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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. Tell me up this
our will catch er. We're seen as Shower of Principal ASSEM Management with stocks at record highs, Edmill's of Raymond James as Canada and Mexico respond to Trump's tariff threads, and Wendy Steward of Bank for America on the outlook for commercial banking. We begin this sour with stocks at all time highs, investors looking ahead to pay rolls to
CPI and the last FED decision of the year. Same as Shower of Principal ASSA Management, saying come early twenty twenty five rather than rece you've seen policy rates at each meeting, the FED is likely to slow it's coming pace to every other meeting, with some risks that rates don't fall as far as either the FED or the market had originally envisioned. Saman joined just now for more Samoa, welcome back and it's good to see you as always. How problematic do you expect that to be to equities?
Well, actually, I don't.
Know if it's going to be that problematic, but equities, I think the key thing that equities need is the strong growth and almost a FED put so. Where it becomes really challenging, though, is if inflation starts to become a little bit more concerning and then the FED doesn't cut race it's far because they're worried about inflation expectations increasing. That I think would be the flying the ointment for equities.
But otherwise I'm going to add to the masses. I'm pretty positive about next year.
Really positive about next year for the US and Europe, or just the US, because all I've heard is the US, US, US and Europe's kind of been left in a dust.
Yeah, I think the story for Europe has got even worse in the last couple of weeks. Use exceptionalism was the story for this year. It's going to be the story for next year, even more so now that we've got the election behind US and Europe it was already struggling with weak fundamentals.
The economy is already struggling.
We've already seen evidence it now services is joy manufacturing in that cooling period. So I think it's a challenging period for Europe and certainly for US. It's more about US secrities in Europe. I think there are opportunities in other parts of the world, some segments in Asia, various pockets, but overall, I think this is going to be another year where you see continued strength for the US.
Seem Can you quantify how much you're sort of doubling down on this bet that the United States is going to be the bright spot and that Europe is going to be even worse than it was this year.
I think that Europe.
I think the thing that we're trying to watch as well is we have to keep in eye those technicals.
We're a sentiment.
We do think that sentiment is getting incredibly negative about Europe. As you've just said, everyone is joining in to that massive US over Europe and becoming very, very negative on that side, valuations value attractive figure. So it could be that you just need a slight improvement in the outlook for Europe, some kind of upside surprises with regards to the economy. Maybe the ECB really stepping in and starting to improve expect investor expectations, and that could be enough
to shift that needle vicinity. At this stage, it's quite difficult to see that coming through.
There's a question more about whether you can bet at least in European bonds at the same time that you bet on American exceptionalism, because you can imagine the ECB is going to have to cut rates more aggressively and if there is some sort of downturn that could be some sort of have in trade. Do you believe that that is the correct way to go or do you think that that is premature at a time where the bond vigilantes seem to be having their pens and papers out for the likes of France.
Well, I think, as it is always the case with you,
you can't just look at Europus as one entity. There's so many different entities which are very different disparant that in that region overall, Yes, the ECB is going to be cutting rates far more aggressively than the US, and think the would be a fifty basis pointcut thrown in there at some point in twenty twenty five, and they're going to be reducing rates below neutral, whereas a FED is going to get maybe a little bit close to neutral, but probably not below.
So there is reason to have that overweight to European sovereigns rather than the US. But as you said, you have.
To be really careful and keeping an eye on what is going on with the budget deficits in every country that we're looking at. I think is going to be a key thing for next year because you know, we talk about FED policy uncertainty all the time, but there's so much on the government policy side with As you said, bond vigilante is really something to gear up and keep
an eye on what's going on in different countries. We've already seen it in the UK, we've seen some idea of it within the US, and clearly is coming through in France as well. So I think that is going to be a key conversation for all the countries for next year.
Which is the question Siema about whether the correct trade on American exceptionalism is with the small caps, given the fact that they seven most leverage to the potential of bond vigilantes just peeking out the window in the United States, even that alone would be enough to potentially some other valuations.
Well, look, I think a small cap the run it's hand so far is really about valuations.
It's still due for that catchup.
Try so it's catching up with a large cap, and it's attractive valuations. But as you were saying before, you know small caps small businesses, they have a really significant exposure to floating rate debt. So if you're not going to see very significant rate cuts coming through next year, maybe because of increased inflation concerns, then that's going to be a fly and the oapment for small caps.
So I think that you can run through for a little bit long for small caps.
But once valuations start to look a little bit less attractive, and certainly from a relative standpoint, where a large cap does continue to look more attractive, and then I think the small cap agenda starts to really become a little bit more a little bit more unattractive.
New question for the office quiz over the Christmas holiday period, do you want the new question. Yeah, please, what's the dag's done in twenty twenty four. I'm not going to put you on the spot and make you answer that. See me show the DACK so far this year? Is that by more than eighteen percent? And as we speak about how bad Europe is, the DAX is at all time highs. Sema Beg's the question, what is the dak's
doing a record highs? If things are so bad in Europe and things aren't great in China either.
It's a great question, and I think this is a key thing for investors to remember. Is it look from a relative standpoint, Yes, it's going to be big differences and these going to look more attractive. But if the US market is doing well, it does tend to carry most markets with it, so there will be opportunities globally. And I think when we're going into twenty twenty five, we so much uncertain team from a policy perspective, especially now with the new Trump administration coming in, it does
make sense to have that global divestification. Are still our preference is still for Europe, but we do think that there's opportunities outside of US as well, so you do get to have some diversification, some exposure to different markets too.
It's the bank's Bramo Commerce Bank Deutsche Bank yesterday perform really well.
Yeah, how much is this.
A catch up trade? How much is this because there is this bed on rate cuts? And how much is it because the likes of Deutsche Bank have expanded dramatically outside of Europe. So it sort of goes to Sima's point that if they have some sort of footprint outside of Europe, they can benefit even if they're listed on the decks.
It's good to hear from your same as Shambare Principal Asset Management on the path forward into twenty twenty five. But here's the exist on that front. Fresh off of visits and Mari Lanago, Canadian Prime Minister Justin Trudeau promising to increase border enforcement to try and avoid tariffs, Mexican President Claudia Schambaum also saying she's confident she can reach
a deal with President Trump. At Mills of Raema, James, John just now for more at Mills, what does that deal actually look like?
Well, I think John, it's a question do we pull forward some of that renegotiation of the USMCA, which is due to be renegotiated in twenty twenty six. I think it is clear that there's going to have to be significant increases in border related items. We see that Donald Trump is going to lead off after he's inaugurated with
a number of immigration related issues. I do think, as it relates to both Canada and Mexico, a lot of changes to the way in which tariffs are done on autos, and probably a huge push towards protecting the US auto industry, especially visa each China. And I think what it really comes down to, especially as it relates to Mexico, is that US tariff policy. John states that you put a
tariff on where a product is finished. China knows that China is moving a lot of production into Mexico and then is able to bring things into the United States TIF free. That's known as the Mexico backdoor. Donald Trump is going to want to make sure that Mexico backdoor is fully closed.
And there is a lot of people are listening to what you say, they heard from the President in the last week, and they just believe that the tariffs that he's threatening are credible threats because he won't follow through on them. Pitychev Academy right over the weekend. Consensus is, right now, this is just a bargaining chip, bring him to the table that've come to the table and maybe get a little bit of something count from them. They
don't think he's going to follow through. Do your client see it quite the same way yet, John.
I think that's probably right.
I was kind of going through this yesterday thinking that when I wrote the note last week about the tweet on the twenty five percent tariffs that could be coming, there wasn't the same market reaction that we saw back twenty seventeen to twenty twenty one during Trump one point zero. I think that there is a long list of tariffs that were proposed against Mexico, in particular during his first
term that never were followed through. So right now, I think that the market would be surprised to the extent that these go into effect. The thing that I am watching, especially as it relates to Mexico, is that I think there's a personality clash between Donald Trump and Mexican President Claudia Steinbaum ready to happen, and I think that is
probable the wild card to watch. She's going to be much more forceful in protecting Mexico and Donald Trump is going to be also much more forceful on immigration in his second term than he was in his first term, and as that personality clash pays out, I think there's a higher probability for some of these tariffs to go
into place, at least temporarily. He's talked about using some dormant authorities that the President has not been using in the past that can put on temporarily terrorists up to fifteen percent without Congress, without an investigation on day one, if he wants to do it.
And can you take that a step further in terms of what we've learned from some of the recent conversations or at least the readouts and the contradictory readouts from Mexican head Claudia Scheinbaum and Donald Trump, as well as the recent meeting with Canadian Prime Minister Justin Trudeau. How much is this just Donald Trump testing different leaders' abilities and willingness to come kiss the ring versus actual policy prescription, and at this point before he even enters the White House.
Now, at least I think you are right.
I do think that this is a testing the waters phase of this. I do think that the readouts have to be taken with a grain of salt. Donald Trump is not using kind of the traditional ways in which we deal with diplomacy, not getting the State Department involved. We all know that, so kind of each president is able to put out their own kind of message as it relates to Donald Trump or Claudia Scheinbaum. Justin Trudeau as Prime Minister is able to put out whatever he
thinks that is necessary. But I don't necessarily think that this is something that you tested out, get some changes to clear victory and move on the issues that he's talking about, and then you put into play some of the personnel picks. Howard Lutnik at Commerce going to be very aggressive on tariff's. Jamison Greer, who is going to be the pick for US Trade Representative. One of the reasons Donald Trump picked him is he's going to be much more willing to be more aggressive with some of
those authorities that I've discussed than Bob Litthheiser. So I understand the reluctance to over index or over expect that this is going to happen on day one, But tariffs are coming. It is going to be volatile, and we have to expect the unexpected when we think about Trump two point zero for this market and how many.
Of these nominees are actually going to get through at a time where we have a lot of clashes between already John Thune, who is the head of the Senate Leadership for Republicans, and at least one or two of these candidates.
Yeah, so I was looking at the ones that you've put up on your screen. I think most, if not all, of the picks for Treasury Secretary, US Trade Representative Howard Latnik more likely than not to get confirmed. FBI director a big question mark, the Defense Secretary, big question mark, Health and Human Services in the area at Raymond James that we've been getting a lot of question more of
a question mark, but in that toss up category. So Donald Trump with fifty three votes in the Senate and it only takes fifty to get the nominee confirmed, far more than would normally get confirmed if we had the old sixty vote majority that was required in the Senate. Get confirmed, Donald Trump will have a cabinet that he wants.
There will be some exceptions, but for the most part, been telling clients expect the vast majority of these nominees to be sitting in their posts sooner rather than later.
Lisa, you whi ed, we do still have a sitting president, and he occasionally tries to remind us of that. The latest coming out with some new restrictions on Chinese semiconductors, in particular having to do with AI memory and tools to build the high end chips. How much How do you interpret this basically, some of the actions that we're seeing out of the White House now at a time where a lot of people have almost discounted current President Joe Biden.
So as it related to tech restrictions, Lisa, I've been telling clients at Raymond James, this is bipartisan. This is something that the Biden administration picked up the torch from Trump one point zero and accelerated that during his term. We will get these restrictions out during the Biden term, but they probably go even further during the Trump term. The restrictions that we're discussing this morning are restrictions that
have been in the hopper for months. The Biden administration has been working with the Netherlands in Japan trying to get a trilateral deal. There are some differences in the way in which the United States, the Dutch, and the Japanese enforce these tech restrictions. That is an unfeared issue
for US companies. The expansion is about making sure that China doesn't engage in what has been a game of whack a mole, where as soon as we put on restrictions, they either move production to a new country or they establish new companies that are not on restricted lists. I am anticipating that the administration tries to tighten up that
game of wackamle. The big question to me for clients is how much of a hammer does Donald Trump come after that next year and tries to end that game of whacka mall and has much more restrictive, you know, changes to semiicap equipment going into China, especially on legacy equipment during his second term.
It's a big question for all of us going into twenty twenty five. And Mills of Raymond James ed thank you, sir. Just check out the picture of Donald Trump President Alec's economic team. And let's go through the names, and we'll talk about the name that's not there. How's it? A Nec Jamison Greer, US trade representative Scott Best and a Treasury.
How would Lutnik a commace. The market was very worried at one point about Ambassador Lightheiser going into the cabinet again but maybe becoming Treasury secretary, maybe ending up for anyc The reporting from Axios side for the weekend almost reinforced by Ed Knows there from Raymond James, Well, Claudia,
welcome to the program. I think we should start there the supply side of the economy and how much of the hard work that's been doing so far over the course of twenty twenty four and why it leaves the federal Reserve as it thinks about twenty twenty five and beyond.
All right, well, it is so important that we don't just look at a GDP number and say, oh, it's almost three percent and move along.
We need to stop and what is going on? Why is growth so good? Are we overheating?
If we're overheating, then the FED steps in the raise rates, they cool things down.
That is not what's happening. We have seen a real pickup and growth.
Remember we were promised a recepsion and we got an acceleration, and we've seen for two years running now almost three percent growth and a lot of that, if you look under the hood, is coming from.
Productivity, and that is the holy grail.
Of economic prosperity, and we should be spending a lot of time trying to figure out exactly how did we get to this place that we've seen a pickup and growth and this is something us is seeing in our peer countries are not.
So it's a really important question to dig into.
Claudia, given that people believe in yourself is as one of them, that this is becoming a productivity story. Does this mean that from your perspective, it's not inflationary, that it doesn't necessarily preclude the fetter reserve from cutting in a couple weeks time.
Right.
Inflation happens when demand is outstripping supply.
That's the one O one. There's more to it.
But in general, if we have too much demand and not enough supply, then we're going to get price increases to kind of you know, make the market work. But if we can get more supply in there, and that is the lesson. We did not get the big disinflation without a recession without this supply side help. And we
got it not just from supply chains. We got it from workers coming online, and we also got this kick of getting people in more productive positions, getting more capital in their hands to do their jobs, and like that was such the way to solve the problem of the high inflation. Well, that's not the only problem that a good supply side solves. It also can really help us thinking about growth over the long term.
But we got to get out.
Of our head that it's like all growth and the FED does interest rates Like productivity is a really tough nut to crack, and it actually is not primarily about the Federal Reserve.
Claudia, How does Fedshair J. Powell message this at a time when he is going to be speaking on Wednesday at a moderated conversation ahead of a time where inevitably, as we've been caring from a host of analysts, the FED is likely to revise a lot of its projections with inflation going up, with unemployment going down, and with growth also going up, given the fact that you have seen those upside surprises to growth.
Pale has made a real effort on this, and I would just kind of tell him to double down on it.
He said multiple times the FED doesn't have.
A growth mandate, but that's a kind of a wishy washy say way of saying that sometimes when growth is high, the FED needs to step in, and sometimes when growth is high, the FED needs to get out of the way.
And this is one of.
Those times where the FED needs to get out of the way because it is there's productivity there and high interest rates being unnecessarily restrictive on the economy relative the dual mandate, it has costs. This high growth is not guaranteed.
Unfortunately.
That is the thing about productivity that we have learned from the past is yeah, sometimes we get it and holding on to it is what is really hard. So like, we should not be taking this lightly that we've got this kind of growth, pick up this productivity renaissance. The question should be what can all policy makers and frankly a lot of these lovers are not with the feather with fiscal or other government authorities, but like, what levers
can we pull to keep this going? And how Continuing to go back to his dual mandate of the price stability and the labor market, the maximum employment, I think is important because the more we've dug into and research with this productivity boom, it goes back to the labor market the dynamic labor market is very much tied back to the dynamic economy.
The higher productivity.
Well, let's talk about the libor folk growth that we've seen, Claudia, and I wonder for your perspective whether you think is distorted the Fed's understanding of the influence that they actually have of inflation.
This is I think the FED has been very humble and open to the fact that there's a lot that's going on with inflation that we don't understand, and I think they have been probably clearer than a lot of the people watching the FED that their tools have been not they're limited, right, There's a lot of dynamics of inflation that had to do a supply side that are not primarily about the FED. The FED does have a
mandate with inflation. They have stepped in. They do need to pay attention and when we see, you know, inflation picking up, they would step back in. So it's not that the FED is out of the picture with inflation. I think they have tried hard to make it a more nuanced conversation. Nuance is tough, right, but they just they can't give up on this, and I think this balancing the two sides of the mandate and just saying hey, this is not about growth. High growth does not mean
we need to hike. High growth does not mean that we have no reason to cut. It's our dual mandate and the growth. This conversation is a separate piece of this Lord, if we have to look under the hood.
We enjoyed this conversation. It's going to see you as always, Cordia, sound there a new century Advisors, Laudia, thank you. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angient 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 Out