Overdependence On Fed Cuts Stems From Uncertainty: Slok

Joining us now is an economist who puts out tremendous research every day that shows just what people are focused on. His latest note shows that macro investing is just getting that much more challenging amid the changing political backdrop that we end up seeing every day. Let's bring in Torsten Slock, chief economist for Deutsche Bank. Thank you so much for being with us. Let's just talk about how challenging it is right now for macro investors and identifying a theme

that you can sink your teeth into and depend on. Yeah, no, highly, it's what art bank that I work. But it's true that the environment at the moment has become much more difficult because central banks are basically not moving interest rates.

So the thing we're pointing out here is that when interest rates basically don't go down or don't go up, then you have an environment where there's just no longer lasting trends in markets, and that just makes things difficult both for rates investors and also for excellent effects investors.

So towards one of the issues I think that investors are trying to get a sense of now is you know, as we think about all the geopolitical issues, trade tensions with China and Mexico, do you believe the market is properly discounting some of these global trade tensions right now? Yeah, this is a really important question pulled because what we're all trying to do in the investing community is to try to quantify these risks. The first question is what

has happened up to this point? How do we quantify that? Because we already know what has happened up to this point, but even figuring out what that means has been quite difficult.

If you look at confidence in the CEO serve is I look at confidence in the CFO surveys, then you do see that there is some deterioration once the trade wall began to escalate in two thousand and eighteen, but at the same time the employment numbers have remained ready to be strong, at least up until the latest months here.

So it still is a really difficult struggle. We just don't have anything in the toolbox that really will can quantify this trade risk, which then leads investors to say, well, it's a risk I can't quantify, so I should just ignore it. Or is it a risk I can't quantify

so I really have to take it seriously. And this is where the debate is with the many investors that we have at the moment, name me, is this something that we should just brush aside and say, oh, the economy is still fine, or is this something that actually could end up being much more serious and have much more downside risk to the economy than what we are

expecting at the moment. So, tourist, and from your perspective, do you think that as a result, people have become overly focused on the Federal Reserve a sort of the key body that can give some direction here? Yeah, because that if when when tetra banks mean the G seven central pranks essentially not moving interest rates much and they're moving much less than they did just ten twenty years ago.

Of course, then people start looking around and saying, Okay, changing policy is no longer a changing interest rates, but it's now a change in communication about what are we doing And this is not only for the US, but what are we doing globally on unconventional monetary policy, everything from forward guidance to a queue, which of course is less of an issue now, but now where they're talking about you control other ways of stimulating the economy next

time we have a slowdown, and the interpretation of these non conventional monetary policy tools and most importantly all these things that are not interest rates just makes things much more difficult. So to your good question, Lisa, it really is much more into the nitty gridy of what exactly is intended with this fait communication and should we interpret that as more easy is coming, or should we interpreted as hey, we're just looking at this and we will

be doing something. We don't quite know exactly what it is, but we will be doing something if there is a sharper slowdown, And for the FED, of course it's lowering interest rates initially, but if we do have a global slowdown, then we will all be debating again, should we then do que forward guidance, should we raise the inflation target?

Should it be you control? That's why it it becomes a much more messy debate about what reactions are coming from the central bank, which makes it so difficult from a macro perspective to identify with what trends is that going to create, both in rates and also in effects. So towardsten I think what we're hearing more and more, um you know, is the potential or perhaps even likelihood by mid recession in the US. Is that something you think is you ascribed to? So we still think that's unlikely.

A We think that the Fed will begin to think about cutting rates here in July and September and December, and once those cuts come through, we do think also that that ultimately will be a preemptive strikes, if you will, that will be enough to basically soften the slowdown that we're seeing. But at the end of the day, the sharpness of the slowdown that we are experiencing in the data is absolutely critical. And this again is very very closely related to what is your outboo for when the

trade wall will end? If you think the trade will will escalate from here, well, then the economy might slow a bit more. If you think the trade was really going to have a full blow out trade wall where you will see significant increases in sterios and significant disruptions and supply chains, it could potentially be a lot worse. But it's really difficult where we stand today to come with the forecast because these things could go away as

quickly as they came. In other words, this is something that is essentially a political situation that came relatively suddenly, and now if we do have a resolution deal, for example, at the D twenty meeting, then this risk could go

away recively quickly. Again, so from a forecasting perspective, when you think about the outdoor for consumption capics and GDP, it just continues to be really difficult what your assumptions are about what will be the end game to the trade wall, and is there an endgame or is discming to continue for a very long period. I guess the Tourson there's a question of how much the U S economy would be slowing down anyway even if it weren't

for the trade tensions. What are the recession risks putting aside trade tensions if you can just based on in organic slowdown given how late we are in the cycle. Yeah, this is really important. I mean, as you know also well, the two key components of GDP are consumption and capics or investment. And if you are a consumption one problem is that interest rates on credit cards have started to move higher, interest rates on auto loans have started to

move higher. You've also seen the linquency rates on consumer loans have started to move slowly higher, and most important in this context, in the linquagy rates on auto loans have also started to move higher. So the first answer to your question is that there there's some something brewing erosion, if you will, and the liquidity rate for consumers that's

beginning to slowly move higher. And when interest rates also move higher on credit cards, auto loans and other consumer loans, you do begin to a bit about what are the consequences organically outside the trade war to the consumer outlook and for topics. Last year, of course, we got the huge tax cut from the administration. This was very helpful in boosting topics, and now those tax cuts are beginning

to slowly run out of steam. So the positive effects of that organically are also becoming smaller and smaller, so that's also resulted in some slowdown in the CAPIC data.

So the long answer to your question is that even outside the trade war, we are indeed, as you're pointing out least that we're indeed seeing already some signs of risks in particular topics slowing down, but also the additional risk here to consumption because of the modest increase in the liquacy rates and the modest increase that we're seeing

in course of borrowing. So we are watching where we are in the cycle and what the implications are for the organic outlook above and beyond what's going on with the trade war. Torsten Slock, thank you so much for joining us in your comments. Torstens the chief economist for Deutsche Bank, joining us on the phone. He is based

in New York. Well. Trade tensions between the US and Mexico appear to have abated, at least for the time being, but President Trump told reporters that he reached a secret immigration pack with Mexico that will take effect when he wants it to, despite the country's insistence that there are no secret components of an immigration deal struck last week. So see if you can get some clarification here, we

welcome Duncan. Would Duncan is a director of the Mexico Institute at the Wilson Center that is based in Washington. D C. Duncan, thanks so much for joining us. So can you give us any enlightenment on what this secret immigration deal might be? The best guest that we have is that Mexico has agreed that if after either forty five or ninety days, depending on which deadline they choose, I want to say they it's probably going to be

the United States. UM if if enough, if enough progress hasn't been made on reducing the flow of Central Americans through Mexico to the US southwest border, that Mexico would consider becoming a safe third country. In other words, that Mexico would be a place in which refugees or asylum seekers rather could could or should seek asylum after leaving

their home country. So, in other words, Guatemalan's, Honduran Salvadorians who are coming up through Mexico would have to seek refugee status asylum in Mexico rather than in the United States. And that's something that Mexico has resisted for a long long time. UM it greatly reduces the burden on the United States because if anybody does make it up to the United States border, then they would be immediately returned to Mexico and they would have to apply for asylum there.

So that's really what I think that we're we're probably looking at um. It's gonna cause a huge to go stink in Mexico if that's what the deal is, because a lot of people are going to say, once again, Mexico is essentially rolling over for the United States. Already, there are so many op eds being written in Mexico and commentaries on on television that Mexico has essentially become

the wall for the United States. Rather than following through on Donald Trump's promised to make Mexico pay for the wall, Mexico is the wall for the United States, and that it will essentially stop migrants from coming up through the country. So I think that this is a it's politically explosive for the President Lopezo Brodord, but it may be the only way that they see to avoid the application or

in position of tariffs at this point in time. So does that mean that the implement implementation of tariffs is more likely than people are realizing at this point. My reading of what the President has said. President Trump has said is that they have been suspended. Yes, he said indefinitely, and people tend to interpret indefinitely is being long term.

I don't see it that way at all. I see it at You know, if Mexico does not succeed in stopping the flow of Central Americans, then the five percent tariff can be pulled out of the toolbox again and slapped on Mexico, And of course that creates huge uncertainty for Mexico UM at a time when the Mexican economy is not doing well, at a time when President Lopez overdoors economic plans are not going well, and investor confidences

is disappearing in Mexico. So this is absolutely um. You know, it's terrible timing for Mexico UM and therefore makes President Trump's threat that much more effective. So, duncan, do you think that Mexico has the capabilities to meaningfully stem illegal immigration? I don't. I have to say that. You know, Mexico has been working exceptionally hard over the last five years, essentially since two thousand and fourteen, to to detain and

deport hundreds of thousands of Central Americans. In fact, if you look at the last five years as a whole, Central Mexico has parted more Central Americans than the United States has um And you know, Mexico has been doing an incredible job. The problem is that the crisis is so huge now that Mexican authorities are overwhelmed. US authorities and agencies are overwhelmed, and it would require a massive injection of resources financial, human, technical, and technological to actually

begin to stem the flow. The gambit here is that if you had Mexico adopting safe third country status, then the migrants would choose not to come. And I think that's a pretty big gamble if you ask me, I don't think that. I think that people are leaving because conditions are terrible. They're desperate to get to the United States. Let's say they do land in in Mexico and you know they're they're forced to seek asylum there. That doesn't mean they'll stop moving. Once they have asylum in Mexico,

they can still move up to the United States. We're still going to see massive levels of illegal migration across the Southwest border, so duncan One key question here is President and Trump is sort of using his executive power to threaten these tariffs and possibly impose them on Mexico. UH in an unusual way. It's the first time, at least in modern history, that a president has used them this way. And I'm wondering whether they'll be challenges to that.

In other words, is this something that could face opposition internally or is it totally a go. Sorry, when you mean internally, do you mean internally in the United States? In the United States. No. I think that we've already seen opposition in the United States. We've seen business associations, UM, We've seen members of Congress stating that this is a

dangerous path to go down. But what's what I think is is telling is that we haven't seen any really well coordinated opposition, nobody standing up in Congress and saying that they will seek legal means of restraining the president from from applying these kind of tariffs UM. And I think part of it is that you know, the the E p a UM, the powers under which he would he would apply these tariffs. I think it's it's quite

I mean, it's it hasn't really been properly explored. UM. And so we'd we'd all be hanging on tenter hooks waiting to see what a court would rule on this. UM and I think that you know, most people have accepted that if it was just a five percent tariff, then we could probably live with that. There would be a depreciation of the Mexican paco to compensate for some of that five percent UM, and you know, the trade

would continue. But once you get up beyond a ten percent escalating tariff, and let's say you did get to which was the original threat that by October it would be a twenty percent tariff, then that's disastrous. That's disastrous for integrated UM manufacturing platform in North America, it's disastrous for supply chains, and it would cause a real crisis in the Mexican economy. Don't get just real quickly twenty seconds. What do the Mexican people feel right now? Are they

really coming up in arms against the tariff threat? So UM, we've seen maximum public opinion of the United States fall to historic lows. UM. We have seen overall support for President Lopez Obrador UM and the fact that his his overall attitude in negotiating with the United States essentially trying to be as calm and moderate as possible. Um and Mexicans do not believe that their country should become a war for the United States. But at the same time,

their astues towards migrants is changing. They're becoming less welcoming, less friendly towards Central American migrants than they ever have before. So as we've seen in many countries around the world that are overwhelmed with migration crises, unfortunately Mexico is is going down the same path and that I think it will become a less friendly country for migrants. Duncan would

thank you so much for being with us. Duncan Wood, director of the Mexico Institute at the Wilson Center, joining us from Washington, d C. A relatively quiet morning of trading in the US equity indusseries. Not a big move in either of the indusseries. First, let's go see where there's some movement, maybe in a small cap world with bloomer stocks. Editor Dave Wilson date, Well, you're definitely seeing smaller companies down more than larger ones, that's for sure.

The Russell two thousand index down a half a percent, in the SMP five hundreds only lowered by two tenths of a percent. The russell steepest drop belongs to Sarah's Therapeutics, whose ticker is mc RB. The drug developers fall in twenty four percent after raising sixty million dollars in a share sale. Ashford Hospitality Trust ticker a HT has lost fifteen percent. The luxury hotel owner reduced its quarterly dividend

by half to six cents to share. Ashford's cut was the first two thousand and eight when the payout was eliminated entirely. And Meat Group ticker m e ET has slipped almost nine percent. The social meeting app company was the subject of a critical report by a short selling firm called The Friendly Bear. Now the Russell's biggest game belongs to our Quel ticker a r q L. The developer of cancer treatments, is up thirty five and a

half percent. Early stage studied data on a proposed blood cancer drug was favorable, and Blue Green Vacations ticker b x G has risen almost twenty nine percent the time share owners settled the dispute with retailer Bass Pro Shops. The deal will let Blue Green resume marketing at Bass stores and expand into the country. The company's sister chain, Cabella's. And we should know bb X capital ticker bb X has a steak in blue Green and that stock is

up six and you see the headline, just Matt Chili. Yeah, opening at thirty six dollars after initial public offering at twenty two dollars a share. So this is one lucrative, uh, pet food operation, you're not kidding. And pet Smart is the seller of most of those shares that to We're we're distributed, you might say, to investors in the initial

public offerings. So they're they're definitely a winner on this deal. Yeah, losers are the people who are the debt investors because they could have evidently raised more money to pay back said dead investors. We'll get into that another time. Dave Wilson, Bluebrick Sock seditor, thank you so much for that. It is getting to be close to lunchtime on Wall Street about I don't know, fifty five minutes if you have

at twelve o'clock exact kind of clock. And what I feel like is a big, juicy plant based protein product in a bun joining us now to talk about that. Dina Shanker, she's a consumer reporter for Bloomberg News. Um, I'm talking about the Impossible Burger because evidently it's incredibly popular as it gets rolled out to what it says is nine thousand stores, perhaps a little too popular. Can

you give us a sense of what's going on here? Yes, definitely, So Impossible is having a lot of trouble supplying its customers specifically, uh even White Castle and Red Robin, these are major fast food chains, are not able to get their hands on the product at the same time impossible as rolling out into more and more burger Kings. So whether there's a cause and effect there, that's that's a good question. So I mean, as you mentioned, I mean

these are not just organic stores, organic outlets. They're bringing these synthetic burgers to Burger King, right, that's right. The plant based burger mania is widespread. It's gone way beyond the vegans and the vegetarians and is fully mainstream. So these companies, these big restaurant companies, are really trying to get their hands on these products, and they do bring new customers into the stores. So Impossible Foods is leaving

some of these restaurants in a tough spot. Well, so I guess I'm wondering are we are we seeing a sort of a Tesla moment here with respect to Beyond Meat. I'm talking about Beyond Me because their I p O has been just absolutely unbelievable, astronomical types of gains and impossible foods also attracting a lot of attention. But is it an issue where they can't kind of fulfill in the promise of the supplies. So that's the big question

right now for what it's worth. Beyond Meat said that they learned a lot from their shortages in eighteen and that they don't see that really happening again. But at the same time, Free Birds as a burrito chain in Texas, and they reported that they don't have their Beyond Meat products. So I think we're going to have to wait and see how long these shortages last and how widespread they are. But it does seem like keeping up with demand is one of the biggest, if not the biggest challenges that

these companies have. So that raises the question for me barriers to entry um, Why can't any existing food company come out with their own synthetic kind of thing and just kind of take over the market and push some of these smaller companies out like Tyson Tyson. So actually there are a lot of companies in this space, and they are big and small. Tyson just unveiled its own Uh. Some would call it a competitor to the Beyond and the Impossible Burger, but it's actually a half beef half

p protein blend. So whether or not you get the same customer is a question that will remain to be answered. Um. And then you have other smaller companies that you've probably never heard of, that are pushing out their own versions um quietly, carefully to make sure that they can meet the demand when it's there. Yeah, I didn't know that flexitarian was a thing, but evidently that's a thing, and

Tyson's gonna cater to those flexitarians. But I'm wondering, Dina, have you had an Impossible Burger and Beyond meat products if you tried all these? So I've had both of them, but I have not had an Impossible Burger recently. That was actually how we figured out this shortage was happening was because I went to a white castle near my apartment. It said impossible sliders right outside on the sign, and turned out they were all out. So do you think that they are as good as the meat version. I

don't need meet I'm not the target customer. Actually, you're exactly teustomer. But we actually did have a Dave Wilson kind of review of several days ago, and Dave Wilson, Bloomberg Stocks editor, is a Hamburger eater by his own admission, and he said it was okay. He said it was okay. So that's that's a win, I think, Yeah, But I think it's kind of our journalistic duty. At some point over the next week, I think we have to go have a beyond meat Burger just to have some some

primary research on it. Amen, let's go make a lunch date. Thank you so much. Gina Shanker, consumer reporter for Bloomberg News. Really really great reporting and interesting to sort of see how this supply issue is sort of emerging in some of these very hot startups and less more than startups. Right, But I'm thinking about Tesla, and I said Tesla moment, because you know, when demand so outstripping supply and some of these fat companies or more than fad uh see

change companies, it can become a serious headwind to the business. Yeah, exactly, And it kind of goes to the issue of you know, when are some of these you know, big mainstream food companies, you know that can really get product out there in scale, and have they have the relationships with all the retailers. They can really take over the market, but we haven't

seen that yet. We are so lucky to have with us someone who has been watching the markets for decades and looking for the accurate indicators to foretell the future. Nicolas Co, founder of Data Trek Research, joining us here in our Bloomberg Interactive Broker Studios. I want to start with oil because it has been a big conundrum frankly for people, especially given the fact that right now we're seeing escalating tensions in the Middle East, which should lead

to price gains, which we saw briefly yesterday. Today we're struggling to hold onto those What do you make I mean, the larger takeaway, what do you make of the fact that oil prices have really actually declined this year despite uh, some of the ongoing growth that we're seeing. Yeah. No, it's a great point. If you look back at the chart from year to day to now, you're looking at

a peak back in April. It's down since then. Oil is in a bear market as we speak, and you have some little geopolitical riffs that kind of helped it yesterday. But the bottom line is economic worries. Global economic worries are clearly in the driver's seat when it comes to oil prices, and that's negative because it's the bad sign for the global economy. But on the plus side, you've never had a recession at least since nineteen seventy in

the US without oil prices first doubling. It's the only kind of clear recessionary indicator you can look at to say we're in trouble. And the good news is we're not on that point. So a lot of guests that Lisa and I have been interviewing over the last really several a couple of months have been suggesting that a recession is increasingly likely by mid Is that something you think that is reasonable? I get the fear. The fixed income market tells you that's a fear of the Fed

funds futures market tells you that's a fear. So at this point I think that's probably that's sort of default value in people's minds. But you know, the oil price thing is some measure of help and a federal reserve that seems more inclined to cut rates might let us sort of scape by a recession. But it certainly is a low growth one one and a half percent growth kind of environment for at least the next four quarters.

So I don't want to become that person who says this time is different and everybody laughs at them when it's not in about a year. But I guess I'm wondering whether the dynamics in oil have changed to such a degree given the shale output from the United States, Uh, that that sort of the necessity for oil prices to double ahead of a recession kind of loses it's it's

it's gravitas. It may well, I'd say. The other side of it, though, is there's still a lot of oil that goes through, you know, through the streights of four moves, which is sort of the flash point right now. And typically, you know, if you think back the seventy three and seventy nine, access to oil has been as critical as the price of it itself. You know, we had actual short pages in both seven three and seventy nine here

in the US. It may not come to pass that way because of national output, domestic output now, But I'd say you'd want to see some bounce in oil prices to think that we were at the cosp of seeing a consumer and business environment that was going to be worse than the next twelve months. In the prior. Lower oil prices absolutely helps and provides a bit of a tail wind. So, Nick, whether or not we have a recession in is it time to get defensive in a portfolio?

That's the number one question I get from clients right now is if if so? When the answer is, look, I mean, the way I think about being defensive is if you think it's not to be defensive, then be defensive. Um. Yeah, there's no point in second guessing that ten years into a recovery with you know, a fairly dicey global picture both in terms of sovereign debt and corporate debt, both

obviously all time highs. And so the short answer is yes, if you feel that way, absolutely, Our favorite defensive sectors in the US market at least are real estate, a lot of her hidden tech exposure that makes a little growth through the utilities and consumer stables because as even though there's been under a lot of attack, fundamentally they do pay very good dividends, and they are relatively safe, and they're big enough part of the SMP to actually

allow you to play defensive without having to double overweight something like utilities. So rates you're saying, basically, yeah, reas reach are kind of a misnomer. Now, if you look at the top ten holdings in the xl r E, for example, you're looking at things like cell phone towers, and they've they've made reets into you mentioned cellphone tower billboard companies. It's just amazing how they've used that reach structure for lots of different insectors. Yeah, it's it's a

really a misnomer. It's not realisted anymore. It's it's structured cash flows. That's what allows you to be a reat um just by definition. And so that's I think a hidden positive behind the real estate sector in the SMP. The downside is it's small at three or three and a half percent of the SMP. You can't double weight that as a portfolio manager and still hold to a benchmark. So you have to look at bigger structors like staples. So why not just be super aggressive if you think

that we're not going to see recession? You know the way to be super aggressive historically has been to be really long tech. That's kind of a spicy play going to back half of the year because if you read you know the comments from the Deputy Assistant d g earlier in the week and the speech and tele Aviv talking about his thought process of regulating tech to anti trust, it's very aggressive. Same thing on the House side of

these new Justice investigations. So I think it's a little bit hard to be super long tech as a way to be aggressive in the market. That's kind of what I think what holds back gains for the back half of the year. We're not going down if you really, I don't think, but these regulations and issues with tech are definitely gonna cap the tech upside that SMP. That's interesting because it's a it's a topic that we've been

discussing for a while. Here has I guess asking the question, has the worm really turned in terms of US regulation of tech historically a very light touch. Has that fundamentally changed? And I guess in your mind perhaps it might be changing a little bit. My worry is that even if nothing happens in the next year, you're gonna hear so much about it because We're going into a very important political year, and there's a very popular topic. We hear it from clients and I hear it on social media

all the time. There's a lot of concern the tech has gotten too big and there is some desire to see some incremental regulation, perhaps not a full break up, but regulation absolutely, and that is gonna cap sentiment. Yeah, that's it's interesting. I think you're exactly right. I think because I mean talk to UH institutional investors who are really,

you know, historically been in the tech space. One of their big risks has been is that day ever going to come when uh U S regulators will really take a hard look at this industry. Historically it's just kind of been the Europeans, you know, taking a look, whether it's Microsoft years ago and UH. But the big, the big downside scenario for a tech long story is US regulatory risk. Nicholas thanks so much for joining us. Nika's co founder of Data Trek Research, and he joins us

here in Bloomberg Interactor Broker Studio. Nick is also a Bloomberg opinion columnist, taking a look at how to get positioned in this market where ten plus years into this economic cycle, we have rising trade uncertainties with two of our biggest trading partners. Yet on the other side, we have a very benign Federal Reserve who appears willing and able to step in and support the market. So investors are weighing those across the board. Thanks for listening to

the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woy. It's I'm on Twitter at Lisa abram wits one Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio