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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. Harry Cavasina of RBC writing, we are lowering our year end twenty five price targets of fifty five to fifty from sixty two hundred, essentially making our old bare case our new base case. Lurie joined us now for more, and Laurier have to say that old bear case, which is the new base case, is sounding like the bullcase based on the moose we've seen over the past few days. How you're reflecting on things over the weekend.
It's a great question, and I was actually talking to my energy trader, and the days are all bleeding together at this point. I think it was on Friday, and you know, we sort of discussed how we went from stagflation in terms of people's thinking to recession in about two seconds. And I've never seen anything like it where you've just seen the mentality shift so much so quickly.
But I will caution you that is what happens in growth spheres, and that is what we are Smack Dad in the middle of the seventeen point four percent draw down that we saw as of Friday was exactly in line with the average drawdown that we saw in twenty ten, twenty eleven, twenty fifteen, sixteen, and twenty eighteen.
Of course, that twenty eighteen.
Went all the way down twenty percent, which would take us around forty nine hundred on the S ANDP. This time around, I think just a touch under. And so this is what it feels like. You know, we have this tiers of fear framework we've talked about to help us navigate. We're in tier two. Tier one is the garden variety pullback. Tier two is the growth fhere. Tier three is recession. And so we have increasingly been talking to people, if we break through that twenty percent number,
what does recession look like? If you look at the average and the media and draw down it's about twenty seven and thirty two percent. It's taken out of forty two hundred and forty five hundred on the S and P.
We could do that. It's not unreasonable to be thinking.
About that, Laurie. We know how to price growth scarce. We're okay at that. We're fairly decent at knowing what a recession might look like, though we haven't seen many over the last twenty years. That's a shock to the cycle. The issue that we've been trying to get our hands around is how to price a shock to the system because of these are the new rules of the game. This is a change we haven't seen for decades, Lourie, How different is that?
So I think it's a great question. John.
And as I've been, you know, talking to investors over the past month, and we've been talking, we were talking about how.
That tier two fear was rising. One of the thoughts that occurred to.
Me, and I didn't like to say this out loud all that often, but it had felt a bit to me like this was January of twenty twenty, where there was something coming that we didn't quite know what it was. I will give you one bit of you know, comfort from that twenty twenty period, which was that that ended up being a garden variety recession in the thirties and terms of the drawdown from peak. And I know it doesn't make us all feel happy for me to say that out loud right now, but it does give me
a little bit of comfort. If you really want to talk about big crises, we don't have a big sample size on those. You know, We've got things like the tech bubble, We've got things like the GFC. You basically see the market lose hap its value. I'm not saying that's what's going to happen, but as we sort of explore, you know, the depths that we could go, that is the one outside of recession that you want to look at.
You said, Laurie in your recent note that full recession pricing could be a drawdown of some twenty seven to thirty two percent based on historical standards, which would take the index down to forty two hundred to forty five hundred. What would you have to see to start entertaining the idea of that being a base case?
So look, I think the street and we talked about this in our target note. We changed our target on Friday morning. It was clear to us on Thursday that that, you know, things were not going to hold in that garden variety territory. But the reality is that the street right now is really doing a lot of hard work modeling out what the economic impacts are.
And so we've got the impacts.
From the tariffs, but then we've also got secondary impacts, right, We've got impacts from all the uncertainty we've just had.
We've got secondary impacts. Even if the.
Tariffs get dialed down, there's still secondary impacts from the uncertainty that will be there going forward. This is a very very tough thing for the economics community to model. They're working through it now, and I will remind you, Lisa, a week ago, we were also all sitting here saying we've seen all this deterioration and the soft data, what about the hard data. We still haven't really seen any hard data yet for the recent impacts of all that uncertainty.
So we need that baseline to come out in this hard data to really understand what the damage is going to be.
At the same time that we're talking in these sort of catastrophic terms. I want to go back to the call that you actually made, which is gains on the S and F through the end of this year. What gives you hope or confidence that actually there is going to be some sort of rally.
What is the relief valve.
That you think Stymy's what this is as you frame a growth scare.
So, look, there are two things that you can look at. One of them I buy into the other that I don't.
I think that the thing that you know, and we've seen strategists you know, start to take their numbers down, A lot have not, and I think one of the reasons why a lot have not is because there is an understanding if you've been in this business long enough, that as fast as you go down, you can rally just as fast on the other side once something happens, once there's some sort of policy intervention, once there's some sort of change, And so I think that's keeping people,
you know, somewhat. I don't want to use the word complacent, because that's not what it is. It's a legitimate thing to worry about. But I do think the trigger in terms of the fundamentals for that is this idea that we get back to tax, that we get back to deregulation, that somehow this storm passes and we get to the promised lands of those business friendly things.
I'm not so excited about that.
But I will tell you the thing in my modeling, Lisa, that sort of keeps me sympathetic to that kind of V shaped type move, or at least on guard for it a little bit, is the idea that if you look at aaii netbulls, they are a very very good contrarian indicator.
If you're looking on a forward, say nine.
Month basis or twelve month basis, and we are down more than two standard deviations below the long term average. We have been there since the end of February. In terms of how lousy people have felt. That is similar to what we saw in twenty twenty two. It's similar to what we saw in the GFC. It's similar to also what we saw in the ninety ninety one recession. If you go back to the fall of twenty twenty two, there was despair running around the street. We had something
weird happen with that inflation spike. It wasn't quite a recession. It ended up being a great buying opportunity that nobody could even entertain in terms of kind of writing the sentences out on paper. But that indicator, that just sort of contrarian impulse, I think is something a lot of people in the strategy community have in their minds.
Laurie Helpers navigated the earning still to come. So on Friday, we were going into the hard daya looking for payrolls. Payrolls came and went. No one's talking about it, no one's mentioned it for the whole of this morning. For the Holy Yesterday, when we did special programming, the payrolls number didn't even come up.
We moved on quickly. This week it's about earnings.
Are we going to have the same behavior towards earnings this week when we hear from down to rail lines on Wednesday? From the banks on Friday? What would you use earnings this week for come they offer any guidance?
So, John, I don't think that the earnings this week we're going to offer much guidance beyond the banks themselves. You know, I think the airlines always give us some interesting clues, particularly in regards to consumer behaviors. Of course we want to pay attention to that, but you know, to be honest, the banks are not at the center of this storm. You know, we might hear some things in terms of trading volume and whatnot, but we knew, you know, back in early March at our financial conference,
that the banks were in pretty good shape. They were cognizant of what was going on, and they felt like they could manage through. So do we see any deviation from that message. That'll be one thing to look at. But really, John, what we care about is week two, Week three, week four, We two, we get more industrials. They're really more at the center of this storm. We need to hear what they're saying in terms of how
they manage their supply chains and pricing. You're not even going to get consumer companies till the end of this reporting season. You might have a few sprinkled out throughout, but this can be a long slog.
There's a lot of hard work to be done.
Companies have done a lousy job of giving the sell side, analyst community guidance on how to think about tariffs because that denialism you talked about, John, the companies have been guilty of this as well, and it's really frozen a lot of the people who cover stocks on the street, because when they don't understand what the sensitivities are, they can't model it.
And I will tell you I read a lot of transcripts.
Companies have not wanted to talk about anything until it comes to reality, and we're just now having that reality.
Hit them in the face.
Laurie, you don't have to answer this question if you don't want to. I don't want to put you in a tricky spot. But do you think that could be because these management teams didn't want to get on the wrong side of the administration? Do you think that was something that was driving that decision not to share their thoughts on tariffs? And do you think that'll change in the coming weeks.
You know, it's hard for me to speculate on what that is. I do worry about John.
About financial markets, and you know, I'm an old political science major. I study political political theory, and so I'm a big believer in the free marketplace of ideas, and I do think we have to have a free market place of ideas on the street for financial.
Markets to work well. But I think, to be honest, they have.
Really just not wanted to talk about things until they knew exactly what they had to talk about if we sort of look forward. You know, I think the conversation is going to get started. But I will tell you one of my analysts last week told me his companies they're not going to be able to figure out this in one quarter. It's going to take a couple quarters. And that was not a comforting thought to me.
Lurie, I appreciate your time as oas thanks for jumping on for us Lari canvasin event a VAMPI.
Sat excited to say I'm joined by Ed Mills this morning of Raymond James, and thank you so.
Much for joining.
A big question we have going into this week is is this a negotiating tactic. This reports in Japan the Prime Minister will get on the phone with the president this morning DC time, or are these the new rules of engagement.
I think it's a bit of both, and I think that they need more revenue to go to the tax cuts. I do think that this is a big part of trying to change policy and Marie, but I think that the problem for the President is that a lot of world leaders are not quite sure that they can negotiate with him. They look at the meeting between Trudeau Zelenski. They don't want to be embarrassed. They also don't know
what the president actually wants. He says he doesn't want a trade deficit, but there's some of these countries that will never be able to be at par you look at Vietnam in particular. I think one of the saving graces potentially is that the only thing that is still not subject to tariffs are USMCA compliant goods. That was a deal that he struck in his first term. Is he trying to send the signal that if I negotiate a deal that I am willing to stick with it.
The more USMCA goods are excluded, the more he can lean into that argument.
The trade deals take years to hammer out. Is the damage going to be done?
That's the question for markets, And when I talked to folks at Raymond James is that they are concerned that what they thought they understood about President Trump is not what they're getting. That there is a big concern that the equity markets are no longer a barometer of his success.
That they are concerned that he is going to be pushing for a change to the world global order that has existed since the end of World War II, and that they are concerned that he might go too far because his advisors are telling them in his first term he didn't go fast enough and that he wasn't able to do the change in the four years that he was president, and that there is a desire to go stronger, hold the course and try to push for additional change that we were not pricing into this market.
Will there be.
Legal or congressional challenges to the tariff plans.
I think that there's going to be both. I think with Congress. Congress has the ability under the National Emergencies Act to undo this emergency. However, it requires a veto proof majority. We saw the Senate pass a resolution on the Canada tariffs last week that was only fifty one to forty eight. It was a majority, but not veto proof. If he's not cutting deals, the tensions will grow when you look to the courts. He used emergency powers JEPA.
Yeah, AIPA.
Back in nineteen seventy one, Richard Nixon did the same thing, used emergency powers to put a worldwide global tariff as we came off the gold standard. There was a strong
argument there about an unbalanced of payments. Then in nineteen seventy four, Congress passed a trade Act that said, if there is an uneven balance of payments, the president's authority is to use what's known as Section one twenty two, where you can put a tariff on for one hundred and fifty days up to fifteen percent one to five. This is not what the president did here. So did
the president violate the congressional intent? Did the president use emergency authority when there isn't the subcontext for an emergency authority?
The problem for me.
Is that the courts, almost exclusively never say that the president's emergency action was not legitimate, and that the beef might be with Congress that the Congress has to make their action under the National Emergencies Act to turn off the emergency.
Saying in Congress, some good news for the administration was the fact that the Senate passed this budget is going to go to the House this week. When do you think we will see extension of tax cuts?
So I'm always looking for a crisis or deadline in DC before we act. You look at Republicans and they're trying to do this with the debt limit. So to me, that goes right up to the August recess, so probably.
The June July time period.
And when you look at that bill, what passed in the Senate was at least five trillion dollars worth of tax cuts over the next decade, a three hundred billion dollar increase in defense, in immigration spending. That would be the single largest bill in the history of the United States. And a lot of people look at this and say, all right, well, this is not going to be stimulative
because it's a continuation of current policy. But when you add in the changes to no tax on tips, overtime social security, extension of salt, extension of the child tax credit, in the business tax credits, I can come up with a reasonable argument that over the next year or two that's somewhere between five hundred billion in a trillion dollars
of additional stimulus. That's where the market is going to say, that's the bull case from here, especially if we start getting some of these trade deals struck.
Ed wills, Thank you so much from Raymond.
Jeans Justin Wolfers of the University of Michigan writing, these tariffs are going to hurt a lot. They're going to reshape your life in much more fundamental ways, and pleased to say that Justin has given us some time this morning just thin good morning to you, sir. Let's just breath some life into that quote. When you say this is going to change people's lives in fundamental ways, what do you.
Mean Next time you walk through the supermarket, just pick up that box of cookies or their pastor or that avocado, and just look on the side for where it's made. Even when it says whether it's made in America, think about whether or ingredients came from and very quickly you'll discover that every part of our lives is profoundly integrated with the global economy. And what we now have is on average twenty percent tax on every interaction we have
with the rest of the world. So we're going to have to shift what we buy, we shift how much we can afford, and you know, the rest of the world's off doing business with each other. This is a shock very much on Americans.
Justin.
You said, small tariffs create small problems, and big tariffs create huge ones. How much of this is just simply price increases. How much is this a real crimping in the economy, and how much is this actual supply chain disruptions? It kin to what we saw during the pandemic.
Yeah, so Lisa, this one of a few networks so I can actually come on and talk about it this way. There's something I hope your viewers remember from when they took introductory economics, which is that the cost of a tariff rises in the square of the tariff. So you know, when we move from one percent to two percent tariffs, which is basically what we did under the first Trump administration, it's just not a big deal. You know, if our two percent tariff can lead you to switch off buying something,
you probably didn't want it that much anyway. But now we're moving all the way up to twenty percent tariffs. And so by my calculation, that means that the second set of the tariffs in the second Trump administration will literally be fifty times more painful. To put it in simpler language. In the first Trump administration, if things became a little bit more expensive, you know, you could sort of soldier on and a percentage point here, and then
you're not really going to notice here. Every time you go to purchase something, every part of your supply chain, every store you visit, you want to ask yourself a question before you walk in hey to these prices make sense? Can I afford to keep doing this? Ought to be looking at a substitute even if it's a substitute I don't like as much. And that's the sense in which this is really fundamentally going to change every part of our lives.
Which raises the question of what the bigger risk is right now? Is it stay fleation or is it recession? And people have been asking this question initially is stay fleation was the main case? If this really does suppress demand, at what point are we just talking out a recession?
Listen.
I think one of the hard things to do right now is to interpret the news that we're getting. So realize that stocks have fallen twelve thirteen percent over the past a few trading days, but realize they'd already priced in their best guess at what the Trump tariffs would look like, and even right now they're pricing in a
very large probability that Trump backs off. So if you took all of that out, that suggests that markets believe that the cost of these tariffs are much much larger than the ten than the twelve or thirteen percent that markets have subtracted as a result so if they got clarity that Trump were going to stick with this, it would be even more calamitous. Look, you raise a really important question, which is it's a very very asymmetric set
of risks. And so here's the thing Trump doesn't understand, which is he remembers from when he was young that there were very not very large, there were large trading barriers within a number of countries. That's simply not true. We had decades and decades of aid liberalization and it's no longer true. So look, heads we win, we can get a country like Vietnam to get rid of its tariffs, but realize the gain there is Vietnam is going to reduce its tariffreate from one point one percent to zero.
Tales we lose. We're facing thirty four percent tariffs on trying to export stuff from China. So this is a game where there's not much to win, but there's a whole heck of a lot to lose.
Justin can we sit on the sources of inflation and the potential for further price increases when you look across the economy of various industries, and you mentioned food production repeatedly through this conversation, are there certain industries where demand will be high but capacity will continue to be low and constrained here domestically in the United States that you would worry about in the coming months.
Man, I'm just going to tell you, I'm not very good getting down to the sector bisector staff. So you've got all sorts of really smart analysts, and so I reckon you oud oppose it to them.
I'm sure I'll ask them that question and they would probably point to what you've pointed to food production, and that could be the issue going forward from here. That raises the question about consumer price tolerance justin and maybe you can speak to that. This is going to be the interesting interplay for us as we watch financial markets and how corporations respond in the coming days, the interplay between margins whether they'll absorb some of this or whether
they'll pass it on consumer price tolerance. Are we in a different phase of the economic cycle compared to where we were several years ago, when consumers could absorb some of the higher costs.
Made were in a very different place. So, first of all, during the last downturn, we had enormous amounts of government support coming and more to the point, we had you know, through twenty twenty one, a government that, whether you like it or not, appeared to be competent on its face, we had no surge in economic uncertainty. Look, one of the things that's really unnerved to all of us over the past few days is not just the tariffs. It's
the clown show that's come with it. It's tariff's on penguins, it's setting tariffs proportional to the bilateral trade deficit, which
Noah on Earth will tell you it's defensible. And then it's sending out the entire cabinet to the Sunday shows, where each one of them, on a different network gave a different rationale for what's going on, basically leaving us all with the conclusion that the global economy is being held hostage by the whims of just one man, which is not usually how we like democracies or economies to work.
Justin, I appreciate your time, sir, as always, and your honor's response as always, Justin Wolferstan at the University of Michigan. Macan Draper Barkley's writing this coinflation will likely rise markedly over the coming months as taris are implemented, labor report needs to weaken materially for the fat to cut as much as it's currently priced then by the market. Maganjoin's is now for more. Megan, gim morning, get to see you,
Good morning, to see you. What changed the chairman pal over the last week.
Oh, I mean things have become much cloudier. I think it's a much more complicated hand that he's been delt. And frankly, we've downgraded our growth forecast I think in good company across the street over the course of the last forty eight hours. So calling for two periods of negative growth in the second half of this year, or calling for unemployment to tick back up to four point six by year end. But the bigger problem for the Fed is that we're calling for an increase in inflation.
So it's up four percent on.
The course EPI number by your end, three seven on core PCE. But to your point earlier, you know, it's not really about where inflation is today. I think for Powell, he's looking out where is inflation a year from now or two years from now, and looking his legacy as a.
Piece of that.
You're running deck capital markets.
How well supplied does this market been in the lead up to this and what kind of issuance are you expecting in the next few months.
Now, Yeah, you know, this is an a liquidity event and I think that's the net positive. So if we look at investment grade markets, is really becoming a safe harbor for issuers and investors. We started out the year with a record amount of supply, an all time record.
Why is that it's front loading. It's not a nominal increase in funding needs, but it was a defensive posturing I think heading into expectations that this year would be choppy to navigate, and so you think about you know, the issuers we're talking to as on the road the last week, talking to CFOs and treasures, they're very defensively positioned heading into this, which netnet is a positive. You know,
they have extended their maturity profiles. You're watching EBITDAH margins that are upwards of thirty percent still in it's far above two thousand and four highs, and you know, at the end of the day, they're appealing to investors who are flushed with liquidity.
So you talk to the buy side.
You know, the silver lining, the bright spot, and the noise we saw in the last forty eight hours. Is that investors continue to have cash to spend. Why there's four hundred billion of coupon and come back coming back into investor's hands this year, they've got record COVID debt maturing. That's all cash coming back into investors pockets. And so we saw actually net buying over the course of Friday session, as bad as it felt in their places, you know, two and a half billion of net buying.
It's pretty astonishing.
Well, we've also seen deals pulled. People have been companies have been planning to issue certain deals and have decided maybe they ought to wait till another time because this might not be the best week in the world. Does that concern you or is this just a timing for the best price kind of issue? And if they needed to and wanted to, they probably could just a small haircut to what they would like.
Yeah.
I mean in investment grade, we haven't had deals pulled, but they've been postponed. So we're evaluating entry points. And it's really three camps I think emerging as I talked to issuers. The first are yield centric investors, and so you look at these moves and underlying treasury yields.
It's more than offset spread widening.
We've seen an investment grade, so you know, in mid January, you know, four seventy eight on the tenure note. You know, four percent or sub four percent feels like a reasonably good entry point, even if you need to pay higher new issue concessions to appeal to some of that liquidity.
Then you got spread focused borrowers.
I think there it's a bit more defensive shelter in place, if you will. But in talking to what are largely bank buyers in that subset of issuers, many of them are already forty to sixty percent through their funding needs for the year.
There's no real urgency here. We're not seeing any signs of panic.
And then there are others that are just flush with cash and I think maybe disappointed that business investment is slowing, but all in all, I think well positioned and willing to write out the storm.
There's a larger question here. You said that there's plenty of cash in the investor base is looking for good investments. A lot of the investor base used to be overseas, Japan in particular, and there's a real question, and John was alluding to it, earlier. Will some international buyers withdraw their interest from the US markets on the heels of a whole host of different policies as well as currency differentials. Are you seeing any signs of that.
It's a great point, and I think it's something we need to continue to closely monitor. So retaliation may not be just as it relates to tariffs, may actually be as it relates to investment in US assets.
And the largest growth of.
Underpinning to demand an investment grade credit has come from overseas investors. It's twenty to twenty five percent of the market, so not insubstantial. On the new issue side, it's probably fifteen percent of the order books that we'll be seeing. It's about forty percent of that is Europe, about twenty five percent of that it's Asia, and then you've got ten percent or so from Canada. The mitigans to that money moving away from investment grade credit are really two
or threefold. One is they already own twenty to twenty five percent. So are you really working against your own book by pairing back or not showing up to not showing up to the new issues that emerge here. On the other hand, it's one of the few places you can source duration, and it's also the most liquid market around the globe, so eight and a half trillion of assets, it would be difficult, I think, to move back to
their whole markets. We did see one or two instances of smaller size real money pension investors on principle stepping back from the market last week, but it's a small fraction and net net six and a half of net buying over the course of the week says it was dropping the bucket in terms of those who paired back.
But certainly something we need to keep an eye on.
Race is the question where asked you go my gape and it was just on just pig me on the Bloomberg terminal said trades only a fraction of US GDP compared to other countries. The larger revisions may come outside the US, and it may be more of a global recession story than a US one.
That's something we have to think about. I think.
Over the last two months or so, we just talked about trade, looked at the market move. The market was basically the bias for everyone to frame their own view on what was happening at the moment. Equities were under performing in America outperforming in Europe. Everyone talked about the pain in the United States over the past week or so. We've only just started to talk about the pain abroad in Europe, stocks down hard, Japan, in China.
That's a new phase of this story.
This was what people thought would happen, like late last year, where they were looking at a potential terror regime, the US sneezes and the rest of the world catches it called that was upended partly because people a didn't believe that these tariffs would go on, and B we're so excited about the idea that Germany was going to spend money that it seemed like the whole world could be
a brighter place with fiscal stimulus. On some level, there is this issue of whether this is the right sizing and the unwind of some of that capital shift that we saw.
Earlier this year.
Megan, this was a clinic. It's great to cant show with you. Thanks for your time, Thank you very much, making great for their of Barclays. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angiot 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.