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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this hour
with stocksliding after their worst quarter in nearly three years. EDGYR, Danny if Youandenny Research cind Of gives us sm P five hundred price target to six k from sixty four hundred, writing the expected fallout from trump two point zero s ign of tariffs undercuts our former bullishness and dims the prospects of our base case roaring twenty twenties scenario. Ed joined us now for more.
Edward Morning in the Morning.
Second change for you in a number of weeks.
I hope you're not looking for clarity for me, because I'm struggling with all the confusing information coming out of Washington. As you said, you're getting different messages from different people in the administration, and at the end of the day, it'll all depend on what the President concludes he wants to do that day, and he can change his mind.
Again.
How much damage do you think the accumulating uncertainty is doing already to the underlying economy.
Well, if you look at all the soft data, which is very much forward looking, it's not looking good. The current data, the present data looks pretty good. The labor market is doing fine. I think we had some really cold weather in January and February that depressed consumer spending. So I think we're going to have this really bizarre scenario where the first quarter is we got real GDP up one percent. I know others have it even lower
than that. Then it could be something like three percent in the second quarter, because you could really have a nice rebound in consumer spending and consumers could be running to buy cars before the prices go up, which will be kind of another possibility. And then in the second half of the year we could have stagflation with the economy in a growth recession, maybe very little growth, if any,
maybe even a shallow recession. And so that's the way I've kind of seen this thing playing out in terms of its impact on the economy.
And right now you and the market are focusing on the reign of tariffs. What happens when we're focusing every day on this potential extension of TCGA and other tax cuts that we may get, and they're focused on having this done before September.
Yeah, well it's going to be you know, if you think it's messy now, it's going to get even messier if you on top of the whole tariff issue, which isn't going to go away just because they announced what they mean by reciprocal tariffs. I mean, the twenty percent number that's out there basically suggests that now the President is looking to raise revenues and Navirus saying six trillion dollars is what he claims that this could could raise.
And now off on top of that, we start to try to extend the tax cuts, and an extension of tax cuts, it's not stimulative, it'll be very negative if they don't get the tax cuts extended.
Well, try sactory last night's talking about that they want to get done. No tax on tips, no tax on Social Security, no tax on overtime, and also purchasing an American car making that tax deductible. Again, if you have even one of those sweeteners, would that be bullish for the market.
Well, I don't know that that'll make it that much easier to get it through Congress. I mean that it is a vowful situation in Congress. The margin that the Republicans have is very narrow, and the Republicans always don't always stay united. So no, I don't know that those particular issues are going to be market moving at all.
At a certain point. If people are talking about the likelihood of recession, what gives you the idea that this is going to be more stagflationary than just traditionally recessionary.
Well, the thing that we all have to worry about, of course is the consumer and the consumer confidence numbers
have all been depressed. The animal spirits that we all were kind of counting on to keep the stock market going and consumers going is kind of fizzled away here, And a lot of it has to do, obviously, with the kind of disappointment consumers were expecting that the administration would focus on somehow lowering prices and instead now we may we will have higher auto prices if we're going to have a twenty percent permanent tariff on autos, and of course if we have a twenty percent tariff across
the board, prices are going to go up. So that's disconcerting.
I guess that the reason why I ask this is because Daniel dots point a one time price adjustment. But if you have less demand, you'd imagine that would be a one time price adjustment, and then you won't be able to have the ability to really raise that, especially at a time where potentially the labor market could come
under some stress. So what is giving people the sense that this time is different, that there could be a prolonged inflationary type of bent that raises questions about US treasuries. It raises questions about what the FAT can do.
Sure, I mean, it's not likely to be a one month event where you know, you raise the tariff and the CPI goes up to one level and it's a bad month for the CPI and then it comes back down. As a matter of fact, we raised our inflation outlook for the rest of the year from two to three percent to three to four percent. I think it's going to show up that quickly, and I think it's not going to be that transitory. It's not going to be one or two months. It's going to last for several months.
And again, this is an ongoing, dynamic process. We don't know whether more tariffs will be added or reduced. It's just kind of confusing. But I think companies have already anticipated that their costs are going to go up. Certainly, if you're in manufacturing, your costs are going to go
up from all the parts. And as a result of that, we're seeing price kind of forward indicators of inflation showing that there's a problem, and so the regional business surveys, for example, also showing that prices paid are going up.
Thanks the question ed, why do you think stocks are going higher by year, Rent.
Well, I'm kind of counting on the market to look forward as it typically does, and I'm kind of hoping that all these issues get somewhat resolved by the end of the year, and I think the market starts to look ahead into twenty twenty six. I haven't given up on'm i roaring twenty twenty scenario, sticking with it. I'm sticking with it. I think it's got temporarily waylaid, all this tariff issues and all these policy balls that are
up in the air. But I think the you know, I guess my underlying thesis is, look how well the economy has done in the past despite Washington and so I'm hoping that will work again.
We've continued to underestimate the performance of this economy over the last several years. That's certainly been a feature, which is.
The reason why a lot of people are saying that actually you could see gains and you could actually see ongoing inflation, because if you are underestimating the power of the consumer, they will be able to absorb some of this and they will keep spending. And companies know this. You know that they don't have a sense of that price target as much as pre pandemic.
The could is right now on ES ANDP negative by four tenths of one percent, just a little bit softer. Ed of theardenty research in our nation's capital just moments ago. If you aren't just joining us and welcome to the program. The Washington Post reporting the White House aides have drafted a proposal to impose tariffs of around twenty percent on at least most imports into the United States. It's according
to three people familiar with the matter. There's an additional dimension to this story on the tag site that I think is worth highlighting that a president's team is exploring using true millions of dollars in new import revenue for a tax dividend LISA or refund.
So this would be the sweetener on the flip side of some of these tariffs. That would be, as some people are saying, the worst case scenario in terms of the most maximalist in terms of terriffs. A big question here of the timeline of how hard it would be
to get those through. And I will just say bonds are still rallying on the margin, but not nearly as much as you'd expect if you think about some of the projections from Mark Zandy from Parthenon talking about the likelihood of recession and unemployment rising to as much as seven percent by twenty twenty seven.
Tobermarcus of Wolf Research joins us now to extend the conversation. Topin good morning, and welcome to the program. How about that twenty percent on all imports, Now, this can change, As we always say on this program, I said just moments ago. Situations very very fluid. But how does that snack out relative to what you're expecting for tomorrow?
Well, happy Liberation Day, Eve to use Well, Jonathan, Look, that's certainly at the high end of the range that we've been contemplating, even when you throw in gross value add a tax into the calculations of these numbers, which are the real big thing that drives them higher twenty percent as an average rate or rate that applies to many or most of the countries that are being here, that's definitely at the high end of the range that
we've been contemplating. I think, even relative to a consensus among investors that's moved towards everyone expecting higher numbers tomorrow over the course of the past week or two, that would definitely be a surprise to the high end.
Right now, the Washington Post is saying, this is just one proposal on the table, Tobin, Do you get a sense that the White House has actually made up their mind yet?
By all accounts they have not. It sure seems like deliberations are ongoing. As recently as this weekend, it seemed like there were multiple reports that the idea of a flat across the board universal tariff in that twenty percent range had resurfaced. I do think they're going to end up with more individualized country by country numbers in this reciprocal framework. But exactly where those numbers come down does still seem to be up in the air.
Is twenty percent here to stay if they go with that proposal, or is this the opening of a negotiation?
So at some level, I do think that this is the opening of a negotiation. Certainly there will be negotiations. I fully expect that there will be talks with many our biggest trading partners, and I think there's probably room for the numbers to come down somewhat. But I think I am more concerned than a lot of the cell side about the durability of these tariffs. And I think
it's really notable. In the past week, you had both Trump and Peter Navarro talk about six hundred billion dollars a year in tariff revenue, not you know, a week before that, you had a lot nick talking about one trillion dollars target for a revenue from tariff's as well as things like the new Trump Gold card. Those are numbers that you can only achieve if you actually keep these tariffs in place, not briefly threaten them and then quickly negotiate them away. And I do think there's an
aspiration to fundamentally redirect the global trade system. So you know, I think a lot of this is going to be here to say, you know, from a negotiation perspective. Also, it's notable if that's are the thing driving this value add attackses, countries are not going to be able to negotiate those away. So this talk about if they drop their tariff barriers, will drop hours doesn't really work that way. If tariffs themselves are not the things driving these ostensibly reciprocal rates.
Toobin, how long would it take to pass some of these other sweetener proposals that could potentially offset the growth hit from these tariffs to the United States. I'm talking about certain tax rebates.
Or tax cuts.
I think the tax bill is probably going to be enacted in a July type of timeframe. Certainly they are trying to get it done before the debt sealing X stage because of the plan in Congress at the moment is to include a dead sealing increase in reconciliation to have that be the vehicle. So that would mean they need to get it done before, probably roughly mid August, so that late summer timeline is what we've been circling. Sometime in Q three. It will be certainly better news
for markets than the tariffs have been. But I think from a scale perspective, what's currently on the table does not look like it comes close to fully offsetting the hit from the tariffs. Like there are good things in there, both individually and in terms of corporate tax cuts on things like bonus appreciation, but it really is at a significantly smaller scale.
I type an appreciate good time, I'm reaction to the break in news and a happy Liberation Day gave to you as well. Set type of Marcus the before free set. Let's turn back to commodities. Gold continuing its record breaking rally. Bank for America suggesting the precious metal could reach thirty five hundred, driven by central bank buying and haven demand a bit rising geopolitical and macro uncertainties. Francisco Blanche and Bank for America joint just now for more, Francisco, Welcome
to the show. A nineteen percent move in the first quarter, the biggest quarterly game going back to nineteen eighty six. Francisco. Let's talk about the drivers of the first three months of this year before we get into the next nine months of twenty twenty five. What got us to this place.
Thank you for having me again, John. So, look, I think gold this has been really drifted up by essentially we started with center back buying in the the last three years, but I think investors have started to accumulate it as well. Saving what's really change this has been more investor buying, whether it's through ETFs other instruments, but also we are seeing asset managers and insurers starting to pile in. So so that's that's been the change. Remember,
we've seen a weekending US war. We've also seen following interest rates at least on on ten year yields in the US, and that's kind of led to incremental demand for gold. Plus, of course there's an issue of tips and the potential implications that may have in the economy. So I thing all of that has come together. But gold's not alone. I mean, we've seen a big rally across the commodity complex. We've seen also coffee moving up,
We've seen you know it's in silver. Actually, commodities are up almost nine percent in the first quarter, John, I mean it, it's been a really strong run, maybe a little bit of unexpected run, and and and the sector has helped pace bonds and equities across the board.
Francisco, Before we dive into just generally the commodity rally, how distinct is gold given its hedge factor as well as increasing concerns as we were speakingly towards cervellus earlier by diversifying away from the US dollar.
Well, so I think there is an element here of verification, no doubt. I mean, central banks are now holding out ten percent of their reserve assets in gold, and that number is likely to continue to increase at an annual pace of one to two percent, probably as far as
I can see. Remember, one of the things that the Trump administration is trying to do is to rebalance the US twin deficits, and that rebalancing of the twin deficits by definition implies that there is a lower desire bio Trump administration to continue to supply this reserve asset that the world has been caring for for a long time,
which is which is US streacheries. Right, So if you reduce the deficit, if you're redeal the budget defici If you reduce the current count deficit and the trade deficits, by definition, there's going to be less treasure is available for central banks around to hold. And then there is the whole sanctions and tirets over that here that's also driving the demand for gold.
So I guess my question for you is, have we seen the book of it? Why isn't your target higher? You see thirty five hundred as a recent target. We were just talking to Eddie ar Denny who left the office saying four thousand by the end of this year and five thousand by the end of this year, and it seems like people can't get enough.
Well, I mean there's a little bit of that right now. But also remember gold is a pretty good, pretty large market already, right It's over ten trillion dollars and in value, so of course you can you can put any number there, because there is no there's no such things as intrinsic value in something like gold. I mean, there is, of course a cost of production, but as we know, mining increases the stoke gold by all one and a half
percent a year. But the real story here is how much investment can you drive in of course gold could spike a or higher, but you would need to see a much worse economic outcome than what the market is currently pricing in our view, right, So it's going to be a steady grind higher as opposed to a big jump unless something grammatic happens.
There's a lot of research that all this has to do a lot with the uncertainty about the trade and the terrors with the announcement we're going to get tomorrow. But how much is it just driven by the fact that it is uncertain and most people are projecting the next year to just remain uncertain. So the safest thing is to just go into gold.
Well again, just mentioned that earlier. It's a combination of factors when you look at a goal. Historically it used to be race, it used to be effects, but now we have this uncertainty, which is of course triggering the purchases. But again, the uncertainty is really impacting all investors across the spectrum. As I said, we are seeing retail investors, we are seeing asset managers and insurers, pensions. We're seeing also center bank so and and again is it the
safest bed here? I don't know, right, But are we going to continue to see interest across the board most likely, yes, Now order the downside risks, well, downside risks is that the Trump administration is successful at rebalancing it's it's accounts and we end up having a very strong US economy with relatively limited deficits, and therefore the US becomes a
very attractive place to investiga in. Right. I mean a big part of the rotation to gold is also related to the drop in inequity markets, to drop in the MAC seven. Right, So let's say that we started to see against strong growth and strong rebalancing in the US as a result of all these policies, maybe gold isn't ass attractive anymore in that in that context, right, So, so I think we also have to consider the downside risks, not just the upside risks. Is never going to be a straight line for any.
Accident, Francisco, I just want to finish on the availability of gold and maybe lean on your conversations with clients so you can avoid offer in your opinion unless you've got one bio made share it. Do you think that losing confidence about that gold availability in places like the Bank of England is that behind some of the speculative drive we saw into gold over the past few months, I.
Don't think there's as much like a confidence in terms of what the stocks of gold being there. I think it's been more about the movement of gold to Europe into the US ahead of potential tires. Remember, there's a lot of instruments in the US that are issued. There
are instruments that may have a gold physical backing. And if you've promised investors on any kind of note with a structure note or an ETF or some kind of fund, that that goal is going to be physically available for the investor to take to take hold in the US, you're probably shipping gold out right just in case that those times go up and suddenly you face a big dislocation between the promote in the US and the product
the world. And some extent we've seen that in other commora instruments like copper and a bit less so in the energy space is a little more fungible. But investors are rushing to bring stuff into the US ahead of this so called liberation day tomorrow in the rose gardens.
So what is the impact of those times is going to be Well, again, you'd rather have your product in the US of a ahead of that potential price change, because unlike currencies and legal instruments, komoris are going to suffer the tires directly, right, So it's a direct play on the tires, and you'd rather be in than out when those tireff walls go up.
Another record hunt of the pounds away Francisco Prety second time breaking down Cade Francisco plunge to Bank America.
Around.
We begin this now with stock study has traded away President Trump for reciprocal tariffs. Emily Rowland of John Hancock writing, there is still a broad based global economic cycle that will drive earnings and valuations on stocks. Overall. This cycle maybe borrow time. As recent economic does start to show cracks, we would consider further pruning risk and portfolios. Emily. John, just now for more, Emily, welcome to the program. We've seen some major moves in this stock market through the
first quarter. Do you see some big opportunities opening up now? Yeah, John, So.
We are actually going to be moving to neutral on US large cap equities and actually allocating those assets to credit. And really it's not necessarily about the policy uncertainty. It's really just about the starting point. US stops have handily outperformed credit really since the stimulus boom in response to COVID, and we've seen a couple of exceptional years where earnings have been phenomenal. We've seen massive moldable expansion, back to back twenty five plus percent returns for the S and
P five hundred. So we're looking to where we can prove a little bit of risk off the top there, and global equities are really what's benefiting from this rotation. It is amazing to see what the leadership has been. It's German industrial companies, it's European banks, it's Chinese technology companies. That's a really odd mix in our mind, especially as we think about the potential for tariffs to create this
negative growth environment. We would actually be looking to look at income as a more important component of a portfolio than capital appreciation. So actually looking again to go a neutral on credit and neutral on US large caps.
You mentioned the performance we've seen abroad, the performance we've seen in places like Europe and we ne do you think some pain might be install for some of those European lungs going into tomorrow's announcement.
I think they could be challenged just because of the velocity of the move that we've seen there. Again, if you guys remember that Sesame Street Show where it was like one of these things is not like the other. That's what we keep thinking about as it relates to the cross asset performance profile in the wake of this policy uncertainty. US small cap sucks. Theoretically should be benefiting from the potential for these America first policies. We should
see the US dollar strengthening. Theoretically, that's not happening. Instead, we're seeing this massive sentiment driven rotation into these cyclical areas of the globe. Typically, cyclical assets should do best coming out of a global economic downturn, and we're actually seeing them out performing in a late cycle environment. So I think that sentiment could shift rapidly here. We have
to remember that this is a global economy. If US exceptionalism is at risk, if US equity exceptionalism is at risk, broad equity exceptionalism here is likely at risk as well, which is another reason we think that income is going to be a more important return driver than capital appreciation.
Emily, that is the line that I want to pick up on. If US accepts equities have lost their exceptional exceptionalism. The rest of the world's equities have also lost their exceptionalism, which is the reason why you see a good place for income producing assets. I wonder do you see bonds as actually outperforming equities this year amid this focus on income and not necessarily equity premium.
Yeah, we do, actually, Lisa, And some of the reasons that we've made this decision is kind of just thinking about that potential you mentioned before. US high yield bonds are yielding almost eight percent. Yes, there may be some spread widening, so we've come off the lows of about two hundred and fifty basis points over treasuries to a little bit over three hundred. Now, maybe you could see a bit more spread widening here, but now the income
is enough in our view to overcome that. You look at standard deviation over the last ten years for the S and P five hundred, about eighteen, we're looking at about five percent standard deviation on high yield bonds, and then finally looking back over the last decade, the maximum draw down that we've seen and stopped through about thirty three percent, and it's twenty one percent in high yield,
so it's not that we love credit. Within the context of fixed income, we actually still have an overweight to higher quality bonds over credit. But within the entire portfolio, we think being able to maximize or to minimize draw down, to be able to lower standard deviation, and to be able to get nearly an eight percent income on high yield is a decision that makes a lot of sense.
Emily.
When we started though, or John talked about how sentiments never been lower, at least not in the recent past, even though we haven't seen an even bigger bear market and broader stocks. And then I started to list off this recession called this recession call this person has gotten graded five times, And I was thinking to myself, I sound really bearish, and I sound as though we're heading
into armageddon. And is that a contrarian indicator? You know, the idea that we have discussed all of these worse case scenarios at a time where the consumer's talent seat is still pretty good. You do have companies that are still performing, Okay, Is there a sense that maybe we've gone too far and equities can reverberate back, especially lead by big tech.
There is I mean, at the end of the day, it's not that bad as it relates to the hard data. We watch things like initial claims really closely on Thursday mornings. We've been in the low two hundred thousands. There are some cracks forming there, Continuing claims are elevated. We've seen job opening slowing. We'll get another read on that this week. But the hard data are holding in really well, especially as it relates to the labor market. The challenge is
the soft data is horrible. Consumer expectations hitting a twelve month low, University of Michigan Sentiment Index declining. You all have talked a lot about that on the show. We've got to be mindful of that. First of all, those that soft data just soared after the election. We saw just massive optimism, things like home sentiment and HB Again, some of the sentiment surveys around expectations soaring, especially on the Republican side. So we've seen a little bit of
a give back there. And then we also have to remember that businesses and consumers sometimes say one thing and do another. I think durable goods coming in solid last week was another example of that. So we've got to be mindful. I'm not saying completely ignore the soft data. But we're watching the hard data for signs that a contraction is happening or something more nefarious is going on, and we're just not seeing it.
Emily appreciate the update. As always, it's good to see you, Emily Rowland of John Hancock. This is the Bloomberg Sevenans podcast, bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app