Hard to Price in Tarrifs: Michael Zezas

This according to President Trump's Kevin Hassett, he is the White House Council of Economic Advisor's chairman. Meanwhile, the price of soybeans falling to the lowest levels since at one point since now a lot of the tariffs that China is planning to impose on US goods will hit the farm belt. Joining me now to discuss this is Tom Halverson. He's chief executive of co Bank, which extends loans and other banking services to farms and other other wholesale and

livestock producers. Thank you so much for joining me today, Tom, Um. I want to start with the price of soybeans falling and some of the other kind of market responses to China's tariffs. It seems like people are expecting the farm belt to get hit pretty hard. What are you hearing

directly from the farmers who you work with, Yes, good morning, Lisa. Well, what we're hearing both from the level of production agriculture as well as their their cooperatives and other agribusiness who aggregate, process and sell their their products is meaningful amount of concern because the market is already starting to respond to this. As you indicate, the price of soybeans is falling as

our other commodity products. And given that we export almost fifty all of the soybeans produced in the United States, we are particularly susceptible to changes in foreign demand for our products. Given that we export approximately of all US agricultural products, particularly susceptible. Can you talk about what you expect the financial consequences to be in real terms? Well,

I would. I would contextualize that by saying, since the United States Department of Agricultures assessment of net farm income in the United States, it's off fifty since when it was at it's high. So while while the rest of the macro economy is generally doing quite favorably, the real economy, and generally agricultural economy in particular, is doing much less well right now as a result of commodity prices already having fallen significantly off the highs that they had three

or four years ago. And so what we're anticipating is is the market is going to respond on hereby further falls potentially in in prices UH, and a lot of the product that that that is already an inventory or has now been planted for this year and this year's season UH is going to create new challenges from a pricing perspective as we have to find alternative markets potentially

for these products. If these terroffts and these changes in market behavior and the underlying UH disagreements that we have with China and other important agricultural export market governments can't be resolved amicably and swiftly, do you think that there will be more defaults just from the financial perspective as

the price falls of a lot of these commodities. Well, I think that the pressure that's been building in in agricultural production in the United States over the last two, three or four years for the reasons I described, is

likely to intensify. As I say, if these if these trade uh disagreements are not amicably and swiftly resolved, and and one consequence of that would of course be potentially, you know, more producers and other institutions involved in agricultural production and processing and the like falling into financial stress. I'm wondering whether people within the farming community view this as the US needing to capitulate or China needing to stop. I mean, are they viewing this in political terms or

do they not really care? They just want the uncertainty to sort of end and allow things to get back to the way they used to be. Well, I think I think if you ask you know, ten or a hundred different people, you'll get ten or a hundred different opinions. All of them, I would suggest, would be very well informed.

Because agricultural producers in the United States, being so significantly dependent on foreign export markets, are actually quite knowledgeable and sophisticated and understanding what's going on in places like China, Mexico, and Canada where a lot of their product is sold.

And while they may have a thoughtful view about how best to resolve these issues, I think for the for the majority of people, what they want is for these issues to be resolved and for some certainty to come back into the marketplace, because they all know, as we do, that that this is not just an issue today. Over the next twenty years or twenty five years, we think there will be more than two billion more people on the earth, and of them will be in India, China,

and Africa. And that is a substantial upside trade export opportunity for the United States, which has the world's most successful and efficient agricultural production complex uh and and for us to be able to capitalize on that opportunity over the next five, ten, fifteen, twenty years, we need certainty, and that certainty needs to be built on a foundation of access on a free, fair and equitable basis to foreign markets where people are going to need to buy

our surpluses and they're gonna want to buy our surpluses because they're such high quality. Tom, just real quick here, we just have a better minute left. Which state do you think we'll get hit hardest by the tariffs? Uh? You know, it depends on how all of this plays out. And I can't tell you down to the down to the dime, but if you look at you know, you

could answer that question almost specifically by commodity groups. So, for example, almost of the cotton produced the United States is is exported, right uh, Almost fifty of the soybeans are exported. A substantial portion of that goes to goes to China. While a lot of our soybeans come from the Midwest, including places like you know, Iowa, Illinois and other states. You know, it's the bread basket commodity producing states particularly that produce some of the highest volume products

that may that may experience the most difficulties. Tom Haliverson, thank you so much for joining me today. Tom Halverson is President, chief executive officer of KO Bank, which extends loans and other banking services to farms and other agricultural producers across the US. It is hard to parse out the noise from what you really need to pay attention to. Right now, our next guest is going to talk about that process from an investment perspective. Aaron Kennon joins us now.

He's co founder and chief executive officer of Clear Harbor Asset Management, which is based in New York. Aaron, thank you so much for being with me. And I just want to start with the idea that the top headlines today on this otherwise slow summer Monday has to do with children being taken from their families and immigrant Asian policy and who's to blame, and then you have a potential trade war with China and the US. This in the past few months has been noise for the markets

that most people have tried to block out. What are you paying attention to right now? Well, thanks for having me, Lisa, And certainly we don't want to discount the importance of humanitarian concerns at the border, but we are keeping our eyes on the fundamentals of what's happening in the economy

and trying to understand how that will impact various asset classes. So, for example, in the United States, we're we're still looking at a robust economic picture, both from the perspective of fundamental data like retail sales and consumption and sentiment, as well as frankly, that the underlying earnings, which as we know in Q one were really strong and we expect will be actually quite strong in Q two, based on a bunch of different data points that that we're looking at.

I think that the story though on like two thousand and seventeen, Lisa, where we saw this sort of synchronized global growth story is that the Eurozone and even China to a great extent, they're hitting some speed bombs, and I think it's um It's it's not the tale of two stories because growth is still positive, but certainly UH

there's much more to pass through at the moment. President Trump's UH top economic advisor today said that this is the time to start a trade skirmish with China because the US economy is strong enough to withstand any potential setback, even short term, given the fact that it's full speed

ahead right now. Do you agree? I don't. I think the trade skirmishes are things that tend to happen in public, and I think very important policy matters, even with countries that are not our allies, but particularly countries that are and I'm not referring now to China, but countries like

Canada and countries within the euro Zone. You deal with a lot of disagreements in private, because when you come to a conclusion, the other side is able to save face and move forward, and that has huge political benefits.

So as much as I agree with some of the concerns that the current administration has with China and maybe even with some of our allies and reviewing things like NAFTA, I think the approach is somewhat flawed and that it's not allowing for them to achieve their own set objectives. So are you changing any of your trading strategies or your portfolios in response to some of these trade concerns

or is that sort of all hypothetical at this point? Well, so, the real question on the trade war side is are we actually going to enter a trade war or is someone going to blank will be the US in the case of the U S and China? What could it be China. We don't know the outcome of that for sure, as it pertains to how we're thinking about clients and

their portfolios. I mean, certainly one trend that's worth looking at that isn't specific to to trade wars, but its effect to a trend over the last six months is inflation versus growth. Inflation was a real concern as we sort of moved through the first quarter of this year. It seems to have subsided. The data suggests that that's warranted for it to be subsided um and now what we're seeing is a concern around growth, and so for

the fixed income asset class. That's actually a bit of a positive thing, right, So if inflation were to go up, yields would probably trend higher, whereas if if growth were to slow down, yields were to trend lower. So that's sort of a roundabout wave me saying I don't mind nudging sort of fixed income average maturity or average duration towards a benchmark here, whereas the beginning of the year I had a tendency to be a little shorter duration.

So we are making adjustments based on the economic fundamentals that are that are occurring before us, UM, but we were certainly not making predictions as to the likelihood of an all out trade war. So you've been lengthening the duration of your fixed income portfolio, Is that correct? Yeah? Yeah, we we've We've been willing to to to move it modestly outward as tenure treasuries have risen call it, fifty basis points uh this year, and as the paradigm has

shifted from inflation to growth concerns. UM, we think that it's a prudent thing for for us to do to not make a huge bet by being a short duration here at the moment as it pertains to equities. You know what's interesting is earnings growth has been very robust li so, but multiples forward multiples have come down, so the markets cheaper even as corporate earnings have proven uh stronger.

So again we're we're not super bullish per se because we've had a hugeage point running the United States, but but we're still constructive. And I would also say that when you look at the duration of this expansion since the bottom of the Great Recession, or since the last expansion every peak in the fall of two thousand and seven, the cumulative GDP that has occurred since that period is only about fifteen since so it's a very shallow expansion

that we've had. Now some could view that as a negative. We view it as a positive, meaning that inventories haven't been able to overshoot and that the expansion may have many more months, many more quarters of legs here, unlike some of the other expansionary periods of the last hundred years.

How concerned are you about the fact that non financial companies are increasingly levering up right now, especially given the fact that A. T and T and Comcast are poised to buy Time Warner and possibly the Fox assets and would end up with three hundred and fifty billion dollars of bonds and loans on their books. That's according to a study that was highlighted in the Wall Street Journal today. Does that worry you, I think on on in isolation, it doesn't worry us, or I should say in isolation,

it could worry us. But when when when we look at the reality of where we are in the interst rate complex, where monetary authorities are around the world, it's just still a very easy money environment um with a lack of inflation, with the ECB still at the zero bound, and very devilish last week with Corona in Japan, very devish. And yes, the United States is a sort of ahead of the curve on on normalizing policy. We think that if global growth truly does decelerate meaningfully, they're going to

hit the pause button. That's not our base case right now. We still think that one or two rate hikes this year, perhaps even two is possible. But M and A activity has been robust. The cost of money relative to historicals is still relatively inexpensive, so we're not particularly concerned about that at the moment. Thank you so much for being with me. Aaron Kennon is co founder and chief executive officer of Clear Harbor Asset Management, based in New York.

Really interesting to hear this sort of on one hand and on the other we are getting to, uh, sort of the final innings, people say, although they've been saying that for years of a credit cycle. Yet earnings do look solid and expectations look solid going forward. We've entered an escalatory cycle of tit for tat trade dispute. UH. This is the conclusion to analysts led by Michael jesus over at Morgan Stanley, chief US public Policy and municipal

strategist UH and Michael joins us. Now, Michael, thank you so much for being with me. So just let's start there. Why do you think that we're entering this cycle? Yeah, well, so basically, I think the pattern of behavior now has made it pretty clear that this isn't just a negotiation. UM, that the US and its allies have some irustrating partners to demonstrates some fundamentally different views of the payoffs of trade.

So what do I mean by that? Is at um and when the US acts and the U responds, the you or and or China responds, you know, the US is acting in a way where it thinks it's leveling the playing field. Trading partners are responding in the way they think is leveling the playing field, and by definition that means that they view the playing field differently, and

you continue to escalate. That's problem one, and then problem too is um both sides kind of disagree on how to kind of break the circuit right, and so negotiations would be one obvious way, and it would seem, for example, that the negotiations between the US and China, we're going to or or thwart the initiation of the tariffs that

were announced on Friday. But that didn't necessarily happen. And I think we got some insight into why that didn't happen when wilb Ross told our European allies that he didn't think that we couldn't negotiate um even after we've instituted tariffs there, so that the institution of tariff shouldn't

they get um the possibility of negotiations. So in the European Allies, Beer clear view it differently, so you don't have an obvious circuit breaker, and you've got a dynamic which is escalatory and so therefore we think markets are going now going to have to think a couple of steps ahead. It's not just about pricing what the Section three or one tariffs are going to do the g d P. You have to think about what the retaliation and then the re retaliation means and when it accumulates together.

Our concern is that we think we are kind of very close to unit offsetting all of the economic boost that was created this year by ciscal policy, both the tax cuts and the spending increases that were implemented. All right, so let's go down the rabbit hole. Okay, what comes next after the largely farm focused tariffs that China has

already announced. So those tariffs are if if the US kind of follows what it's already said it would do there in the middle of investigating and UM its news is to be believed close to announcing, so perhaps sometime in the next few weeks and intention to teariff another one hundred billion dollars worth of UM Chinese imports, and if China holds true to what it's stated it would do, it would respond in kind, which would require another round

of tariffs on inside. Now, one of the interesting things here is that UM China only imports about a hundred and thirty billion dollars worth of good so UM how it responds is a little bit murky, which is to say, perhaps it's gonna have to just further increase its tariffs to equate the economic damage, or well have to take some other retaliatory actions. But that's kind of the next

level we think you have to count for there. And then in terms of UM Europe, the response on the steel aluminum tariffs, the US is flag that UM tariffing foreign imports of autos is probably the next step there that we have to account for. So those are the two things we're watching out for now. Hundred billion dollars on tariffs, hundred billion tariffs dre billion dollars with the Chinese imports, and then foreign auto tariffs. Do you think that the market is taking this seriously, this risk of

sort of a t for tat escalation. Yeah, I do. I think it's very hard to price in exactly how

far this cycle goes before cooler heads prevail. So I think what you've seen in you know, the equity markets, for example, is I think it kind of healthy respect for the unknown of this dynamic, it kind of sinks with the view of our US equity strategy team, which is that we're gonna be kind of range bound for the balance of the year fifty price target and the SMP with a range between twenty and twenty nine because you know, ultimately we priced in at the end of

last year all the sort of benefits of the U. S. Public policy agenda, i e. The fiscal impulse that we got and you know, pe multiples peaked basically the day that Senate the Senate passed UH tax reform, and now we're in the middle of frightening in kind of the uh, you know, the the less desirable parts of the U S. Public policy agenda, and that means that we uh, you know, we of a road the benefits that were priced in

at the end of the last year. So having kind of a range bound, choppy and ultimately you know, kind of a flattish market for the year makes sense to us. We think these things are perhaps less than the price if you look at the credit markets, which are still hovering around all time tights, and I think the rates markets over the course that you're going to show this more through even flatter curves and ultimately a lower tenure yield by the end of the year. Michael Jesus, thank

you so much for being with me. Your report was fascinating and really illuminating, a really interesting way to look at the fact that there isn't really a circuit breaker, in your words, to change this cycle of the US threatening tariffs, imposing them, and then the European Union in China retaliating in kind. Michael Jesus is chief US Public Policy and municipal strategist for Morgan Stanley in New York.

The new era of advertising is really interesting because it's hard to know how companies should really be measuring the efficacy of their advertisements on platforms such as Twitter and Instagram and Facebook. Well. Jamie Gilpin focuses on this in part as her role as chief marketing officer at Sprout Social.

She joins us, Now, Jamie, uh, your company just put out a fascinating study taking a look at just how companies are using social media, the fact that Facebook is still the key the key social media platform that they use, and the efficacy of some of these ads. Can we just start with Facebook? Why does Facebook have such sticking power as the influencer sure, and thanks for having me

really excited to talk about this. UM. There's so much data in this report, UM, and you're right, we really did focus on UM or actually the day to have really brought to light UM the focus on our o I and how marketers UM, all of us are thinking differently about the social channels and and ultimately the value they provide UM to our overall business strategy, not just marketing. UM. And so you asked about Facebook, UM. You know, it's interesting.

We talked about this a lot internally. You know, Facebook was in a lot of ways sort of the first social UM, the first social channel or platform or network, and so it's still because of that, you know, the Kleenex if you will, UM, it's still has you know, the the lion share of both usage from a consumer perspective, UM. You've seen the report, it's it's upward of consumers use Facebook. UM. But also on the marketer side, so marketers using UM

Facebook as one of their their major platforms. But what I asked those thought was really interesting, UM, because the data also shows the usage and so while it's still one of the most popular networks from both a consumer

and from a marketer's point, of view. UM. Consumers are starting to tell us that we're they're using Facebook, lass and they're starting to use Instagram more right, they're starting to use UM, YouTube, some of these other platforms more UM than than perhaps the Facebook and some of the early entrance. So just let's take a step back for a second, and when a company decides how to engage on social media with potential customers, how do they determine

whether their messages getting across effectively? Sure, and a lot of this comes back to UM sort of the traditional use cases of UM of listening or analytics UM. You know, they've been around for a while. Actually, most organizations have have been invested or investing in in these types of UM sort of tools to help them here just actually get insight into your exact question, UM, are we the messages that we're putting out there, are they resonating with

our target audience? Because we we also hear a lot of from brands UM, you know, just meeting with several over the last few weeks, UM around. You know, the audience on my social channels are for sure the kid maybe of the parents who are making the decisions UM to to buy certain products. UM. But how do we really understand you know, the power or the influence of those of that audience that we're reaching out to UM and then more importantly, how do we ensure that we're

actually getting the audience that we need? And that really comes back to again, a lot of these listening in analytics tools UM that that that many brands are invested. Hold on a second. When you say listening in analytics, it's it's things like people clicking on an AD or people you know, just going and shopping on that on a website after visiting Facebook, which they could probably get some insight into based on the cookies. Is that the kind of okay exactly, I started to take a step back.

Sometimes I'm so far into this UM that that I realized that that others don't have the sort of the context. So so yeah, I think of that exactly like listening at a broad scale. But there are tools that can aggregate all of those different touchpoints that you just went through UM to to give you insight into what's happening at a broader So you're saying that you are starting to notice that people are spending a little bit less time on Facebook and going to YouTube or Twitter, Instagram instead.

Our companies are marketers responding to that by advertising less or putting less of a focus on Facebook than perhaps they have uh in the recent past. No, and the main reason is just because consumers are saying they're using it less. Um. They're still using it quite a bit, I mean parts of twelve hours a week, right, but consumers are spending on Facebook. So it is still a very powerful networking platform for both consumers and and brands

and quite frankly for that connection between the two. Um. But you are starting to see, and this is what the data UM shows in the study, UM, that that markers are starting to take a more serious look UM at Instagram and Twitter in particular. UM. Still trying to figure out Pinterest, UM, still trying to figure out YouTube. UM. You know some of the definitely Snapchat, Um not quite uh you know, to the level of of some of

the other new entrants. But but again, you know, we're dipping our toes and we're trying to figure out how we use these networks to make that ultimate connection that we're trying to drive. Just real quick here, I'd love to get your take on whether social media budgets in general have been increasing by marketers and just the scope of of just how much more uh, they're putting towards

social media. Sure, yeah, I found this actually really interesting. Um. You know, we talked you know at the very beginning of this conversation around r o I return on investment. Yeah, exactly, return on investment and really turn honestly return on effort UM, because this is more than just UM, it's more than just budgets, is also people as well, and so um, while marketers are are having a challenge really um applying a direct return on investment from their social efforts, they

are still absolutely making an investment here. But what's interesting is they're making it with their budget. So of marketers are saying they're going to allocate more budget to social marketing and that um that comes by ads, that comes by by tools. Right, there's lots that goes into that. But what's interesting on that is only said that they're

going to hire more staff. So while you know, and that's where that sort of that lever was, we think about marketers, the staff is a longer term investment and so UM, while I see, while I know and I have confident in this platform and networks as a as a huge opportunity to communicate and more importantly, connect with my customer and consumer base. UM. I'm willing to put more budget there, but I'm still trying to figure out the staff side. UM, and so I think there's a

really interesting nuance there in the data. Jamie Calvin, thank you so much for joining me today. Jamie Gilpin is chief marketing officer for Sprout Social. 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 Pam Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio