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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am Marie 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. Mohammad al Owen of Queen's College, Cambridge, writing, the US has taken its economy and those of other countries on an uncomfortable journey to an uncertain destination. This will severely test the financial system and America's global standing. Muhammed joins us now for more. Mohammed, looking forward to spending the next two hours with you.
Good morning, Good morning, Thank you John one. Your reaction to this headline here from the President in the last hour so add on Truth's social social media platform. The President following maybe some of the ECB commentary this morning, expectations that they'll reduce interest rates and complaining why isn't the Federal Reserve doing the same thing? And he ends this post with this line here, Mohammad Powell's termination cannot come fast enough. Now, the debate we've had around the
table is how do you interpret that line. Is that someone waiting for the expiration of a term that takes place in May of next year, or someone who's thinking about doing things sooner.
So only President Trump knows what that means. But it should come as no surprise. We know that President Trump has been frustrated at the absence of interest rate cuts. I suspect you got very angry when you heard Chair Powell yesterday. Chair Poal really put all the blame on tariffs, gave no possibility to the better outcome zero given zero possibility. And then there's one thing you have to remember. I know that the conventional wisdom is that this is an
attack on the independence of the FED. There is another way of looking at this, which is this Fed has sacrificed people in the past. If you remember the president of the Dallas Fed, the president of the Boston FED. The vice chair was sacrificed ahead of Congress looking into allegations of insider trading if you remember, the potential side
was sacrificed to protect the monetary policy side. And it wouldn't surprise me if President Trump is pushing on this, because there's a real question for Chair Pale should he step down to preserve the independence of the Fed, because otherwise the Federal will be the subject of a lot of attacks going.
Forward if he did step down, with that call into question even more the independs of the Federal Reserve, what's the ultimate outcome here?
So this is a judgment that has to be made, and has to be made by Chairpalell. There are credible candidates. Kevin Walsh, for example, The markets would be very comfortable with Kevin Walsh as the FED chair. He has tremendous experience, He understands the market, understands the economics, he has expertise.
So you know, I could see a scenario in which what Secretary Bassett said before the election plays out, where they pre announce Kevin as the next chair, and then that puts tremendous pressure and then Chair Powell has to make a very difficult decision.
Let's say that happens.
And I know that's not your base case right now, you can tell us if it is, but it hasn't been before. Let's say it happens, though, how do you think the market would respond to that?
So I think the market would look at Kevin Walsh and think he's a very credible FET chair, And I think the market would rather have a credible FET chair that's not in continuous conflict with the White House than being continuous conflict with God. The Harvard example gives you is an illustration of what can happen. You can suddenly have all sorts of other things questioned about the FED if it's in direct conflict with the White House.
Isn't this conversation alone putting in question the independence of the FED? We're talking about scenario where we could basically get around the White House to placate the president.
But we've seen that scenarios where they've gone around the Congress to placate the Congress. We've seen a situation where in the beginning they sacrifice the pretential side. Michael bo was a vice chair and he stepped down. So I don't think this is a much structural break, but I do think there's a very delicate judgment, and Marie here very delicate and I'm glad I don't have to make it.
Well, it almost sounds like you agree with the president in this sense. His termination cannot come fast enough, meaning when Powell's out of the job, it cannot.
Be soon enough.
It sounds like you agree with that.
So the word termination is a very strong word, right, that word, I must say. I looked at it and thought, wow, that's a really strong word. But we do know that in a year's time, Chairpal will step down. We know that, we know that he's not going for us. We know he's not going to get a third term, so that issue is out there. We also know the President is
really frustrated about interest rates not being cut. And I go back yesterday's comments by Chair Powell, which he went well beyond what he've said in the past, were like a red rag to the White House.
You've been critical of the Fellow Reserve before. You've referenced this address a couple of times. Now what stood out for you yesterday? Where do you think the Chairman went wrong?
So?
Actually, I think the Chairman yesterday was less political than he normally is. I do think that we all have to give the possibility of the good scenario. The market certainly. Does you heard me say the market is fifty to fifty. As to which of the two outcomes in the destination
is going to play out. Is this going to be a Jimmy Carter moment with prolonged taxlation or is this going to be a Margaret Thatcher run a Wagan moment where you rewire not just the domestic economies, but to rewire a global economy.
Isn't the fact?
Yeah, basically acknowledging that by saying, we've got a way for more clarity before we can decide what we need to do.
Yes, but he went much further. I mean, I have all that. He generally said, we have to wait for greater clarity, but he kept on pushing on the challenges to do a mandate. He kept on pushing that inflation may be persistent. He hasn't said that in the past. Two meetings ago, he reintroduced transitory. Two meetings ago he we introduced transitory when we talk about tariffs, and then last meeting he walked it back. And now he's gone one step further and made a very strong statement.
So let's talk about the optimal outcome. What does it look like in the months to come.
I think I am in the same vote that everybody else is saying. This is a really highly uncertain time. You know, I think this is an uncertain journey to an uncertain destination, and the market has been swinging one way and the other. You said it this morning, depending on the tariff news, it's either excitement or fear.
Yesterday we did also here J. Powell talk out the Smoot Holly levies of the nineteen thirties, ninety five years ago, and he said there isn't a modern experience for how to think about this.
Do you agree with him?
Or can you draw some modern experiences to deal with this time right now?
No, it's hard. I mean, by the way, that was a strong statement as well, something that he hasn't gone anywhere near before, and.
That was the Faires Bueller scene I was alluding to earlier.
Correct, and I remember that scene that he should have referred to in the movie. No, we haven't had this before. This is an attempt to rewire the global economy, and we haven't had this in an integrated globalized economy.
Are you surprised by how different Powell sounds from Waller?
Yes? I do. I'm surprised how different Wallers sounds from Waller a year ago.
I think he's running.
It's been quite a transformation. Let's put it this way.
Do you know how he did do a good job yesterday? Ragged Raj Jahan.
He was a great He was absolutely fantastic, and he asked this question I'm place he asked. They talked about the difference of a challenge to the cycle and the challenge to the system. And you and I've reflected on this too, the challenge to the system here, how are you thinking about that challenge at the moment.
So first of all, let me say Rugu was great because not only did he keep the flow going, but for those who are not very familiar with economics, he explained why he was asking the questions, and he did really well. You know, we've put it slightly differently. Is that normally advanced economy live in cyclical space and developing countries live in structural space. Now suddenly we have advanced
economies living in structural space. So the boundaries to the cyclical fluctuations are no longer holding, or they are much wider than there were before. So we have a whole range of potential outcome. I love the United earnings call when they came out with two scenarios, it's a bimodal world. MX today came out with a huge qualifier saying it's
subject to the global macroeconomy. So companies are not only thinking internally about arrange of outcomes, they're expressing it in their earnings course.
As allocators need to do the same exercise. They need to work out what the future looks like. And Rujan talked about a change in US philosophy. So in the post war system, as you know better than most, US assets are at the very heart of it. And the interpretation of this administration appears to be that their responsibilities are a net burden and not a net benefit, and
they're trying to rebalance that. They look at the FX so called distortions, that's what Steven Myron called them, and they don't look at the benefits that come from this structural bid for US as sets that deliver lower interest rates than maybe that otherwise get what are the dangers of trying to rebalance that over the period of say three and a half years.
So, whether it is the US, whether it is the UK with the EU, this integration does two things to your balance sheet. It increases the gains and increases the potential losses, so you now operate at a higher level of both. And if you don't manage the potential losses, then people will focus on that and forget about the gains. We sort o the UK with Brexit. So I think the more integrated economies come, the more you have to manage the downside risks. I say this because AI is
really critical in this. We've got to manage the downside risk to exploit the enormous benefits that come from that mom.
And you said, when you look at developing economies, it's structural and like the United States, we're cyclical. Is everyone just viewing this moment wrong? Should we be thinking about developing economy when looking at what is going on right now in US in terms of policy.
Well, some have tried to make that parallel when saying it's highly unusual to see the US having higher interest rates and a weekend dollar. That happens in the developing world that doesn't happen in advanced economies. I think that's a step too far. I think what we're seeing is a portfolio reallocation from an overweight to the US to more balanced globally. That is what we're seeing, and I thought, wik reader yesterday on the show, what's great with that?
So here's the latest this morning starts at heading for a week of losses is Chan Chan Pound pause freezing cold water over the so called fed pert joining us now to discuss as Jean Pavan of Black Rock Jean get to see you, sir, some reaction by the President of the United States earlier on this morning, which I'm sure you saw, complaining that the chairman had not cut interest rates unlike the ECP, which is set to do in about thirty minutes time, and saying at the end
of his social media post this morning, the pals termination cannot come fast enough. If clients asked you about that line this morning, what will you tell them?
Well, I spent a week in Europe last week, and I'm going to tell you that the discussion about like us asset then we should think about this environment is totally different than everything I've seen. And I think that kind of development in the context.
That is already one that investors are.
Shaky, I think will require had a bit of work to reassure. I think you know what I would say would fall back to I think there are immutable laws that i'd play here.
We're going to be bumping into them.
We need to be ready for some kios along the way, but we're going to be bumping into some pretty immutable laws, and I think that's what we need to get a handle on.
We've said repeatedly on this program this morning that we'd like clarity from the White House what termination actually means.
Does it mean the expiration of.
The term may next year said to take place, or moving that forward and doing something more dramatic. But you've touched on something important, the erosion of trust in US assets that we've seen. Some people have made the case that over the last week all we saw was treasury markets responding to the unwinding a trade, some hedge funds blowing up, and maybe it was nothing bigger than that.
What do you think it was.
I think there's a broad story here, and if I had to say one word, I think it's debt. It's the large US debt that is a big part of the story here. But you know, I think we've seen and we were with a view with discuss that before that we were.
An environment shape by supply.
I think the tariff discussion we're having here is very much an example of another supply shock that is that is leading German power to be more awkish and people expected, I guess, but there is a really real story of supply shock that is putting pressure on rates to go up.
So I think there was already uh, pressure for long term rates to go up, but you add on top of that, you know, questions about tariffs that are really like if you really are trying to decouple from the rest of the world quickly, Uh, that also means that you're cutting yourself out from a source of funding for your debt, and the that is large and I think this is this is the the key thing that is driving here is that you know, the financiers of that debt,
people financing it, are looking at this differently now and I think that's adding another kind of risk premium, if you will, in terms of long term rates. And so that is the nimic at least, not about one player. It's not about like you know, one official government selling or not. I think this is a broader kind of sentiment story.
So Jean, you set up, you told us about what you heard, You told us about the sentiment, how far are we in this rebalancing from the US to the rest of the world.
I think we're pretty far.
I mean, if if there's a if they are real intent of reducing current account deficit and surpluses and balancing these things, were very far from that objective and decoupling, and in fact, I don't think that can happen very quickly.
So to me, this is more than there's a very.
Near term, kind of immutable kind of constraint that we're going to be bumping against, as I said before, and it's going to be materializing by rates going up, which will make the debt look very different for the government I think themselves. I think their bigger channe The biggest challenge for them is rates at five percent ten year changes completely the budget are in medic going forward, and I think that will have to be confronted at some point. So that's why I mean, no matter the intent, I
think we're going to be stopp along the way. It's a many year's process as opposed to a mini month's.
Process, and that goes against a key objective from this administration, which is to keep rates much lower. They want to see it going lower to four percent. When it comes to things like who is dumping these assets? The Treasury Secretary didn't seem to think it was foreign governments. Do you think it's sovereigns?
As I said, I think this is a broader global reassessment and thinking. I think there's broad fundamental reasons for rates to go up, and then you get events like we got last week, and it adds to this narrative.
So I think it's difficult.
To pinpoint like a single source. I think this is broader. And then when these things happen, there's always other things that happen at the same time, so you get like the dynamic leveraging in the market that gets triggered by this. So I don't think we'll ever pinpoint one, but I think we should take note that there is a sentiment story that is playing on.
So John, one of the things that is really debated right now among global macro ponomous is what is the beta of the rest of the world to US growth. So some people feel that it'ser point five, others feel it's more than one. Where would you put the beta the growth beta of the rest of the world, Well, it's the US for Europe and for developing countries.
You know, I think there's a distinction between where this administration might want to go in many years from now and where we are right now. I don't think the world has changed materially yet. I mean, yes, the tone and everything has changed like drastically, and the uncertainty is as uncertainty as we've ever seen it, as you said before, But right now, the fundamentals where the US is still very much as link as it was. And I think we've seen it right, you know, when we've seen the
baration day, we've seen the US market tank. It's not like Europe has outperformed during those days or other markets are. So the beta is still very much as strong as it was.
Over time, more than one, more than one or less than one.
I think we're looking at something that looks like one right now. So I don't think I wouldn't.
Take a big on either side, but I think it looks like it's very much correlated with it.
Does that mean you can't think is bigger bet for Europe against the United States and vice versa if they're on the same boat.
Yeah, So I think I think it's it's it's it's something.
To say US is risky, so let's let's go elsewhere. But because of that beta, I think we're still in the world where you know, all boats will be moving together. But there is one thing happening though, is that in this environment that you know, clients have always been having a home bias, right, it's easier to invest shelter to home. I think that exacerbates that home bias we have. So it's in this environment.
Your high conviction view is actually in the treasury market. So should we finish on that underway treasure raise? Is it for all the reasons we've discussed or something missing?
It's for while we had on top of that the inflation story that is not resolved. It's actually being you know, fueled somewhat more with with those measures.
So we have been on the way to us church.
This is the highest conviction we've been having for the last many months, even I would say many years. We're setting through a high rate environment. Everything we see confirms out and the leader's development. I think after that as well, and.
The latest communication from cham and Pan which reinforced it to Choman Van a black crop can I'm shure before my senior Trump trying to advice that joins us now for more Candian is.
Good to see you. Good to see you as well.
What are the prospects of making a deal in this smaller timeframe with this money countries?
Well, I think the chances of making a deal with Japan seem pretty high. Right, Like you've heard bess and talk about the fact that there are about fifteen countries with whom they're close to making a deal. I don't foresee ninety countries in ninety days, but certainly with some of our major trading partners with whom we have some of these significant issues, I do think the administration is very optimistic.
Let's talk about the one that's a little bit harder, China. They came out this week with a number of demands they'd like to see response. By the way, we should note this was a bloomberg scoop according to someone familiar with the CCP, thinking right now, do you think this administration is ready to appoint a point person for Beijing to deal with.
Well, I think both sides are looking to see if there is an off ramp. Right Like last week, we backed ourselves into a trade embargo between the two world's largest economies, So there has to be a way to resolve this at some sort of political level, and I
think appointing someone seems like a reasonable way forward. But that said, the President has said that he wants to negotiate directly with Shijing Pang, so there's going to be some negotiations behind the scenes to see if they want to back off that approach or if they're willing to delegate one level down.
Do you think the likely scenario here is that there's a call and then they appoint someone, and then who do you think that individual's going to be?
Well, of the constellations of actors, who it could be. It could be a Secretary Bessant, could be a Secretary Letnik, it could be someone like Jamison Greer. But I do think that in the last week or two we've seen Bessant really take the lead publicly in terms of advancing some of the President's trade agenda points. He would be a likely interlocutor with the Chinese when it.
Comes to the other deals. And speaking of China, the Secretary has insinuated he wants to shore up some of these other deals and then confront China together. Is that the kind of concessions they're looking for? When they talk to Japan or the European Union or Vietnam.
Well, I think, like taking a step back, this is existential from their perspective of the administration, that we are overly reliant on China, that the Western world has become overly reliant on China, and so it makes sense from their perspective to look at building alliances with other countries where they adopt some of the same measures that the
United States does. And even from the perspective of third markets, if the United States and China are in this posture of not trading with one another, those goods are going to go somewhere else. They're going to flood other markets, and so I think that's what they're trying to get to. But the question for me is some of these Asian nations in particular, are they going to pick sides. Are they going to be willing to put up some of these barriers on China or not.
So when it comes to other investigations and administration is launching, we learned this week that there is an investigation a section two thirty two on pharmaceuticals on semi conductors that was launched April first. Why did we learn about it this way.
I have to say I spent ten years in government and have never heard of a secret.
Two thirty two.
But that's effectively what we saw happen. Well, there is no legal obligation to notify the public that an investigation has been launched. There is a legal obligation to give the public an opportunity to comment. But some of this may have just been there's so much going on that they failed to alert the public. Could be that they were just investigating and sort of got out over their skis.
But for whatever reason, it's neither here nor there. We're in an active investigation and the administration has two hundred and seventy days to complete those investigations.
They have two seventy How quickly can they wrap it up.
As soon as almost humanly possible? So that comment period is I think it's going to be May seventh when all those comments are due. They could potentially announce the results as soon as May eighth. Now I don't think it will be the soon. I think they'll give themselves another month to digest some of the comments. But we've heard Secretary Best or Secretary Letnix say that within a month or two we're likely to see some of those measures.
A couple of names in the mix right now, Who do you think is running the show at the moment?
I think Donald Trump. I think President Trump is running the show. He has always been his own trade advisor. But of the economic advisors who seemed to be in the mix, Secretary Bessett, Secretary Latnik, Jamison, and Career.
Does it surprise you that the Treasury Secretary has almost made a U term when it comes to negotiations in the past two weeks. When I spoke to him after what Trump called Liberation Day, he said he wasn't part of the negotiations. Then clarified to me this week he meant he wasn't in charge or a part of the negotiations regarding the tariff rates. On that big chart, How big of a disagreement was those reciprocal tariffs.
Yeah.
In Trump run, it was very clear that we had different advisors on different spectrums. We had the free traders, we had the protectionists, and Trump two the difference between them is much smaller, right, So, I think you have advisors who might have different perspectives, but their view is largely rowing in the same direction. So I don't see
the same break in the same way. But I do agree that Secretary Bessant is much more active now in terms of driving some of the agenda, at least in terms of the public voice of the administration.
And this is certainly something malcat Pontispen's wanted to say, including Jamie time at a JP Morgan, who basically said that in a Financial Times interview.
Early this week.
He said he's an adult in the room and he likes that he's now taking a louder voice when it comes to these trade negotiations and thinks he should be the point person. Neil Dutta has talked about this the ascent of Bessent, and he said Trump has cracked a lot of eggs and now it's up to the secretary to make an omelet. So Wall Street is definitely feeling more comfortable that the Treasury Secretary is the one who's bit more careful with his words when it comes to
these negotiations. He's in driver and seat.
Kellyan's good to say thanks for dropping bye, thank you. The former senior Trump tried to devise a Kelly On show with that. The New York Fed President John Williams, speaking at the moment just said this. The economy is in a very good place. Learn Goodwin of New York Life. John's isnaw from are Lauren, Come, I ask you, is the economy in a very good place?
Ooh?
I think the economy is in a pretty precarious place. But we're starting from a really strong base. Our economic scenario is. Coming into this year, we expected growth to slow from around two and a half percent to just below two percent. We're now looking at half a percent of GDP growth out of the US this year. So it's not a recession, but that's a much more worrisome position, let's say, than we expected just a couple.
Of months ago.
And perhaps more important than that, though we have about a fifty to fifty percentage on recession versus not. We're pretty confident that will end the year with inflation higher
than it is. And so as I see investors look around and say, maybe we'll wait and see see how tariffs develop, see how monetary policy developed, I look at that expectation for higher inflation, and I say, even if you were going to wait and see, do you have the portfolio that you need to wait and see When we have such inflation volatility.
Let's get in that in a second, to just focus on the economy of monetary policy, and then we can get to the market. Cause if you think the growth is going to come down from three to zero point five and inflation by the end of the year will be higher than now Cham and Pal, it's not giving us any clues on what hate reduce interest rights? When do you think hate reduce interest rights? If at all?
I think that the FED will do as much as it can to do as little as possible. It's just very difficult to change policy credibly in a position where inflation in inflation expectations are so.
On the line.
Do I completely agree with Mike that short term inflation expectations that we're seeing out of consumers, out of businesses have de anchored in a meaningful way in reaction to how people feel right now. I expect that those will come down as reality proves to be less dire. But we're still in an environment where, in order for the FED to avoid some of the worst case scenarios for the econ ME, cutting rates doesn't get you there. I don't think cutting rates does much to shore up supply
chain challenges. Cutting rates certainly doesn't do much to manage inflation expectations in both short and long term market interest rates, and so they're going to do everything they can not to move.
So your base case is stackflation.
Stackflation light, where you have a little bit of growth but inflation moving up. And the difference between being in recession and not in recession, I think is meaningful for the markets. But when we're looking at the economic scenario, not a whole lot of daylight between us sort of muddle through with inflation as opposed to an outright recession. Our lowest probability, about fifteen percent, is for a recession that's deep enough and demand destruction is pronounced enough to
actually bring inflation lower. I think that's the least likely scenario.
You mentioned things like trade and supply chains. The President was out this morning with a few different social media posts, but one of them was about the fact that he talked to Mexico, He talked to the Japanese, the GHOSTI. He says, even China is waiting to come in. The Italians are here today. What if all these trade barriers and concerns are actually solved within ninety days.
For one, I think it's very unlikely and expect that the average tariff rate will be higher in a couple of months than it was a couple of months ago, which has a meaningful impact on inflation. But perhaps more important, tariffs are a negotiating tool, but they're also a policy in themselves. We've been hearing from the administration that trade deficit is perceived as a sign of global economic weakness, and it's a challenge that the administration is looking to resolve on top of that.
If the goal of.
Those policies in the end is to re shore some important supply chains, how far that goes remains to be seen. But even so, that's a very capital intensive trend that frankly, even if tariffs were completely rolled back and we shook our shook our hands of the last couple of weeks, those capital intensive trends are happening, they're underway. And see that as an environment where outright disinflation is unlikely.
So, Louren, you tease the portfolio implications of everything we just discussed at the beginning of the interview. So what audi and how far our investors from where you think they should be.
For starters the sixty to forty portfolio, and look not all investors use it, but just as a baseline, the sixty to forty portfolio was designed for a period where inflation and inflation volatility were low. That's not the situation that we're in right now, and so it's not the benchmark probably that investors should be using.
For two, if you think.
About the last fifteen years, the most effective acid allocation, if we're all honest with ourselves, would have been to be ninety percent invested in US large cap growth equity. We got a couple of extra years of that, even as inflation rates have been higher because of the boom from AI.
But as I look forward, I.
Don't think that that's the allocation that overweight US equity allocation that makes the most sense moving forward. So geographic rebalance I think is important. We're definitely seeing that out of x US investors already. I think US investors need to do the same. We're also looking at building inflation resilience, whether that's in dividend payers or inflation or income generating equity, or by taking equity like risk in credit or in
the bond market. And we're considering some hedges for inflation volatility. Those moments when you get inflation surprises, so including gold, real estate, other inflation aware asset classes sort of.
One thing you didn't mention is government bonds. You completely avoided government bonds, So let me take you there. What about government bonds?
So I have very high conviction that duration is a tactical bet at best for the foreseeable future. Now we know that, taking the ten year treasury bond as an example, there are three things that move the tenure treasury the path of the Fed funds rate over that ten year period. We're not seeing a lot of price expectation or changing there inflation expectations which have been pretty well anchored, but are are there's a wide dispersion of estimates so that
it moves a little higher. And then the term premium, supply and demand issues, and not only in moves in the tenure but also in moves in currency tell us that demand for treasuries is fraying a bit on the margin, and that makes sense to me given the what we're seeing globally. So that's an environment where I think the tenure treasury yield is absolutely live between four and five percent.
So if you can be in the market tactically and trade those moves, sure, but for the average investor that's making one month, three month, two year changes, duration is not our favorite place to take.
Risk, Lauren.
I appreciate the clarity. It's good to see. As always, thank you, Lauren good when they're in New York life. This is the Bloomberg Sevenmans podcast, bringing you the best in markets, economics, antiopolitics. 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 out
Mm hmm.