0:16:17.840 are not misunderstood. In addition, the American economy has continued 0:16:17.920 --> 0:16:21.920 to sustain momentum far beyond expectation, leading some to think 0:16:22.000 --> 0:16:24.800 that the amount of restraint that is required to achieve 0:16:24.840 --> 0:16:27.840 the inflation target is higher. That's the science behind the 0:16:27.880 --> 0:16:31.080 neutral rate, And so again it looks to us as 0:16:31.120 --> 0:16:33.080 well as the markets, like it will be late this 0:16:33.160 --> 0:16:35.720 year at the earliest before we get that first easing 0:16:35.720 --> 0:16:36.480 from the Fed. 0:16:36.360 --> 0:16:38.920 And between now and then more dollar strength. And I 0:16:38.920 --> 0:16:41.560 would imagine Carl and the conversations that you're having there 0:16:41.560 --> 0:16:44.080 in the Apac region, there are some people that are 0:16:44.160 --> 0:16:46.000 a little annoyed with that fact. 0:16:47.120 --> 0:16:49.280 There's little doubt. While it's been good for me, I 0:16:49.320 --> 0:16:51.760 was actually able to afford breakfast in Singapore for the 0:16:51.760 --> 0:16:54.640 first time and a number of visits. The fact is 0:16:54.640 --> 0:16:57.920 is that there are central banks in emerging markets who 0:16:57.960 --> 0:17:01.080 have settled inflation, they have growth struggling, and who would 0:17:01.200 --> 0:17:04.480 like to ease interest rates to help those conditions. But 0:17:04.560 --> 0:17:07.560 to do so would risk appreciating the currency and making 0:17:07.560 --> 0:17:11.040 the things they import more expensive. So there are central 0:17:11.040 --> 0:17:13.640 banks around the world that are very much fed dependent. 0:17:14.560 --> 0:17:16.399 So, Carl I was interested to hear you say that 0:17:16.520 --> 0:17:20.439 you felt as though the markets were overextended to a 0:17:20.480 --> 0:17:23.000 certain degree. And that's not what I want to ask 0:17:23.040 --> 0:17:25.600 you about. I want to ask you about the economy, 0:17:25.680 --> 0:17:28.760 because you get this feeling that some people still hold 0:17:28.800 --> 0:17:32.600 out that a recession could happen sometime later this year 0:17:32.680 --> 0:17:34.800 or early next year. In other words, there's a lot 0:17:34.840 --> 0:17:39.040 of uncertainty. How strong is the economy and how durable 0:17:39.080 --> 0:17:40.600 and sustainable is it in your view? 0:17:41.440 --> 0:17:45.680 Well, looking backwards, American economic growth has exceeded expectation for 0:17:45.760 --> 0:17:48.280 seven quarters in a row, and not by a little, 0:17:48.280 --> 0:17:50.480 and the tracking here in the second quarter also looks 0:17:50.600 --> 0:17:55.119 very positive. I think the common over the thing that 0:17:55.119 --> 0:17:58.480 people have overlooked is the consumer strength. I know that 0:17:58.560 --> 0:18:01.160 the markets got a little excited that our unemployment rate 0:18:01.200 --> 0:18:03.520 has gone up to three point nine percent, but for 0:18:03.680 --> 0:18:06.080 most of my career that would have been an amazing level. 0:18:06.440 --> 0:18:09.640 And real wages are growing, giving the kind of spending 0:18:09.680 --> 0:18:14.400 power that sustains economic activity. Consumers have turned out their debts, 0:18:14.400 --> 0:18:17.680 so of corporations, and so monetary policy hasn't bitten as much, 0:18:18.040 --> 0:18:20.520 hence the need to keep rates higher for longer. 0:18:20.640 --> 0:18:23.439 Carl, I'm curious, how are you making sense of the 0:18:23.480 --> 0:18:26.520 inversion of the yield curve as persistent as it has been. 0:18:28.200 --> 0:18:30.360 One of the things I've pointed out to our clients 0:18:30.359 --> 0:18:32.919 at Northern Trust is that an inverted yield curve is 0:18:33.119 --> 0:18:35.960 consistent with a soft landing as well as a recession. 0:18:36.320 --> 0:18:38.000 And if you take a look at the history of 0:18:38.000 --> 0:18:41.080 the yield curve as a recession indicator, it's quite mixed. 0:18:41.320 --> 0:18:44.200 There have been times we've had inversions without a recession, 0:18:44.520 --> 0:18:47.000 and at times the curve has inverted and we haven't 0:18:47.000 --> 0:18:50.560 seen a downturn for almost two years afterwards. So I 0:18:50.600 --> 0:18:52.919 think it's important to look at other indicators as a 0:18:52.960 --> 0:18:55.160 compliment to that one gauge. 0:18:55.400 --> 0:18:59.520 There's also this fear, perhaps that the consumer is weakening 0:18:59.560 --> 0:19:03.520 a little and particularly at the lower end. And you 0:19:03.640 --> 0:19:05.959 need only look at a stock like Visa, which is 0:19:06.000 --> 0:19:08.360 actually down over the past three months. It's not up. 0:19:08.400 --> 0:19:10.919 I mean people think, oh, every stock is up in 0:19:10.960 --> 0:19:13.879 the United States, this is the everything, Raley, It is 0:19:13.920 --> 0:19:18.000 not really the case. Some consumer even Meta is actually 0:19:18.000 --> 0:19:21.720 a little bit lower over the past three months. I'm 0:19:21.720 --> 0:19:24.440 wondering how healthy is the consumer really. 0:19:24.840 --> 0:19:27.320 Over And I think you've hit on something that's very important, 0:19:27.359 --> 0:19:29.280 and that is you can look at things in aggregate, 0:19:29.320 --> 0:19:32.959 but the details matter. The incomes. Let's say the lowest 0:19:32.960 --> 0:19:35.760 forty percent of income groups in the United States, they've 0:19:35.800 --> 0:19:38.880 exhausted their pandemic savings, and while they're still working, they're 0:19:38.920 --> 0:19:40.800 spending a little bit faster than they should. And we've 0:19:40.800 --> 0:19:43.960 seen an accumulation of consumer debt that's back to levels 0:19:43.960 --> 0:19:46.719 that we saw prior to the pandemic. Associated with that, 0:19:46.760 --> 0:19:50.280 we've seen some debt delinquencies, which also suggests that maybe 0:19:50.280 --> 0:19:52.720 some belt tightening is on the horizon. One reason why 0:19:52.960 --> 0:19:56.680 I would anticipate consumer spending in America to taper off 0:19:56.720 --> 0:19:58.520 to a much lower rate of growth as we move 0:19:58.560 --> 0:19:59.520 through twenty twenty four. 0:20:00.200 --> 0:20:02.560 One of the things that we've been focusing on a 0:20:02.600 --> 0:20:05.960 lot on this program. Is the divergence between kind of 0:20:05.960 --> 0:20:10.119 what the markets may be signaling and the soft landing 0:20:10.160 --> 0:20:12.879 that you've been kind of outlying there. Do you think 0:20:13.000 --> 0:20:16.480 that there is a risk that markets need to recalibrate, 0:20:16.520 --> 0:20:18.560 that maybe there is on the equity side, at least 0:20:18.600 --> 0:20:20.040 a little too much enthusiasm. 0:20:21.520 --> 0:20:24.520 I wouldn't think so. Again, the economic outlook is very solid. 0:20:24.680 --> 0:20:28.320 The earnings outlook has been very, very good in certain 0:20:28.400 --> 0:20:30.840 sectors that have been leading our markets as well as others. 0:20:31.200 --> 0:20:33.760 There's a lot of optimism about what the next generation 0:20:34.040 --> 0:20:37.480 of machine learning and artificial intelligence might bring. That's really 0:20:37.520 --> 0:20:39.360 been the big driver. The other question that I get 0:20:39.400 --> 0:20:41.199 a lot is we do have an election coming up, 0:20:41.240 --> 0:20:43.800 and people are concerned about how that might affect markets, 0:20:43.800 --> 0:20:48.800 but the history shows that that impact is relatively small. 0:20:49.359 --> 0:20:53.199 Both gentlemen running seem to want to spend a lot. 0:20:54.040 --> 0:20:56.600 Is that something like debts and deficits don't matter at 0:20:56.600 --> 0:20:59.720 the moment, but does that come into the picture sometime soon. 0:21:00.480 --> 0:21:02.840 Well, it's frightening. Neither one of them is serious about 0:21:02.880 --> 0:21:05.840 fiscal policy. One would probably like to reduce taxes further 0:21:05.920 --> 0:21:08.000 and claim that that pays for itself. The other would 0:21:08.040 --> 0:21:11.280 like to continue spending but characterize it as an investment 0:21:11.320 --> 0:21:14.560 whose returns would also leave the budget net neutral. And 0:21:14.600 --> 0:21:16.639 I hear that said, and then I look at the 0:21:16.720 --> 0:21:19.640 national debt of thirty four trillion that's likely to triple 0:21:19.720 --> 0:21:23.680 over the next twenty years if policy isn't changed, And well, 0:21:23.720 --> 0:21:26.239 I'm looking around for somewhere else to live, just in 0:21:26.240 --> 0:21:30.320 case the worst happens in the USA may maybe here 0:21:30.359 --> 0:21:30.920 in Hong Kong. 0:21:30.920 --> 0:21:33.720 Who knows one of the candidates too, seems to be 0:21:33.960 --> 0:21:37.479 implying that maybe the FED shouldn't be an independent body. 0:21:37.520 --> 0:21:38.520 How do you feel about that? 0:21:39.680 --> 0:21:42.440 Yeah, that story came out I think a few weeks ago. 0:21:42.600 --> 0:21:46.040 Let me reassure our listeners. Structurally, from a legal perspective, 0:21:46.040 --> 0:21:49.680 it would be very difficult for an administration to have 0:21:50.000 --> 0:21:53.879 undue power over the FED absent a congressional change reopening 0:21:53.920 --> 0:21:57.120 the Federal Reserve Act itself, which I find highly unlikely. 0:21:57.119 --> 0:21:58.840 In the structure within the FED where I used to 0:21:58.840 --> 0:22:02.720 work is one that feels it's independence is really critical 0:22:02.800 --> 0:22:06.280 to economic and market performance, and they will safeguard that 0:22:07.359 --> 0:22:08.359 to their last breath. 0:22:09.240 --> 0:22:12.040 You know, I'm curious to get back at some of 0:22:12.040 --> 0:22:16.159 these uncertainties that persist, and my ultimate question to you 0:22:16.240 --> 0:22:18.960 will be what's an outlier? But let me just lay 0:22:19.000 --> 0:22:21.600 some groundwork here. First, I was interested to hear Morgan 0:22:21.680 --> 0:22:24.639 Stanley's Mike Wilson on Surveillance, excellent program. I always like 0:22:24.720 --> 0:22:26.880 to catch that before I go to sleep at night. 0:22:27.359 --> 0:22:30.520 And you know, he was a long standing bear. He's 0:22:30.680 --> 0:22:35.479 raised his targets, but he still sounds pretty bearish, pretty 0:22:35.520 --> 0:22:39.679 downbeat in many ways. So he says, look, we just 0:22:39.720 --> 0:22:42.280 don't know, We can't know. And anybody who says they know, 0:22:42.920 --> 0:22:46.480