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Bloomberg Terminal and the Bloomberg Business app. We begin this hour with stockslower, adding to three days of losses as President Trump says, levies on Canada and Mexico and moving forward on time on schedule. Joining us now is Sharon Bell of GOLMD sach. Sharon, Welcome to the program. Given the rerating we've seen on European equities over the past month or so, how vulnerable are they to a tariff here over the next month.
Yeah.
I mean, I think, as you see on your screens now, that everyone is a little bit vulnerable to upping uncertainty Again. We clearly don't know what Trump will will do when it comes to tariff plans, even for for Canadera Mexico will will they will they restart again? And is the tariffs that he's talking about sort of a negotiation tool or something that that he plans to use permanently.
So it's a lot of uncertainty.
I think that's extremely unhelpful, unhelpful for growth, unhelpful for inflation as well. But you're right, European markets have done very well this year, but I don't think that's necessarily related to tariffs. I think it's because the valuation gap to the US have just got so large, and European companies are benefiting from a view that maybe there'll be peace in Ukraine, maybe we'll have more physical spend from Germany for example.
Well that was really the question.
Is it just a low bar or are there shoots signs that maybe in Europe there are going to be some moves to in gender growth?
How much, Sharon, are you seeing.
Some of those hopes come to fruition with the latest information about the possibility of expediting some sort of amendment in Germany to get some extra military spending.
So I completely agree that Germany absolutely needs to spend more. Germany is one of the very few places in Europe where debt to GDP is not extremely stretched, and that's because of the constitutional debt break really having prevented our rise in levels of debt in recent years. So their deficit, their debt certainly could be expanded. Now why would they do that because growth has been so weak. We just
again had wheat growth members out of Germany. We know that a lot of industry has been reducing exposure to Germany. We also know Germany needs to spend more on defense. So I do think I mean exactly what, guys, It tasts difficult to know what I do think the new German administration as it forms, will be looking to spend more, both on infrastructure spend in Germany, but also on defense as well.
Shanon, I gotta say this is one of the most confusing markets to try to understand. From a macro perspective, I could possibly a Madge and let alone the tariff uncertainty, let alone whether Germany starts to spend more.
There's a question of what this means for.
Interest rates in Europe and how this rebalanced into stocks. The consensus heading into this year was that European rates the ECB would be cutting rates more aggressively than in the United States. Now you have a potential growth shock in the United States and the fear of one, and in Europe you have the potential for more fiscal spending that actually ascending yields at least yesterday marginally higher. How does that factor into the bullish call on European equities.
Yeah, I think in the case of Europe, you're talking about more fiscal spend in an environment of pretty much no economic growth. So it's really to boost infrastructure or reform the supply side of the economy, get growth and productivity improving. I don't think even of itself it's going to be hugely inflationary, given that you've got other disinflationary things going on. For example, the labor market loosening a little bit. If there is peace between Ukraine and Russia,
you may see more energy supplies into Europe. So I think the ECP would be looking at all of those things. We do expect them to be cutting every meeting, just given how weak economic growth is.
Sharon, given where we have the Trump administration and their policy perspectives. You talk about in your note this idea for deregulation driving of growth. We've heard this from a lot of number of European leaders, but is the rhetoric actually matching what you feel on the ground in Europe and what may be beneficial for equities.
Yeah.
I think there are some big leavers you can pull in Europe. One of them is for Germany to spend a bit more fiscally on infrastructure. Another one is potentially try and bring down energy prices, getting more gas supplying to Europe. Another one, potentially would be some deregulation. Europe does have more regulations than you see in the US,
where you certainly hear companies complain. Regulation levels are extremely high in Europe, but it does take a long time to move that, and you've got a lot of different countries with different incentives to regulate. So I'm more skeptical about that one. I feel that more spending on fiscal and defense by all countries in Europe and especially in Germany, and maybe lower gas are really the things that are going to move the needle for Europe.
This year.
We have the UK Prime Minister of Cure Starmer, coming to Washington this week. He's going to a meeting with President Trump. The two have seemingly had somewhat of a good relationship, having a number of meetings. Do you think there's an investment case for a UK outside of the EU right now, especially if they can get you a comprehensive trade deal.
Yeah, I mean the.
UK's got some advantages.
One advantage, ironically, is it's not a large manufacturing economy.
It's mainly in services.
It's not that exposed to therefore tariffs, and Trump has already said that UK is not a special target either of those tariffs. So given those things, the UK is probably less vulnerable to the trade war, to the tower risk, etc. But it is nonetheless a small, open economy and it will have some vulnerability to all of that. So I
think that's one helpful point on the UK. The other helpful point on the UK, again is if you did see it ultimately a cease far in Ukraine, if you ultimately saw gas prices come down, the UK, particularly the consumer in the UK is very gas dependent, so those things would certainly have so there are some elements that could be better for the UK. And then final point on this is the UK indice stock markets are on a particularly large valuation discount to the US, even more
so than the rest of Europe. So again that may look attractive.
Sharon, just want to wrap it together with the sense of what your highest conviction trade is after you got it right to start this year.
The idea that Europe.
Would outperform US equity is simply because of evaluation gap.
Is that trade done or are you leaning into that?
Yeah, this is number one question that I'm getting from clients really at the moment. This is what investors really want to know. Can European out performance persist? Particularly given that we've seen all this before, haven't we? You know, Europe has been a long term perma underperformer every now and again. Of course it has pops of good performance,
but will these last? I think this one could be a little bit longer, just because you've got this huge valuation differential between the US and Europe, and maybe it's closed a bit, but even adjusted for growth, which is lower in Europe, for sure, we still find that Europe is on quite a big discount. We've had some institutional flows come back into Europe, but they're still quite minor
compared to the outflows in the last few years. You do need the politics to go the right way in Europe and the stuff we talked about before were spending et cetera by Germany, more defense spending, et cetera. But yeah, I think there possibly a little bit more to go.
Hey, Sharon, I appreciate your time. Sharon Valda of gone A sax on the latest out of Europe joining US now John Lieber of the Eurasia Group. John, just a recap and welcome to the program, sir. As always, these are the proposals right now. Next week twenty five percent on Canada and Mexico. A week later steel and aluminum. The following month, we're talking about reciprocal tariffs. John, just
to recap your base case. What is your base case for what does and does not happen over the next month or so.
So I think that April first deadline is the really
important one to watch. There's a bunch of investigations directed across the entire government that will be coming out on April first, the reciprocal tariffs that were just talked about the unfair trade practices of America's many trade partners, and I'm sure that we'll see some allegations against countries like Vietnam and Japan and Germany all coming out on April first, and then that is going to kickstart a process which eventually will lead to higher tariffs on quite a few
of these countries. But in the meantime, this on negotiation is going to be ongoing, so you know, over the next month. I mean, you know, you listened to Trump last night. He was responding to a question from a reporter and he started talking about Canada and Mexico, and he ended up talking about reciprocal tariffs, which are much
broader than Canada and Mexico. So I'm not sure. You know, the President has a way of weaving when he talks, so I'm not sure we necessarily can take this as real guidance as to what's going to happen next week. Our view is that those broad tariffs on Canada and Mexico are unlikely to be avoided because the two countries
are doing enough to avoid them. But April first remains the real day to watch because of these other investigations, and the sectorial tariffs are probably going to end up being more meaningful for the North American countries than these broad tariff threat song.
It was a question from our own Jordan Fabian, and the President's response this weave if you will. He did talk about the fact that the agreement under place now is not working, but that deal USMCA was negotiated when he was the forty fifth president. What doesn't he like about USMCA right now so that he's so willing to put twenty five percent tariffs on Canada Mexico.
You know, the grievances on USMCA, I think are relatively narrow and specific, and I think they have to do with China. Everything else about the USMCA, there hasn't really been in any controversy about its implementation. There was an energy case that was brought against the Americans, there was a case brought on some labor issues in Mexico. There's been a few other disputes that have been brought, but they've all been working basically as the plan was sketched out.
I think the American grievance here is about Chinese goods in the Mexican supply chain. But of course, because it's Trump, they're also using the thread of tariffs to broaden it out on issues like fentanyl and immigration. So I have not heard the administration lay out a reasonable case of what exactly is broken in USMCA. The Mexico points an
obvious one. You can raise North American content requirements, But it really seems like Trump is using the thread of tariffs to leverage this for other policy goals.
Well.
Behind the scenes are reportings that the Trump administration told Mexican officials they should put tariffs on Chinese goods coming into Mexico. They're concerned about Chinese goods getting through the border. John is at your base case, then Trump is a negotiating mode when it comes to the tariffs due next week.
Yeah, I mean yes, but I don't think it's about The China issue is going to be settled in the USMCA review, which is not due to the middle of next year. But all of this is happening in the background of that review. They want to force changes to Mexican laws, and they want to force changes to USMCA that will make it harder for Chinese goods to get in the supply chain. That I think is the context
for all of these things. In the near term, though, Trump is trying to fight over these unrelated policy issues that really matter to his political agenda. Immigration, fetanyl crime, the whole suite of issues with Mexico John chaos.
Maybe the point it might be the strategy that Donald Trump uses to try to break through and get some change. At the same time, that kind of chaos is creating uncertainty in c suites at companies. You're seeing that some of the earning expectations going forward. How much are some of the rank and file Republicans in Congress right now getting concerned about that?
I think there's quite a bit of concern. And right now, I think that the focus is on economic policy, is around the budget, and it's around extending the Trump tax cuts at the end of the year. The real issue that's caused concern in Washington right now among Republicans is Trump's approach on Ukraine, which seems to be taking the Russian position, and that is causing quite a bit of consternation and is taking up a lot of the oxygen
in the room. But when it comes to the budget cuts and DOGE, I think these issues actually have quite a bit of support among Republicans who continue to look at this deficit challenge that the US has and see it as a generational issue that there's no real solution for because they're not willing to raise taxes, so the spending cuts, despite the uncertainty, are relatively popular. I think the tariffs everybody in Washington could do without, except for
Trump and his team. But this is just the reality of what happens when you elect a tariff man as president.
John, you said that the pivot toward Russia has gotten a lot of attention among Republicans.
What's the explanation for it? How are people understanding it?
I think the president is once day in the war, is succeptable to his has a relationship with Putin's susceptible to the Russian message on Putin, excuse me on Ukraine, and is sympathetic to what's coming out of Russia right now. And I don't I mean, I think that there's a that's a pretty disturbing explanation. I don't know if there's a better explanation for it.
However, John, I appreciate your perspective as old ways. John Lafer that if you're your grapes of westburst joins us now to extend the conversation, don bomb down and down had the ideas ideas out of China listed in the United States. How investible I.
Think well said, I think Boba over sold here. I mean there's gonna be some fear factor. But when it comes to cloud, when it comes to who's going to be the winner in Ai in China, I think names like a Bob and those are names that you own here.
I think Bar's gonna be a little worse than bite here.
I think that's actually the best reaction that we're seeing in China in terms of some of these names.
There are two different things, though, Dan, the idea of buying in China if you are in mainland China versus buying the ADRs in the US at a time where there is increasing focus on whether some of these companies should be raising money in the United States, do you think that there will be an increasing divide between the depositary receipts and what we see in mainland China or Hong Kong.
Well, I think there will be, just because the worry here in terms of what could come out of Trump in the Beltway. And then I think the other focus is, even though we're hearing jitters and obviously going to in video tomorrow, I think more and more investors would rather own big tech.
Obviously there's regulatory.
Risk, but that continues to be I think at the top of the mountain when it comes to Ai Revolution.
Dan evercore I put out a note saying the sell off what's going on in China is more about sell first and ask questions later. Given this directive from the the president, is just that a directive. It's a place of travel where they want to go. How much of this do you read as leverage for some sort of deal potentially Trump might want to do with Beijing.
Well, God was just in Hong Kong, you know, over the last week.
I do think that this is all game of high stakes poker to ultimately where you get to some sort of deal.
Well, I think given the movements, I get it.
But I do think that you're going to get to maybe a lot better outcome here between US and China. That's the thinking I think, especially in Hong Kong and a lot of investors there, rather than maybe some of the owners or draconian scenarios that you would have thought, you know, going back to when Trump got elected.
How concerned you though that there are conversations already underway between Trump administration officials when it comes to stricter export controls similar to wish on the Biden administration, but actually even maybe a little bit sharper.
Look, it's all going to be this fine line and just even think about things like TikTok rightother chip on the table, just like China's chips as well with Tesla and FSD.
Look, this is all going to be a negotiation. But I do believe that there's going to be this balancing act. I don't think this is going to what I'll view is.
Like draconianly impact chips the supply chain, despite maybe some of the fears out there.
And I think that's also why he talks to Jensen, talks to Cook of course Musk, you.
Know, with a front row seat in terms of this very tricky balancing act between acting tough but not ruining this you know what continues to be I think the biggest tech transformation the last forty years.
So, Dan, one reason why I love speaking with you is because I never know where you're going to be today.
You're in Kuala Lumpur, you travel around the world.
I'm not sure if you're in a yacht, but I am curious about what you're hearing from people around the world when we see some of the uncertainty coming out of the White House. How seriously are people taking that internationally as they decide which tech giants to invest in and how much they can really be confident in the American tech power story.
Yeah, I mean that's I say, every meeting in the last two weeks, regardless of what city we're in across the Asia.
It starts off with that.
In terms of Trump, what does it mean, especially a lot of these countries that's gotten crushed in terms of worries about the ripple effect in terms of data centers, you know, cap backs, regulatory and.
What that means.
Look, I think it's just another risk investors are trying to handicap. But a lot of it really just does come down to fundamentals.
I think fundamentals continue.
To kind of drive, and I believe we'll see it from Nvidia tomorrow. I think some of this stuff does go to the background, But no doubt it has been white knuckles to start the year. You're just giving you don't know what's going to come out from a regulatory perspective.
In terms of this, you as China call tech.
Warm Dennis in Malaysia this morning or the safe Nick don't appreciate it. Dennis at Westbin. No doubta of Renmac raising concerns on the labor market, writing, much of what we see in the financial press tariffs and certainty is a Red herrick An ex post rationalization for an economic slowdown that was already in motion for the economy. Expect conditions to deteriorate further in the jobs market. Neil joined just now for more, Neil, Welcome to the program, sir.
As soon as you hit published yesterday, we talked about that note. Fantastic read. They'll just share with us why you think this is a train already in motion. It's not about the last month.
Well, John, I'm beginning to have second thoughts already because I see Anne, Marie Rock and Fendi on the program. So it must be a bull market.
No, Vin, did someone spending Neil? She says, it's secondhand.
I don't know if it is sure. No.
All I'm doing, John is just applying the playbook from late twenty twenty two when we made that no lined in call. It will remember, if you recall, it was basically four things, real income, housing, government spending, and this the way the consensus was positioned. Right, so you fast forward to today, Real incomes are slowing as the labor market continues to cool. The housing market is getting worse. Even though the FED had been cutting stay in, local
governments are pulling back. You know, the doge gets all the attention, but really state in local government spending has been a meaningful talement to growth, and that's likely to go the other way. And if you look at the consensus, I mean back in late twenty twenty two, everyone was positioned for you know, essentially recession. I mean people held onto that view, believe it or not, through the middle
of twenty twenty three. So one of the ways you know it works is through an element of surprise, right, I mean, if everyone expects recession and it doesn't happen, you have to have this sort of period of ketchup. By contrast, if you know, if everyone is expecting things to be fine and then they're not, you know, I could you know, prompt a clearing out of inventories, hiring, investment, and so forth and kind of create a negative feedback loop with the economy. So that's kind of what I'm
I'm concerned about. You know, the data hasn't been particularly encouraging of late and i'd expect that to continue until the FED gets on the right side of the eight point.
Well, now let's talk about the Fed. I said yesterday, we all said yesterday, what's worse than a slowdown? And it's a slow down the Fed's not willing to respond to anytime soon.
Now.
The Federal Reserve was willing to get ahead of something. Last year, they dropped rates by one hundred basis points across three meetings. What changed coming into twenty five, Well, I.
Mean they're basically taking out an insurance policy against the new administration. That's basically what happened. I mean, if you look at the adjustments to their risk assessment around inflation, the notion that they're simply innocently responding to the inflation data, I think is a bit ridiculous. The upside surprise on inflation that we saw in the back half of last year paled in comparison to the upside surprises we saw in the first half of last year, and you know,
the risk assessment didn't change all that much. So you know, to me, this kind of feels eerily similar to the period between June twenty twenty four and September twenty twenty four. We went, you know, if you recall, I mean the FED basically went peak hawkish in June and then three months later they're cutting fifty bases points. So I think where I'm at right now is the FED is waiting for permission from the markets and the data in order
to respond if and that's essentially tempting fate. I mean, if if you're waiting for something bad to happen before you move, chances are something bad will happen. I mean, what changes the trends that we're seeing at the moment absence some kind of FED response.
Well, but Neil, I think that a lot of people are picking up in the same thing that you are, and suddenly the idea of terroris is no longer considered so inflationary and it's considered more of a gross shock in the absence of some other pro growth measures. Right now, it seems like the bond market is turning around to your side. Now we've got two rate cuts being priced into the market through your end.
Is that enough to make you more positive.
If the FED does go through with a fifty basis points of rate cuts by the end of this.
Year, No, not really.
I mean I think the FED will need to do more than what's priced because the economy is weaker than they think. It's really that simple, you know. I do find it kind of amusing how everyone is basically using tariffs and policy uncertainty as a rationale for their forecast adjustments. Now, I mean, to me, it's a bit it's a bit rich, you know, as if you know, if you thought that, I mean, why don't you make your changes back in
November after the election. It's not I mean, the guy ran on tariff being his favorite word in the dictionary, and now you're surprised that he wants to go through with it. I mean, it's crazy.
So well, you know, but let's just be clear.
It's not just that he's going through with tariffs. It's, as Jonas measured many times, the sequencing of it, that there isn't a clear path for some of the offsets, which we're back to the tax cuts and the pro growth measures, and you're not seeing the boom in deal activity. That's the reason why people are focusing more on the growth hit from tariffs than they are inflation.
No.
No, I mean, I think what I'm seeing more is people talking about policy uncertainty related to the Trump administration, and that's why they've gotten cautious all of a sudden, and why there will be a freeze and sort of investment and so forth. I mean, to me, it's ultimately demand that's going to be driving the discussion, and household demand is slowing because the labor markets continue to cool, you know, the tariff stuff. I mean, again, this is
all just sort of X post thinking. I mean, it's uncertainty would be high if if the shoe are on the other foot, right, because we'd have one of the largest tax increases ever potentially at the end of the year. You don't think businesses would be worried about that. So it's just sort of like this heads eye, wind tails you lose type of analysis that I think is a
bit ridiculous. I think everyone should just focus on the here and now, including the fit, you know, instead of trying to take out an insurance policy about what may happen or may not happen. I mean, Congress is very evenly divided. I mean, the sort of physical expectations that people had baked in after the election, you know, you could pin that at the at the feet of Congress, right, I mean, so it's not just the Trump administration from where the uncertainty is coming from. But I think it's
wise to just focus on the here and now. And what the hero now tells me is that demand is slowing down, housing is still weak, and inflation is likely to continue to moderate as rental inflation keeps cooling off.
He knows his fend and he now did it. At the end, there Nodnsa of renmc neil got to catch up. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, angier 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 Amp