P&L: The Biggest Risk Is a Trade War, Nick Sargen Says

the potential iterations of what could unfold. Somebody once said to me, you should should have start something called catastrophe corner. But here with me to to sort of join me in my catastrophe corner is Nick Sargeant, chief economist at Fort Washington investment advisor and author of the new book Global Shocks. One of the things that you take a look at, that you are looking at right now is whether Donald Trump, the next president of the United States,

will be a global stock. So will he be? UM? And I think the answer is to be determined. UM. I think his policies have the potential to be transformative as Ronald Reagan's work. So what do I mean by that? UM? Big tax cuts, but also you don't have spending under control. So the good news the market likes tax cuts deregulation. The bad news is outsized budget deficits. And the biggest

difference though in the Reagan era was interest rates. He inherited record high rates thanks to him and the Fed, they brought down inflation, so um interest bond yields declined, but after adjusting for inflation, they actually rose in real terms. So the difference today with Trump is easy inheriting record low rates. And so what I see is the potential for significantly higher bond yields and a super strong dollar, which will make it harder for him to contain trade. Well,

here's here's what I'm wondering. I mean, the market is pricing in a lot of hypotheticals right now. It's been very hard to sort of understand the moves and sort of whether they are long term or very short term. Knee jerk. As we were talking about offline, how much control does does President elect Trump really have? I mean, can't the market get ahead of him before he does anything? Oh? Absolutely? And that's why I say, you know, I think right now, um,

when I ask the direction of the moves. Um, it was a surprise outcome for me, So I have to scrap what I had written before and said, well, wait a minute, Um, if this is the case, what would I expect. The easy call for me was higher bond yields, stronger dollar, I said, stock market people are gonna like tax cuts, so I can see that going up. But what you know, to your point, what I think they're not thinking is second round effects. Uh, we've had six

consecutive quarters of profits declining or flat. So if he can't turn that around overnight, and if suddenly I wake up and I've got significantly higher bond deals to me, the market then is vulnerable to a correction. And how long do we see? How long does the market give Trump to see? You know, as Leasa pointed out, all of us is rhetoric right now. We don't know what's going to happen, So how long until we make those judgments or do we just kind of you know, bet here,

bet here, bet here, kind of hedge against everything. Yeah, that's great question. I don't have the answer, but here's what I'm looking for. You don't have anything right now. Everything's clay, it's putty. It can be changed. The most important decision is going to be who's his secretary of Treasury.

What is his secretary of the Treasury say, because on his campaign, which I heard and I was in New York, he's talking massive tax cuts and spending increases, and I'm sure every advisor, I'm sure con Ris is going to say, Mr President, with all due respect, he can't do that, and so then he may scale back. So I would say to you, I want to see a plan in place, and you're not going to see that until you've got the new Secretary of the Treasury to work with him.

So in the meantime, I think we're in limbo land. Well, when you talk about a global shock, I want to go back to your book. Uh, what is the sort of transmission mechanism here? Because the last one it was the financial sector. What is it going to be this time? You know, they all play out differently. Most people this time, even before Trump would say, is the bond market a bubble? You know we have these record low interest rates. Um,

I'm an economist. I say that can't continue forever. So you know you were anticipating could there be some development, could it be higher inflation, stronger growth, whatever, um. But I would say, Lisa, if that was what I was talking about, then I would say, you know what, that's going to be a sell off. But I don't put it in the category of catastrophe of crisis. So what I'm basically saying is, to me, the thing I'm most concerned about is the potential for a trade war that

is not priced into the market. Now again, hold on a second. You said it's not priced into the into the market. What would you have to see for a trade war to be price into the market. I think again, what people are waiting to see with Donald Trump? He's a self described negotiator. So is he going to talk tough with Mexico with China and then say I want to scare them and I'm going to get better concessions out of them. If that were the case, I'd be okay.

But if we get to the point where he takes action, whether or NAFTA, whether um, whether um, you know, on the RMB, declaring it, you know, manipulative currency and I'm going to impose tariffs, that's when the market would react. So it's actions speak louder than words. With the market react, Oh, Martin would sell off the scary you know. UM, here's again what I think is interesting. I listened to Donald Trump, and UM, I understand his his domestic policies on the

on the international policies. He comes from the school of thinking called mercantil is. Um, if you have a trade deficit, it's bad. If you have a trade surplus, it's good. That's the story. There winners, there's losers. And so what I'm saying that concerns me is the type of policies that we're pursuing because we saw it on the Reagan will expand the trade deficit, but will blame the foreigner for it. Nick Sargeant, thank you so much for being

with us. Nick Sargeant, chief Economist. Right now, I'm looking at a thirty year treasury yield that is at the highest since December of last year. It has exceeded three once again, this is the big question, and here we have Lacey Hunt to answer at Lacy Hunt is chief economist at Hoisington's Investment management company. UM, is a long bond is that I'll just gonna keep rising here. Well,

anything that happened over the short run. Um. But my view is that rates can go up for any number of variety of reasons, just as we've seen in a very vicious fashion over the over the day since the

end of the election. But the economy is too fundamentally weak for the rates to stay up well, I mean, so here, what's the big thinking behind uh the significant rise in rates is basically that people are expecting that a combination of President elect Trump's trade policies along with his infrastructure spending will spur market increases in consumer prices that will force the Fed to raise rates UH faster than they had expected. That people are pricing in UM.

It would also lead to people to demand how our yields just to compensate them to offset the inflation risk? Is that what's going on here is this selling from foreign investors. I don't Foreign investors don't hold long bonds. If you look at the treasuries study of the foreign ownership of the treasuries UM, foreign investors only have six percent of their holdings and ten year securities are longer. They own a lot of short paper builds in two

year notes, three year notes, that's their holdings are. Yeah, the long bond is a domestic market has been always and the and the one the foreign investors that hold the tenure in older paper are the big European insurance companies who have dollar based liabilities, then they're they're not hot players. Um, what we've seen in here is a massive rush to judgment. And there is a presumption that sounds biblical that biblical times we're seeing a rush to

judgment in the treasure market. What is that judgment? What we've seen that we've seen this before. When when when President Obama and bailed his one trillion dollar stimulus that was assumed to be highly inflationary is going to lead to a boom, fond yells would rise, the dollar would collapse. UM, when quantitative easing one was announced, UH saw the same pattern. Quantitative to markets presume that they understand the complexities of

the macroeconomics. And the fact of the matter is that um that that deficit spending actually carries a negative multiplier, It contracts the economy, doesn't croyd. This is this is the big debate to me, and I'm so glad that you raised this because you know, people say this is going to finally ignite inflation. This is what we've been waiting for. We're waiting, We've been waiting for the fiscal stimulus, and then you have people like yourself who are telling me, yeah,

deficit spending actually has the opposite effect. It hampers growth in the long run. So what's going to have to happen for markets to wake up to that reality? Or is that a controvers sial issue. I mean it is a controversial issue. Some people would disagree. Well, it's hard to know when the markets UH will focus on the long run fundamentals. That's why I don't try to do it. We had Poisington Management. We we look on we key

our investments on the long run trend and inflation. And the most critical factor is to look at what's happening to the rate of growth and money supply and the velocity of money. They're equal partners in in this stance. And money supply growth has been right at its one year average, one years average. Nothing has happened there. But but the velocity of money has fallen to a six quarter low. It's only one point four four. It's the lowest UH in modern times really except for right after

World War Two. Now, the velocity of money is influenced by a lot of factors, but the most important of which is the productivity of our debt, and the productivity of our debt is increasingly worse. Another, it's not doing enough with our debt to actually stimulate gross And give you a couple of numbers. From nineteen fifty one, one dollar and seventy cents of new debt generated one dollar of GDP. From from to two thousand, it took three dollars and thirty cents of debt to generate one dollar

of GDP. Last year, last four quarters, I should say we took on two point two trallion dollars of debt. Our GDP was only a four fifty billion, So it took nearly five dollars of new debt to generate one dollar of GDP. Now, and why is that because because the debt is basically financing consumption, it's financing things that will not generate an income stream to repay principle and interest. Okay, well, let's let's talk about the number that I'm staying. We've stopped.

You've got to let me finish here. The critical point is, in this rush to judgment, you've had a massive increase in the long term rates, not just in the United States but worldwide and even even a greater rising in the emerging markets. And this rate rise has occurred everywhere, and you've seen in a lot of countries where UH interest rates that were negative gone positive. And at the same time, there hasn't been a dramatic surge in the dollar.

Dollar is it a fourth junior high unprecedentedly high? Well, the surgeon long term rates UH encourages more saving, less spending, that puts downward pressure on velocity that is already declining precipitously. In addition, the surge and the dollar will serve to bring into the United States a wide range of lower costs goods, and it will cost domestic firms profits when they convert their foreign earnings back into dollars. It will

cost them market are at home and abroad. And so the events of the last several days are our giant constraining action that will put both downward pressure on the radar growth and money and ready the growth and velocity. And so in essence, what we've seen is there has been a massive market tightening of monetary conditions. Massive and so when the tax cut takes effect, if it does take effect in a timely manner, that's something we really

don't know. It's quite possible that the markets have already negated its effectiveness. And if you go back and look at the at the Reagan tax cuts, UM, the conditions were a lot different, a lot a lot different. First of all, debt, government debt was fifty GDP, not a hundred and seven. And we had favorable demographics. We have very unfavorable to the birthrates the lowest spend. We have a huge percentage our households uh in the of our

of our youngsters in court living at home. The demographics are not good. And also when Reagan tax cuts took effect, UM, monetary policy was working in tandem. Monetary policy has to be supportive, not adversarial. And and that's that's the markets have made sure that the beginning is very adversarial. Lacy Hunt, thank you so much for being with us. Lacy Hunt, chief economist at Hoysington's Investment Management. Looking at the long bond, it is down almost seven percent so far in November.

I'm Lisa Brown Boys here with Shelley Banjo, my co host Pim Fox on vacation. This is per blah blah blah. That's how a renowned economist summed up the state of macro economics. I'm Lisa Brown Boys I'm here with my co host for the day, Shelley Banjo pim Fox. My co host is on vacation and we'll be back in about a week. So, Shelly, this story caught my eye.

I thought that it was so interesting because it just highlights some of the frankly what people say behind closed doors or in private conversations, which is macro economics have gotten has gotten it so wrong, And then one of their own came out and said it very publicly. Uh, I want to bring in one of the authors of this story, Craig TORUS Economy and Federal Reserve reporter at Bloomberg. What kind of response have you gotten from this story,

Craig Ey, Lisa, Hi, Shelley. It's funny, but economists love it. Why they like to sort of bend at each other because it's just like what you said, right, They all knew that the house was burning down, and and but nobody really wanted to say it. So walk us through the sort of what made Paul Romer, who was had a in as the World banks next chief economist when he wrote this paper? Why did he write this paper

that essentially tore down macro economics. So he said he had a like a space and a journal that he had to fill and um, so he's going to write something. And then he saw a movie about scientology, and so it started to make him think, well, you know, maybe macro is a bit of a personality quote as well.

With all these schools of economists, you know, um, the Robert Lucas school of Rational expectations and real business cycle theory versus the Kynesians, and then he started to think, you know, these guys are so busy arguing among themselves and devising these big, intricate mathematical models that they've entered what he calls post real economics. Love that that's the

best description ever. Um. You know, this story reminds me of back when I went to business school and the people who were started rewriting a macro economics books after two tho Nate, they were doing full rewrites of textbooks. I mean, what happened to that? What? What didn't this debate kind of unfold in two thousand and eight? Why the why the big shock now with this with this um,

you know, rummer scandal. So what economists didn't really have in those models were things like financial markets, and I think so, uh, you know, I spent a year in business school too, and actually this idea of Robert Lucas Nobel Prize winning economists from University of Chicago was very powerful. It said, whatever government does, it kind of is ineffective because consumers anticipated and um and they adjust and businesses anticipated.

But if you think about ordinary life, um uh, you know, often as rational as we are, we we make mistakes. And one area where you could see this is um a book I read and I like a lot called Deep Survival, which studies how accidents occur. Let's take a group of climbers in Yosemite and they say, you know, it's a beautiful day, we're going to go up the wall of El Capitan, and the weather forecast is perfect.

But then something changes, like well they didn't really research the weather enough, their expectations were flawed or the weather model was flawed, and then they get trapped up there and they're in serious trouble. So you could say, you know, whatever it is, subprime or the kind of odd things that happen in human behavior. Those models don't incorporate that at all. They don't plan for them, and you get

these explosions that are completely unexpected. Well, and I love the line that you quoted of his paper, assume a assumed b blah blah blah, and so we have proven that p is true. Um, you know, on one hand, it's comical. And as you said, you know, people kind of evolve been talking about this, uh, you know, not in private, right, in private conversation. But this, really BAC

economics have has a much broader effect. I mean, if you think about the Federal Reserve or other central banks, I mean they base a lot of their policies on macroeconomic theory. Right. That's why I think this is interesting. Is right now this year is a matter of fact, we're seeing none other than Janet Yellen start to talk about the flaws of what economists call representative agent models. So in these models, they have household a and business

be and those households representative households and business. You know, representative business will always respond to a price or an interest rate in this way. And what she said in October at a Boston Fed conferences, we need to look underneath the hood and ask ourselves are various cohorts are young people responding that way, our savers responding, how are they responding? I think that's very healthy. You mean to actually think about facts and and maybe it's cross check

it with reality. Um Craig torres thank you so much for speaking with a S. Creig Touris Economy and Federal Reserve reporter for Bloomberg coming to us from Washington, d C. About blah blah blah Black Friday. We're getting closer, so we need to talk about it, all about it, which we expect. With us, we have Tom McKee, CEO of the International Council of Shopping Centers. You know what's gonna happen.

What's gonna happen? Are we gonna be talking on the Monday after the Saturday after Black Friday that it was the best ever and that it saved the retail sector? Always the best ever? I wish I knew everything that was going to happen, but I do think we'll be talking the following Monday and saying it was a very good Black Friday and holiday weekend. We just recently did a survey. We expect about a hundred and fifty million Americans to go shopping over the Thanksgiving Day holiday, which

is you know, which is clearly strong. Uh you know, Black Friday is kind of instituted in our American psyche. I think is A is a big part of the holiday weekend. Our survey Consumer Survey I indicated that holiday sales overall will increase about three point three. They're going to be winners and losers. Retail is a fiercely competitive business. Actually, I think that I think the retailers that will win are really I'm not gonna give your names, but I

think it's I think omni channel retailers will win. I think what's happening in retail, and which is often kind of an untold story. And I know, Shelly, you cover the industry a lot, is you know, we tend to position the industry in bricks and mortars versus online, and I think that's really kind of an antiquated, uh you know comparison. I think what's really happening is technology is being integrated into shopping, just like it's been integrated into

every part of American life. And I think those retailers that have an integrated omni channel experience over the long run will do much better. In fact, you know, our surveys would indicate that the vast majority people will shop at omni channel retailers. An omni channel of course, being both digital and people that retailers that have a presence

online and in the physical space. And I think what you're another, I think untold story is a lot of online only retailers are moving into the physical space, and so that will create additional demand. Even Amazon, you know, is announcing opening up two thousand grocery stores, etcetera. So when was when was the survey conducted? Was this pre election? Now? The Black Friday survey was was posted? Was post election? And so did you the kind was three? Was pre election?

Did you guys see anything that surprised you that came from any kind of election showing up there? No, I mean, I don't think I could attribute any of the findings directly to the election. I think, obviously, you know, there's a level of uncertainty that's been removed from the economy and from consumer psyche relative the conclusion the election. But as you know, I mean, last month's retail sales were pretty strong, uh, and that happened in the midst of

the election season. So I think just generally a king we're in an environment where you know, incomes have improved, the job markets improved. Obviously all of us want the economy be stronger, but I think we are in a better place today than we were a year ago. Tom, What am I going to get for the holidays? I mean, what are people buying? Are they going to be buying? Uh, you know, clothes? Are they buying? Uh? They buying new blenders,

they buying juicers? Like what they want? It's the holidays, right, So I think that, you know, if you look at historically, and I think our survey results would align with what historically happens. And electronics are always popular. Toys are always popular. I mean it's holidays. Apparel is going to be popular because it is always popular. Gift Cards are also, you know, a big expenditure during the holiday season because people give

gifts and they don't exactly what are lazy. They don't want to actually have to pick anything out for somebody else. They just exactly say time you go return it. I mean, come on, I don't know you or Picky, I understand that, but as the mother of two young children, the idea of then you're not going to give your kids gift cards. You're getting by them. They would love they would love that. So it has the importance of Black Friday diminished over time?

I think that. I think symbolically Black Friday is still really important in the American psyche and as we evaluate the retail industry, I think, however, when you look at the holiday shopping season, it's really become longer. It's become a much longer season. It really starts kind of in November and continues all the way you know through Christmas Eve. There's a lot of people that still shop, you know,

that Super Saturday right up until Christmas Eve. So I don't think it has um the direct impact that it once had on you know, retailer's fortunes for that year. But I do think it's symbolically and important um day in the shopping season and in the holiday season for sure. Do you think that perhaps that Saturday it's going to continue to be even more important than Black Friday? Saturday? Yeah, because it's the last time you can get a gift for someone you can't shop online at Amazon. I do

I think Super Saturday will continue to be important. I think it's part of it's just human nature. People tend, you know, where people are busy, and they have lots of polls on their time, and so it's logical that some folks procrastinate and uh, and so that lays plays into Super Saturday. I also think that people, um, you know, just part of the holiday season that you remember you need to buy two or three more gifts that you didn't think about. And so I think that is going

to continue to be important. What about the experience economy when we hear so much about how people are moving away from the traditional shopping experience and for going physical things for experiences, I mean, are you seeing that in any way? Does that play out at all? You can see? I do? I think it's well, I think, first of all, I think the holiday season. I mean, if you really,

you know, kind of take a step back. Before we started talking about experience, the holiday season was always really experiential, right, That's when you go shopping and you see the decorations. But I do think, I do think the retailers that win will create a differentiated experience for their consumers. That's part of this omni channel environment. I also think it's part of great customer service. It's also integration of technology

into the retail experience. Whether it's you know, being able to use technology to help you fit you know, the right piece of clothing, whether it's to use technology to make sure you're buying the right sneakers and you kind of test them out on a on a half court, you know, and and say are these the right speakers for me? Do I get the right kind of response time?

So all of those things, I think are are going to continue to be important, and I think you'll see technology and experience be integrated the shopping experience going forward. But I think ultimately, what I think is important is that people don't there is this at this time of the year, this sense that, oh, by goodness, e commerce

is taking over and that's not happening. I think that e commerce is certainly a big part of the retail landscape, but brick and mortar, physical retailers are the by far are the largest part of the retail landscape. But I think you're having an integration of technology and physical and I think we'll get to a point where we won't talk about online versus physical, We'll talk about an omnichannel

retail environment. Talk to us about malls though, what you know traffic is, you know, constantly down month after month. It's going to be something that's not going to stop. Um, what are malls doing this holiday season to get people in to convince them to come shopping, spend some time there? You know? You know? Uh, I think as it relates to traffic, obviously there's there. First of all, there's no real good measurement of traffic that's out there. There's nobody

that measures traffic and says this is what's really happening. Also, remember sales overall have been going up, and so what is really happening, I think is you have a more efficient shopper. They do a lot of research online, they come into the store prepared to consummate that transaction. Efficient shoppers we're having. We had a wonderfully efficient conversation. We learned all about what we're gonna buy and what we can expect for the holiday season. Thank you so much.

Thanks for listening to the Bloomberg pien L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at Pim Fox. I'm out there on Twitter at Lisa Abramo it's one before the podcast. You can always catch us worldwide on Bloomberg Radio