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Well.
One of our top stories that we've been talking about all morning, the Biden administration, according to our sources, will raise tariffs on some Chinese goods this week after nearly two years of review. We understand that Biden will target sectors like electric vehicles, solar cells, batteries, and steel and aluminum. Joining us now for some discussion of this is Steve Angel, who has a title that's too long to get to, but he's one of the top dogs on the TV side.
Friend of the show is my title?
Well, yeah, with the emphasis on dog anyway. Look, I mean a lot of this looks symbolic. It looks like it's a sort of political positioning and everything, because we know that, for instance, with evs, they're really not China is not really selling any evs in the United States. So what's the point here?
I mean, the point is obviously something that the Bide administration has been going on about, and that is the overcapacity in China in the EV space, in solar space, in the new three that she dimping has been touting of course in green tech. And then that overcapacity has to go somewhere abroad to Europe. You were already hearing about tariffs. They're coming from the EC and Ursula Vandaleean
and you know, the United States. You're absolutely right, they don't really have access for the Chinese evs, which you know, some of these byds are sub ten thousand US dollars. And the you know opponents mainly in the in Detroit, in the auto making places in the United States. They're concerned, obviously in this election year about jobs by administration definitely worried about jobs. But keep in mind EV's right now. According to Edmunds dot com, Brian make up just about
one percent of US cars on the road. Now, proponents of allowing Chinese evs to come in and say, look, this can help the US and it's it's climate change fight, it will help inflation and give a cheaper access to these kind of technology to the American consumer. But really
it's the politics that's driving this right now. So EV's well, the terifs will rise to one hundred and two percent from twenty seven and a half percent currently, increase of two hundred and seventy two percent, so quad nearly quadruple.
It's kind of ironic too, isn't it, Steve? With the Zeker IPO happening on Friday night, it's in that big gain. I mean, you know, we are keeping products outside of the American market for understandable reasons, but at the same time allowing capital to be raised for those same Chinese companies.
Yeah, Zeker is an interesting One's kind of the high end EV from the company Jujong Jeee, which of course they owned Volvo and others. But Zeker is a complete EV and made a lot of headlines and the buzz at the Beijing Auto Show last month. But they raised, you know, a lot of money in New York and the shares on the first day rose thirty five percent. The biggest Chinese IPO in the US by a Chinese company since twenty twenty one. I think it was d D Global was the last one. So yeah, it's a
bit ironic. As again, if you've read David Fickling's The Bloomberg Opinion's latest call him, he's kind of saying, what's going on with the EV push in the United States. He calls it an astonishing loss of nerve in the US. Basically, the country that developed the modern automobile industry is kind of shying away because you know, EV sales just rose two point six percent year over year in the first quarter. That's after blistering growth a couple of years ago in the same period.
Well, I suppose with the positioning on tariffs here, it sends a strong message at the moment, and it also will probably discourage, you know, the expansion down the road of Chinese manufacturers into the United States at least until the environment changes.
I absolutely would agree with that, and that's something that Donald Trump seized on this morning. Essentially, he also said Biden should have done this on EV's some four years ago. But what he's also warning is that, look, the Chinese are going to come and use their manufacturing bases in Mexico, and then through the US Mexico Canada Agreement that Trump did sign, they could potentially export from Mexico into the United States those evs. But I'm sure there's some loopholes
that would be closed there as well. But he says, you know, two hundred percent tariffs on Chinese cars made in Mexico is what he would do on top of course what he's already pledged on the campaign trail, sixty percent tariffs across the board on all Chinese products.
So, Steve, how do you think this is being viewed by aging at the moment? I mean, is are they writing it off to just kind of election year politics?
Is?
Are there are there deeper concerns here about kind of protectionism and a further I don't want to use the term decoupling. I mean, but fred relations, let's let's put it that way.
I think they're realistic about it. I think they know as well as an election year. There's no secret why
Sijenping went to Hungary and Serbia in Europe. He found a friendly economy there that is building out the EV infrastructure in there at a time when Brussels is kind of trumping or not trumpeting, I should say, actually talking about you know, more protectionist measures, possible tariffs on those Chinese evs, whereas the United States, it's just non existent market for Chinese EV's right now and it will be for quite some time. And I think they're realistic about that.
Across the board, generally, both Europe and the United States are talking about overcapacity. They've kind of shied away from subsidies because they themselves are offering subsidies.
Yeah, yeah, absolutely right, there's no question there is. Everyone I talked to at the Beijing Auto Show said, look, we've been to these factories. There's some factories that you know, their capacity utilization rate is just you know, so low, and there's over capacity everywhere, and they do need to sell that somewhere.
Putin comes to China this week, right, Yeah, what do you expect?
Right? Well, I think there's just going to be more of the doubling down on their relationship. It will be interesting to see what kind of word Shi Jinping uses, though, as the war in Ukraine goes into a third year. He did get an earfull in Europe from Macron, from vander Layan as well on the nascent support if you will, Moscow as a de facto support for the war and the double use technologies that are sold into the Russian economy. So hear how she words that?
All right, Steve, Thanks very much. Steven Engel, Bloomberg's chief North Asia TV correspondent, joining us in our studios for a closer Loogod Markets George Merris, Global Equity CIO and principal Asset Management. George, thank you for coming into the studios here. So for the S and P five hundred, it's on track to post earnings growth in the first quarter seven point one percent. That almost doubles the analyst
preseason estimates of three point eight percent. But the one interesting factor is that traders have really punished companies that delivered weaker than expected forecasts. So that's one thing to note. But the other interesting thing to note is that some of these companies like ARM and Meta that got drilled on the day of their earnings, they've come back, They've recouped all of the losses. So it's like the trader slam them and then the true believers come back in.
So how are you approaching earnings that you've seen this first quarter?
So I think that's an excellent way of phrasing it, which is that there's a trading activity and there's a longer term investment activity. And I think the trading activity is part and parcel of a change where we've seen much more retail and sys systematic activity markets much more momentum oriented, very fast again headline and even quicker type
of activity. But I do think in areas, so for example, with ARM and others in meta, there's this long term secular wind that is at their backs, AI and other high process computing developments that are going to continue to be powerful, and you're going to see longer term investors take advantage of volatility and continue to increase their stakes in these companies.
When you look at what Warren Buffett did recently and kind of lightening up on his position in Apple and accumulating a bit more cash. Yes, he's a value investor and he's got very high standards when it comes to where to put money to work. But does he have a point? Are there far fewer opportunities right now if you're concerned about maybe stretched valuations, Far fewer opportunities where to find you chances to really put good money to work over a long period of time.
I think the number of opportunities that are out there that we're out there, let's say this time last year, I have shrunk. The market was a lot much lower this time last year than it is now. We've had a spectacular run, whether it's US domestic equities, whether it's abroad, again a substantial move. At the same token, you can get five percent holding cash, so your opportunity cost of
doing something is just that much higher. So why not, you know, a really, why not just sit back, hold some cash and wait for opportunities to arise, especially if you think the volatility that's out there is going to give you chances. Over the next year or two.
We have two massive events coming up, particularly the consumer Price Index data this week, and then you know, retail sales is also kind of interesting. The consumer is a little bit in question. I think the next big one after that is Nvidia's earnings on May twenty second, So you could perhaps understand a little bit of caution over these next two weeks with those things.
Looming for sure. Look right now, inflation is the key factor not only driving markets, but striving politics, as we're seeing in polls everywhere. The inflation data has been stickier than we thought it has been. We've seen expectations of FED rate cuts go from six to now a little
bit over one through the course of five months. So clearly the market is on tenderhooks determining whether or not what's going to happen with inflation, and then related to that is what's happening with the state of the consumer. The consumer has been carrying the global economy for a long period of time. Are we seeing weakness, particularly within the United States? If we do see that weakness, it's going to create a much more difficult environment going forward.
So I think those results are critical. And I also think in Nvidia again, AI is the secular power behind the markets, so much activity not only on that first order, but also in terms of investing behind AI. So people want to see that that trend continues.
George, did the FED make a mistake at the end of last year when it signaled it the all clear in terms of further rate hikes? Maybe it should have you adopted a different position. We can say this in hindsight now given the stickiness of inflation, but perhaps there was a bit of a policy error at that time.
Coyensien's always twenty twenty. If you were to look back in time, they shouldn't have. They should have been much more circumspect with respect to guidance in terms of the all clear, I would tell you that that as I look at you know, this is my own personal view, the sticky elements of inflation continue apace. And if you think about where the where the economy is, I worry just about just as much about inflation as I am
about anything else. And when you consider the economies generally humming along, and you know, unemployments sticking below four percent, I didn't you know, it's hard to see and markets were up strongly, hard to see what was driving a rate cut, you know, moral for the FED. So I do think it's probably overly aggressive.
We have actually seen some broadening out in the marketplace. We've seen tech kind of level off. I think if you look at the cues over the past three months, basically flat. You've seen it in dust drills, sore materials, soar finance is now soaring. I mean, the banks have done very well here of late. You know, it does almost beg the question, though, I mean, where else do we turn out? Emerging markets are starting to move, and we've seen China really pick up a little bit. Is
that the thing? Now? You kind of want to switch to other areas? How are you approaching it.
I think that's right. Look, there's tremendous enthusiasm around not just AI but also the Max seven. They posted phenomenal earnings growth. We're seeing that broaden ow you talked about seven percent earnings growth in Q one already, we're seeing that continue to increase. Estimates are increasing as the year progresses, and you're seeing sectors outside the mag seven do well
as well. Again, broadening out of opportunities, I think as you get outside that Max seven, whether it's moving to different sectors beyond just technology and communications, but also outside the United States. We're seeing a substantial catchup in China equity this year. We're seeing Japanese equities continue to power along.
We're seeing a rebound in European equities. There are all many of those are coming off of very depressed levels, and we're seeing a strengthening or at least a stabilizing of the economy and gets a natural tendency to look for other opportunities that have been probably you know, discarded over the last year and a half.
So, George, your firm principal asset management, from what I understand, has about a little over seven hundred billion under management right now. I'm curious about the cash position.
So the firm is always again, we have substantial balance sheet, you know, liabilities that we have to manage, so we're we always take a very conservative, prudent view of that. I think that continues to persist.
And you mentioned earlier that actually the consumer is doing okay, it's fine, but you know, there are perhaps a few warning signs when you when you know what what does what does go bump in the night? For for for the guy whose name or rhymes with rawd maris.
So again, a lot of things to be concerned about. I do worry about the potential for stagflation in the United States. Everybody cheered the weaker employment numbers last week. Markets certainly rallied off of that. I'm not sure that's such great news. I mean, seeing weaker employment and sticky inflation is stagflationary. That is a very bad outcome. The Fed's hands are a little bit tied to respond to that. And I think you've seen a bifurcated economy in the
US with respect to consumers. You're starting to see the lower end consumer struggle a bit more. Inflation is biting them harder. The real person's cost index when you look at food, when you look at petrol and gas, is a lot higher than the aggregate numbers, and so those folks are suffering.
So if that's your assessment, is it fair to say that you skew away from fixed income and you're forced to really look for opportunities solely in the equity space. Or maybe I've got that wrong.
My fixed income colleagues will view this very differently. But I find an environment where inflation is sticky and likely to be stickier longer to be one where I want to get exposed to more cyclical equities. Cyclical equities can pass on the effects of inflation, they have the benefits of operating leverage, and right now they're not priced for that kind of growth. So I am geared towards more cyclical equities.
So you know that brings in some of those sectors I raised before. What about staples? Is that interesting then?
So I'm less convicted around staples, and staples have suffered relative to other sectors over the last year and a half two years, but it's worth knowing they had a huge bull run over the last five years solely because of zero and negative interest rate policies which put a premium on stable like earnings. Again, they're essentially a proxy for the bond market. I think that likely comes in
and continues to come in play. I think, frankly, a more interesting play that gives you a lot of features like consumer staples will be defense defense trades more cheaply and right now, as we've all seen, the world is under invested in defense and geopolitics are not exactly in a good place.
So do you like the electrification? You know, sort of a part of the utilities trade without question.
Not only is AI going to continue to drive electrification, we're hearing about Microsoft looking at a one hundred billion dollar data center, but I think that you're continuing to see again infrastructure spend happened globally.
Yeah, all right, George, thank you, good session, Thanks for coming into our studios. George Merris, Global Equity CIO at Principal Asset Management. One year consumer inflation expectations rising to three point five percent. That's the highest sense November. This was very much front and center in markets late last week.
Joining us now for some discussion about markets is Anna rothbun CIO at CBIZ Investment Advisory, services, So you have inflation expectations rising there would you feel more comfortable on if we got something from the Fed which who was more or less like, we're not sure if the next move is up or down.
Good evening evening here in Eastern time the United States. I think the FED has been pretty clear that we have to wait and see. There isn't any kind of clear trajectory right now for the rates. And I believe the last time the FED spoke to us, in the form of FOMC meeting and the press conference afterwards, Powell basically said a hike isn't really in the future. We
do believe it's going to be higher for longer. I think the one year expectation of inflation there that you talked about is probably more powerful than the CPI we're going to get because it is backward looking, right. So I wouldn't feel better necessarily one way or another what the FED says. I do think that the FED will ultimately be practicing higher for longer as we had thought they would at the beginning of the year.
To what extent are you hearing the word or the term stagflation enter the conversation that you've been having with clients.
More than we have before. So inflation it seems to be settling a lot higher than where we would like it to be or where the FED would like it to be. But we are seeing slow down in the economy. And look, a lot of our clients are small business owners, mid sized business owners. They're seeing it before we do in the aggregated aggregated data, so they are starting to talk about potential stagflation what that may mean for their businesses.
What's interesting about playing all of this in the markets is that even though we haven't seen a cut from the FED, they've talked about it, but it's just talk. You know, rates are high, and look at the earnings estimates they've they've they've not only the earnings have not only come in good, but the earnings asked are being raised now at the fastest pace in two years. So you kind of have to wonder whether or not a little bit higher inflation, a little bit higher for longer
FED is really hurting earnings. It may be slowing the economy, but is it hurting earnings in your view?
Well, I think depends on each company's cash flow profile as well as their debt profile. Look a lot of the earnings increases. In frankly, the spectacular earnings performance that we've seen are in companies that are really flushed with cash where the rates don't matter as much. If you go down the well capitalization and go into small caps, you have a different story there. So I think it really depends on the company, and the longer we keep rates high, the more difficult it will be. And I
think we're going to see some deterioration going forward. Large caps, it's just going to be not as impacted as much as small caps.
Is that the area that your most let's say focused on these days mid caps small caps as opposed to the you know, the big blue that we used to say we're members of the Dow.
Well, the large caps have definitely performed a lot better, both in terms of earnings in terms of prices. We do not ignore large caps. Large caps are way too powerful. The momentum there is too powerful. We had a little blip in April and then now they're back up, which is interesting because they're moving based on you know, these macro data and what the FED might do, and it really they're they're they're more immune to it than some
of the smaller companies. We do invest in smaller companies, but the smaller companies we have to be a little bit more careful because they are more rate sensitive. I mean, if you look at the debt side of it, most investment great companies are going to be large, and there's definitely more comfort in the size, whereas a lot of the small companies tend to be higher yield where they have to pay for it with even a high credit spread.
Some of what we're talking about here is really cyclical in nature. In terms of secular adjustments, you do have the reindustrialization of the US economy, which which may augur for accepting a little bit slower pace in consumer spending. Do you agree or do you think that that's more hype.
Do you mean the reshoring or onshoring?
Yeah, the reshoring, the encouragement of companies to you know, retain workers in the United States and to produce locally. You know, you've got this big push really right across the board. You've got a deglobalization process that is playing out over over years.
Yeah, that's going to take a really long time. I mean, we've been talking, what is it's twenty twenty four pandemic started four years ago, and we've been talking about this for a while. It is definitely happening, but it is very, very slow. Do you see companies talk about capex plans to reshure their production. I mean, we're talking about tariffs here. I guess it's coming up this week to really strengthen the American auto industry. So it's not just coming from
fears of supply chains. It's also coming from the government as well. I do think that in order to stay competitive, there is a labor market mismatch problem supply versus demand. We're having a hard time even meeting the current demands because the supply is just the supply that you need, right The skilled labor isn't there. So I don't think
it's going to have an impact. I do think that ultimately the companies will have to make a decision between making these investments in the context of higher labor costs, which means you have to really do whatever it takes to maintain that margin.
Are you avoiding anything in the fixed income space.
These I am not avoiding anything. We like fixed and come, well.
If inflation's sticky, you know that's a concern for sure. You might be getting four and a half percent on your tenure. Thank you Anna rothbun Cio and CBIZ Investment Advisory Services.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.