Welcome to the Bloomberg p m L Podcast. I'm pim Fox. Along with my co host Lisa Abramowitz. Each day we bring you the most important, noteworthy, and useful interviews for you and your money, whether you're at the grocery store or the trading floor. Find the Bloomberg p m L
Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Earlier today, President Donald Trump said tariffs have put the United States in a very strong bargaining position, with billions of dollars and jobs flowing into our country, and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with US, they will be tariff That's according to President Donald Trump's tweet earlier today. Here to
help us understand this issue is Brad Setser. He is the Senior Fellow for International Economics the Council of Foreign Relations, and he joins us now, Brad, do tariffs put the United States in a stronger bargaining position. Let's say visavi the Chinese, so they present China. They present China with a choice. China will, if it wants to avoid Trump's concessions,
have to make some concessions of its own. I think the difficulty is that it is from the Chinese point of view, and I think from the point of view of most outside observers a little unclear precisely what Trump wants from China. So in that sense, uh, the US bargaining position is weakened by the lack of clarity about
US negotiating goals. Right your expertise laws in balance of payments, and right now I'm struck by the fact that markets are really not responding to these potential additional two hundillion dollars of tariffs. What would the practical effect of them be. I mean, they would be a significant friction to about half of US trade with China, so total, you know, looking back last year, total US mports from China were
about we've put tariffs on fifty billion already. You add two billion to that, and you've careft about half of trade with China. The tariff level though that has been floated on the two is and it's hard to get a major shock out of a ten taraff on two billion. You just work through the math. If everybody pays it, it's about a twenty billion dollar tax that goes to the U. S. Treasury presumably paid for by some combination
of US consumers and US businesses. Uh. And that's just not on a scale large enough to generate major macroeconomic shocks. There certainly will be some sectoral complications, and I suspect that there may be more pain associated with the coming Chinese retaliation. Brad. If let's say that Chinese negotiators were to call Brad Setzer and ask him, what do you really believe the administration wants from these trade talks? How
would you respond? I would say that there are there seemed to be at least three schools of camp within the Trump administration. I think there's a camp within the Trump administration that believes the tariffs are preferable to almost any plausible deal. They want to put a tariff on trade with China to encourage US firms to to relocate their supply chains, reorganize their supply chains, and become less
dependent on China. So the goal, in some sense is less to change Chinese behavior and more to convince US firms to restructure their supply chains and at least move them out of China, if not move them to the US.
I think there's a second school of thought within the administration that wants to see substantive changes to the policies known as China China's industrial policy, it's tech transfer policies, the set of techniques that China is using to build out advanced manufacturing industries like aircraft, like semiconductors, like high end medical equipment, And they want meaningful changes there, although they haven't articulated precisely what kind of changes would be enough.
And then I think there's a third camp that just wants a deal, that doesn't want h tariffs and is looking to in some sense come up within an optical victory. Yeah, Brad, you said that probably the bigger impact on businesses will
come from China's potential retaliatory moves. What would those be, Well, China's threaten China's already put white substantial tariffs on US slating exports UH in response to the to the first round, to the fifty billion in tariffs, China has threatened sixty billion and additional tariffs if the US goes ahead with the UH. The sixty billion presumably would be at a slight you know, at the ten percent rate, that was
probably not prohibitive. And I would guess my sense at least is that China's best targets were included in the fifty billion initial list. But nonetheless there's going to be a likely tariffs on most inputs that the usls to China, and that at the margin, if possible, creates an intentive to substitute away from US make goods. Brad Setzer, thank you so much for being with us. Really a pleasure
having you as always. Broad Setser is the Steven A. Tannenbaum Senior Fellow for International Economics of the Council of Foreign Relations. He also is the former Deputy Assistant Secretary for International Economic Analysis in the U. S. Treasury Department from two thousand and eleven to two thousand and fifteen. How do you put together a market outlook that takes into into consequence the efforts of trade negotiators, the change in interest rates, and also changes in the valuation of
different equity sectors. Well, one thing you do is you turn to Denise Chisholm, the sector strategy just in portfolio manager for for Fidelity Investments based in Boston, but joins us here in our eleven trio studios. Den He's thanks for coming in. Much appreciated. Now, Um I was thinking about your approach and I thought, wow, okay, So here's
like a checklist. You take a variety of different measures and you put them all together to try to get some kind of holistic vision of the market, and then from that you extract what you believe to be tradeable ideas. And if you could just explain some of the things that go into your thinking, yeah, I think to boil it down, I do historical probability analysis on data, right, so constantly asking the question, hey, whatever theory you have,
whatever thesis you have, is that really true historically? And if you ask that enough times and you do the work enough times, that can actually inform your investment opinion only you overall market and then on individual equity sectors. All right, So let's get down to what's going on today. We see a little bit of softness light of the headline saying that President Trump is set to impose tem percent tariffs and two billion dollars additional goods from China.
The markets aren't down nearly as much as I would expect, given the fact that that seems like a lot. It's take again, like using historical data to inform a view rather than just giving you my opinion, this is fascinating. So if you plot world trade and nominal dollars and you look at it on a year in your basis, we have that data going back to publicly available data, and you said, I have perfect foresight and I know that it's going to contract, which is a bottom quartile event.
You would be shocked to see that if I quartile that out, that's actually the highest probability of an advancing equity market with the highest average returns. So that to me means one of two things. One is that the equity market actually discounts this in advance, or two that the backdrop is actually more important and can overwhelm the individual univariate variable of global trade, which I think we have both situations going on currently. When you said backdrop,
what do you mean by that? That backdrop, now that's a great question. By backdrop, I mean the corporate profit recovery. So I think we are in year two of what could be a four to six year long durable profit recovery because we had a contraction on a global earning basis in and you're seeing now estimates do something that they rarely do historically, which usually as you start the year, they start out very optimistic and then over the course
of the year they come down. You're seeing something that you're seeing them do a hook up, right, So that tells you two things. One is that analysts are underestimating the durability this recovery and underestimating earnings. And to it means the valuation levels that we're seeing all those forward numbers are actually more solidified, meaning that now at sixteen times next year's earnings were at bottom quartile valuation levels.
Since when you look at historical data, how much do you factor in other countries and what's going on with um other than just the United States? Because there's been this existential question hanging over the markets, how much longer can the US diverge from the rest of the world. It seems to be in a worse position. No, I
think that that's definitely true. So I do look on a global basis, right, So I look at Europe, I look at Japan, and I look at emerging markets and what you see historically and again it can always be that this time is different. But what you see historically is that the US being strong drags other countries and regions up, meaning it lowers the probability of a crisis that comes back to the U S stock market. So you can actually see this divergence on a relative basis
for quite some time. Speak a little bit more if you can about corporate profits. So if you look at that recession that we saw in two thousand sixteen, right, what I think fascinates me is that most people think, oh, it wasn't that big of a deal. It was just really energy and materials. And then actually when you look at the data, that wasn't the case. At the then ten gigs sectors that we saw at the time, you had a median stock earning this contraction in seven out
of those ten sectors. So it was very diffuse, and actually on a diffusion basis, it was as much of a contraction as we saw in the recession of So if you just step back and say, forget the corporate tax reform that we put in place, let's just look at what an average corporate profit recovery looks like. You actually see that it lasts four years. Now, the range
is pretty wide. It goes between two and six. But then of the forty five variables I looked at, and it's not all the variables in the world, but it's the forty five one. It doesn't correlate to the FED raising interest rates. It actually correlates to the starting point in bank credit, and that's delinquencies a percentaive overall loans bad bad assets as a percentage of assets. However you'd
like to to quantify it just thirty seconds. I'm curious from your perspective, do you think that the tax reform brought forward profits and that they're likely to dwindle out and that this could be a different period of time than the past because of that. So again, there's not
much data on this. We have six instances in history, right, but what you see is exactly history saying confirming what we have seen, which is corporate profits turned the year before corporate tax reform hits because of that investor optimism or I should say that CEO optimism, and it becomes sticky. Right, So in history you don't historically see the dwindling, it actually sticks really really interesting. Thank you so much for being with us, Thanks for having me. Denise Chisholm. She
is a sector at strategist at Fidelity. Taking a look at those historical data points and putting them all together saying that perhaps analysts are underestimating just how strong it's recovery will be and how long it will last. Him really interesting. Yes, that's a bulk case for stocks. Yeah, despite the calls for a recession from a number of different firms, I want to turn our focus to self
driving cars. A lot of people thought that this would be the future of driving and the car sharing economy. But there's a major problem. They can't handle rain or sleet or snow. Joining us now, Kyle Stock, Senior correspondent for Bloomberg News. I thought your story was fascinating, Kyle, thank you so much for joining us. So, just how enable unable are these cars able to handle weather? Yeah,
it's it's tricky. They're making very slow progress on this front. Um, there's other things that people thought were going to be major stumbling blocks, like epics or other human drivers or algorithms. Um, those are all approving a little bit more easy to deal with. So, Kyle, let's get this straight. When the weather is perfect and there's no traffic, driverless automobiles might
actually work just fine. But at those moments when it's cloudy, rain, any snowy, or there's a lot of traffic or a lot of congestion, that's when there might be trouble exactly. I mean, there's a reason why they're testing all these things in Phoenix for the most Partum, it's pretty sunny
most of the time. Oh my goodness. I mean, honestly, on one hand, it's sort of shocking that this is such a big obstacle at a time when so many people are considering in a very serious way a mass adoption of self driving vehicles and a lot of money being thrown at this topic. Absolutely, I want to talk about where the opportunities are given that this problem is definitely being worked on by a lot of startups with a lot of sensor companies that are looking for ways
to address it. Can you can you talk to that please? Yeah. I mean there's there's definitely a hardware play and a software play, so you know, the engineers are tuning the software to sort of help help the sensors make better sense of the world when there's rain or fog or snow. Um. But then they're also you know, building these these sensors. Way Moo, the leading self driving company, is build its own sensors. So they say they're iterating every time they
make a new version of the product. And one of the companies I talked to is out of m i T called Waves Sense, and they have an entirely new approach. They're doing a ground penetrating radar literally looking under the road, um, to keep the car on track so they don't need to worry about whatever is happening on top of the road in terms of weather. Kyle disabused me of my idea here, But I don't think the issue has to do with driverless automobiles. It has to do with traffic.
If you're if they if you're able to drive in traffic free conditions, driving is kind of fun, isn't it. It sure is? Yeah, And well, the other interesting thing is I think we're almost holding sort of these robot vehicles to a higher standard. We expect them to be better than human drivers. And there's a lot of weather when I'm not comfortable driving. I won't speak for you, Pim, but um, we want them to get us there, and you know, yeah, right, And the idea is, you know,
when it's inclement weather, slow down. Well, hold on a second, I take a step back here, because your story said that even a dusting of snow would be a problem, and anything more than that, So I think that that would be just fine for you, Pim, to go out driving in a little bit more than a dusting of snow. But I do want to talk about the incredible investment, as Pim mentioned earlier that a lot of major car
companies are making in autonomous vehicles. If you have such fundamental problems as this at a time when people do hold robots at a higher standard, does it suggest that perhaps our hopes are a little bit further along than the actuality when it comes to these cars. Yeah, I think that's fair to say. But it's just the opportunity to market is so huge. Um, you know the ride
they're talking about a seven trillion dollar rideshare business that. Um, you know, these company Ace and the the investors behind them are dreaming big. So even if they're just even if they can operate only in a perfect sunny day, it still makes sense to really be be charging for this.
If you're a company like Ford or Uber or Weymo. Um, Kyle, I would just say all people who have been stuck in one of those automated people movers at an airport, please raise your hand at one point or other, listening to the to the music play over and over again. Yeah, this is is Do you feel that there's gonna be
a shakeout from this? I mean, you can use a lot of the technology in cars that are driven by human beings, of course, whether that's blind spot warning or you know, breaking technology, which is all great, But I mean, do you think that people are going to sort of, as Leasa said, kind of pair back a little of this science fiction. I think the timeline will be adjusted. Um. I think rather than a shakeout, though, what you're going to see this is not something we've talked about a lot,
is a rollout based on geography. So the irony here is that some of the tech centers of the world, San Francisco and Seattle specifically, might be the last places to get self driving vehicles. You're going to see them
in the Sunbelt, You're gonna see him in Florida. Um. One of the analysts I spoke with said, basically, when they these cars do show up in a place like Boston, they'll be bespoke versions, so they'll have twice as many sensors, will be totally over over engineered just to deal with the heavy weather in a way that they won't be um, you know in uh in Georgia. Right, all right, well,
we gotta leave it there, but thanks very much. Kyle Stock, our senior correspondent for Bloomberg News, talking about self driving automobiles and whether they can really handle the rain, the sleet or the snow. Will find out. Oil prices have been rather stable considering the backdrop of hurricanes and typhoons and other situations, but perhaps some traitors are not taking into account. November four, that is an important date when
sanctions will go into effect on Iran. Here to talk about that, Dr Ellen at Wald, president of Transversal Consulting and a non residency your fellow at the Atlantic Council's Global Energy Center, as well as Toby Harshaw, editor at Bloomberg Opinion. Uh. Dr Wald, let's start with you. Why
is November four such an important date? November four is d date at which these sanctions are going to go into effect, and now that it's the middle of September, we are really looking to see how the dominoes are going to fall when it comes to the sanctions. Which countries are actually going to stop importing Iranian oil and which countries are planning to continue and right now it looks like China, India, and Turkey are still importing lots
of Iranian oil. But also surprisingly we now have data that shows that Italy and Spain and possibly even Greece are still importing oil from Iran even though it's now the middle of September. Toby Harshaw, I want you to come in on this topic of Iran, but ed in what's going on with their economy. About six of the Iranian economy is centrally planned. It's basically dominated by the oil and gas industry. Yeah, and it's dominated by UH UH the Iranian Guards, which are supposedly a military force,
but they become the most dominant force in the economy. UM. There's no overestimating the effect that oil has on their economy. The question is with their exports, how much of that money they can bring back UH. Last time, with the sanctions UH, the money was held in escrow by countries like India and China, and Iran could only use the money to to buy products in those countries and have them sent back. And they were actually buying products in
China that they didn't even really need. So as Allen will tell us that's one of the big questions about how these sanctions are reinstated this time around. So Ellen just to talk a little bit about plugging the holes and sort of creating a more airtight system of sanctions. I'm wondering if the US administration can do that successfully, what would the effect be on the oil market, on the price of crude in a way that perhaps people
aren't factoring in right now. Well, if the US can really enforce these sanctions to the maximum to plug these holes. There have been holes in terms of Iran's exporting of content thates, which is a very light type of crude oil that some people see as or or classify as crude oil and other people don't technically classify it as
crude oil. But if they can ug all of these holes, if they can really get the Iranian exports down, I would say, buy one point five million barrels wave they can eliminate that from the market, then we could really be in for some serious tightening in the oil market, mostly because at the same time we're also seeing continued
drops from Venezuela. US production isn't increasing at quite the rate that we thought it was going to be and so the question is really can Russia and Saudi Arabia, the two countries that have the most spare capacity, can they really increase to combat these drops. And then the other question is if they can, will they And that's all going to come down to that December three Opeque meeting. So in other words, if they don't, that means the
price of crude could rise substantially. It could rise substantially, But there's there's also the speculation effect. So even if we we do have enough crude oil to go around, there's always this effect of people thinking that we don't necessarily have an enough and that can push the prices up. There's also the matter of the right type of crude oil.
Do we have enough heavy crude coming in? That's really kind of a hot commodity now because there's so much there's kind of an overflow of light crude coming out from the US and and from from fracking, So we
need to have the right type of crude. So crude quality matters, as people like to say, But there's also the issue of um demand and what one of the interesting things on the horizon is that OPEC has recently revised its demand figures, So they think that demand is actually going to um to be less than they thought in en and that could actually kind of arrest some
of the higher crew prices. Toby, maybe just to add your thoughts about what's happening to the Iranian economy as a result of these UH sanctions and additional sanctions, I just want to note it's about eight two million people, that's the population of Iran and unemployment. If you look at unemployment levels, maybe fifteen to twenty nine, about a quarter of the potential workforce is out of work. Yeah, and it always depends who's who's compiling those statistics. Uh.
If anything, that's probably higher. The inflation statistic put out by the Iranian government is an absolute joke. Um, it's vastly higher than whatever they're going to say. So the combination of high inflation, high unemployment, and now additional sanctions, will it have the intended effect on the Iranian government? UM? I don't see it as having much of an effect at all. Um. I don't think they have much choice except to, uh, you know, to bear it, to buckle up,
and and it's going to happen. Um. The it's a political gamble on the part of the government. Um, people are unhappy about it, but then um, they can always use further hardship as another reason that America is still the great Satan um and and you know, appeal to patriotism and things like that, Toby. Are there enough people in the administration with knowledge of the Iran situation who could bridge some of these loopholes and sort of plug
them up and make it more tight. Yeah. Absolutely. This is professional staff for the most part that deals with it. It's the Treasury Department that's in charge. There's a lot of Treasury lifers, um, long term employees, were very very very savvy about this, you know, And this is one of those instances in which you know, to my mind anyway, the Trump administration is is pretty set on doing the
right thing, ellen Wald. Are there any examples that you can point to that show us that sanctions actually achieve their goal? Well, that's that's the big question here. And you know, some people will You can always find people who will argue that they do, and you can also
find people who will argue that they won't. And many people say that the sanctions did achieve their goal when they led to the negotiations for the initial j c p O. I at thing though with regard to the Iranian economy, and that's the the Iranian economy was not
doing well even before these sanctions were instituted. They've they've really kind of shot themselves in the foot in a sense in Iran um politically and economically, particularly with respect to the oil industry, because they have very very deep and institutionalized um distrust of foreign oil companies that could
have come in and really helped get their oil industry going. Yes, there was a lot of fear on the part of foreign oil companies, but there were some who were really were willing to come into tal was one, but the Iranian UH kind of ideology makes it very very difficult for that to happen. So they were going down a bad path even before these sanctions. I want to thank
you both very much for joining us. Dr Ellen Walled is the president of Transversal Consulting, a nonresident Senior Fellow at the Atlantic Council's Global Energy Center, and our thanks also to Toby hart Shaw, editor for Bloomberg Opinion. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa
Abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio