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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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. Here's if you're on
Wall Street this morning. Julian and Emmanuel have evercore writing the President's speech last night, celebrated American values, intensified the Parlisan divide in Washington, and maintained the uncertainty around the situation with Iran. Julian joins us now for more. Julian, good, Mornic Coome morning. I read your recent note. Despite valuations, despite geopolitical anxiety, despite the political anxiety, despite a series of blow ups, the index has been really, really resilient.
What does that tell you?
It tells us that you know the backdrop, the macro backdrop in a year where we're getting better earnings growth, it's likely going to be double digits when all is said and done in twenty twenty six. Long term yields staying very very you know sedate, particularly when you think about the rest of the world stimulus and the potential for rate cuts. It says that sucks. Likely going higher, definitely passed.
The state of the union is in Vidia. The big event of this week. I mean, how big of a signific of a market moving event is just going to be.
It's very big. I mean, what's fascinating to us is, you know, we're comfortable with being contrarians, and when we came into twenty twenty six, we felt that, you know, being overweight the AI centric names and themes was really in consensus, and that changed very quickly. The mood around technology remains very guarded, the positioning remains very frankly, and a lot of that has to do with the build up around Iran and so you know, look, we know that the report today will be good. They will beat
on the metrics. It's just a question of how the shares will respond, and frankly, the market is poised for likely a good share price response.
So I'm wonder if what's good for in video is bad for everything else. We've seen this rotation through the rest of the economy at a time when there's a lot of anxiety about the labor market, where you're seeing those pressures. We got home depot yesterday, we got lows this morning, raising the specter of uncertainty really pressuring consumers. At what point is in Nvidia a counter indicator to the economic cycle and could their earnings reverse some of the broadening out that we've seen.
Look and again, think about the backdrop that we've had the leading sectors this year, energy industrials, the deep cyclicals, but also consumer staples. In terms of the action and the interpretation of earnings, all is well, except you know,
you've had these occasional blow ups. But in our mind, if anything in Nvidia is likely to and remember, the public hasn't really soured on technology because the labor market, as difficult as it is to actually fathom with all the policy changes of the last year, is still relatively strong, and that bodes well really across the S and P.
Five hundred.
You mentioned Iran the Present spent a lot of time last night talking about this. Do you think that this is going to be potentially an next catalyst for the market.
There's no question about it. And what's interesting is is, you know sometimes there is an eye roll when we talk about options, but actually the options market is telling you right now that investors are very edged for a more challenging outcome in Iran. You look at the prediction markets, the market, they think something is going to happen. While I got news for you. The skew the price of downside puts versus upside calls in the triple ques is as wide as it was during the trough of the
April tariff tantrum and so very contrariant. And the same thing in terms of bullishness in the oil market, as bullish as it was when oil was one hundred and twenty dollars a barrel when Russia invaded Ukraine initially.
So the market is screaming military intervention, not diplomatic offramp.
That's right.
And so for us, the surprise, I mean our base cases, we think there will be some either off ramp or limited military engagement. Because think about it, we heard it last night, we hear it all the time. If the oil price spikes further, you are losing the war on the affordability issue, and that means you're going to lose the midterms. So that's really, you know, a least desired outcome.
They give news so far as the rights have banked that we've got ten year bond yods back down to four percent. What's the signal an equity gund like you takes from the move that we've seen in fixed income.
Well, it's this dual edge, you know, thought that the you know, the violence under the surface. You've had crashes in software, you've had crashes in silver, you've had crashes in all to investment managers that the message from all of this is that the credit market is disturbed and maybe we're having a growth scare. But frankly, if you look at the broad credit market, it still behaves very nicely, even though there's pockets of distress.
Jenny, Let's talk about the consumer and how that's been priced in the equity market. We've got discretionary down by close to four percent for the year so far, state was up fifteen Ist an economic story in there or is that all AI?
It is very largely AI, frankly, and if you think about it, so when we did our foundational work on AI, we really digested what the job impact would be across sectors. And actually, when thinking about it, right, the least impacted sectors metals and mining, agriculture, consumer staples, all the sectors that have ripped year to day. The most impacted sectors financials, software, the legal profession, all of the places where you've seen
tape bombs on and off. And so you know, to us, this is also typical behavior that you get in the first quarter of the new year, that kind of rotation. But there isn't really in our mind a broader.
Message financials and the banks, where a consensus overweight into the new year has not changed for the year ahead.
For you, we've had it and inline rating. Look that they have been expensive, they remain expensive. And obviously, again you know, while we don't see anything systemic, this is an environment where we're shooting first and asking questions later. We'd rather not be in areas where there's going to be more shooting.
Stay with us more Bloomberg surveillance coming up after this. President Trump defending his economic record in a marathon State of the Union. According to a recent poll from IPSOS, americans are split on who can better handle the cost of living crisis, including thirty three percent who say they trust neither Trump nor congressional Democrats joining us now to discuss his anam post of the Peterson Institute Adam a
one welcome bank to the program. As always a affordability issue set to get worse and no better in the year ahead.
I think they are John, thanks for having me back, and I feel the first time in my life, I feel a little bit of sympathy for Donald Trump because it's just not that much he can do on affordability. He would have to try to intervene directly into particular market that matter, like housing or food, which he's not averse to doing, but even the Congress is not willing to do, and it's not clear those would be more
than for show. And I think there remains a headwind, excuse me, a tailwind to prices because the labor market's a lot stronger than people think, because the FED is not as tight as people think because of the tariffs, and in the background, the migration issue is starting to hit. The other point, though, is as Lisa and Anne, Marie and everybody said, he didn't make any major budget proposals.
He didn't make any major policy proposals of any kind, and so against my prior forecast that there was going to be a handout, Maybe inflation will be a little lower than I feared, because he's not going to blow out the budget quite as much.
But Adam, couldn't he do something when it comes to affordability, when it comes to terror, specifically, just let the Supreme Court's ruling stand and don't now have new deals of ten or fifteen percent with one twenty two's.
I didn't mention that because it's something he's clearly not willing to do. He could take down tariffs unilaterally, and just since basically every ally we trade with, including Canada, including Europe, including Japan, including Korea, has lower tariffs on US now than we have on them. And as Governor Svan Burger pointed out, none of the things he claimed about manufacturing or jobs or trade deficits were true. Some of the things he said were true, but those weren't.
And so yeah, he could reduce prices, but even that wouldn't That'd be a great idea, and it'd be good for the country and good for the average working American, but it wouldn't necessarily translate into price drops. So as all of you have been saying, a decline in the rate of inflation isn't the same as seeing prices for things people spend on declining. You need real income growth for that, Adam.
The one thing that struck me as a potential market moving influence was his discussion of tariffs as reshaping the way we pay income taxes. In other words, no income taxes and increased tariffs to account for the bulk of
all income for the nation. He went on to say, as time goes by, I believe the tariffs paid for by foreign countries will, like in the past, talking about the late seventeen hundreds, eighteen hundreds substantially replaced the modern day system of income tax Is there anything that you take from that that could be codified. Do you see that as a feasible path forward.
It's not feasible, Lisa, I mean, it's just wrong when the US government was surrounding on taxes, just like some subsa Aeran, African and Central American countries today have tariffs. That's a big part of their tax It's because they can't collect taxes in a more efficient way. All they've got our troops at the border. And because the society and the economies are not very well developed, a tariff system doesn't work. It also isn't paid for by the
foreign countries. No matter how many times the president says that, no matter how many times his people try to attack research, it's universally recognized. It's just right there in the data. Now, how much of that's the consumer versus companies is a question. How much that becomes inflation is a question, but there's absolutely no question it is the American purchasers of the
inputs and of the products who pay the terriffs. But finally, even with the Supreme Court ruling, tariff revenues are going to go down because if tariffs stay up, then people change behavior. They start buying more American products, or they start forgoing foreign products, or they start substituting in ways that are not good, or over time, you bring some stuff home even though it's less competitive, and so what
happens is you end up spending less on foreign goods. Now, that's not a good thing, but from a revenue point of view, it's definitely not a good thing, because then if you're spending less on foreign goods, there's less terriffs, and so my view is we're already well passed peak tear for revenues, even if the President were to let them laves.
And I'm just to final question, just to go back to the summer of twenty twenty four, you warned ahead of that election, given the policies that we're being proposed, that this Federal Reserve might have to prepare the market and the country for higher interest rates. They can't interest rates subsequently in the year ahead, Adam, Given where things stand and your revision to your outlook on inflation, where are you now on Fed policy?
John? Thanks for asking. If it turns out that the President doesn't put in a budget request for bailouts and handouts to people and out of the midterm elections, I'll be surprised. But then I have to reduce my happily my inflation forecast from four percent to three point five or less on CPI at the end of the year. But I also think that the Fed, as a large number of FMC members have indicated over the last several weeks, the FED is not going forward with an easing bias.
They should not be going forward with an easing bias. The labor market is much stronger than people think. The pain is real for people, but that's different from us saying that there's a cyclical weakness in the labor market. You have to separate those two things. And in that situation, and as your guests and manual mentioned, credit markets are holding up pretty darn well and a Reming credit remains
pretty available. So I don't think the Fed's going to be cutting as many times this year, even before we get into the independence politics, as markets currently project.
Stay with us. Maulblinberg Savandan's coming up offter this by some facts in that state of the Union, President Trump remaining defile, that is, tarifagenda will continue despite the Supreme Court's ruling.
They're a little more complex, but they're actually probably better. Congressional action will not be necessary.
It's already time tested.
And approved, and as time goes by, I believe the tariffs paid for by foreign countries will, like in the past, substantially replaced the modern day system of income tax.
Formacenia White House trying to devise a county on show rights in the follow and it may not be a straight cuts and pace, but I expect at least some tariffs to increase the fifteen percent in the coming days. Canny On Johness, Nawim Walk Kenny and welcome to the program. Help us understand where we are. It was ten, then I of the weekend it was fifteen, and then we came into the weaken it's ten. What is it and what's it goin to be?
Well, right now it's a hurry up and wait.
So it's technically a ten percent tariff that went into effect at twelve oh one am yesterday, but I do understand from the administration that they are still looking to implement the President's fifteen percent tariff increase. Part of the challenge is that Section one twenty two. It's a really wonky statute. It's never been used. It does allow you to carve some countries out, it allows you to carve out some goods.
It's not really clear that it.
Allows you to differentiate between countries in terms of the overall tariff rate. So once you get to fifteen, you're actually increasing tariffs above some of these agreed trade agreements, and you're also putting tariffs on countries like Australia, the UK and a lot of Western hem countries, so it's a little more complicated to work out legally.
I think that's part of the delay.
But I'm still expecting that fifteen percent tariff increase.
So if the rate is higher than what this administration has agreed to with some trading partners, and they want trading partners to abide, but those agreements, are we going to get carve outs.
So I've actually talked to some of our trading partners about this, and you know, some of them are a little concerned that they're going to end up with a teriff rate that's above the agreed rate, and they're talking to the administration about that. So I think the administration is going to look for some flexibilities in terms of whatever proclamation comes out next, but you know they're going
to have to do so within legal constraints. They just had IEPA tariff struck down, They're going to be really conscious of not wanting to have these ones enjoying struck down to.
Well, are one twenty twos legal? They have never been used either in the past.
Well, certainly a law on the books, and if you look at the CIIT decision that initially struck down the tariffs, one of the bases was because the core thought that the president should have used one twenty two in the first place. So there's certainly scope to use Section one twenty two. It's just really a matter of how you implement it. And I think that's really what the administrations wanting to make sure they're doing, to make sure that these tariffs don't get struck down again.
There was at tension yesterday, Kelly, in between this focus and affordability and this focus on tariffs and trying to explain how tariffs are actually structurally going to be better longer term because it could potentially reduce income taxes and other aspects that consumers pay. I just wonder how capped, how it hampered the president is from increasing either the one twenty twos to fifteen percent or implementing some of the others based on the affordability aspects of his agenda.
Yeah, I think it's a great question.
I mean, really, what's going on here is the administration looks at the data, they look at the tariffs, and they say that, look, we haven't seen significant price increases on the backs of some of these, in some cases really high tariff rates.
We haven't seen some of the.
Economic catastrophes that everyone predicted would happen if the administration put in a universal baseline tariff. And so this idea that tariffs are leading to this affordability crisis doesn't really register, but it does register in the minds of voters. And you have a situation in which voters are linking tariff increases to price increases and to the fact that they're having trouble affording grocery store, energy prices and a lot of things that voters will vote on in terms of
how they're feeling about the economy. And so the administration has some work to do in terms of trying to message this to the American people going into the midterms, but I don't see the administration significantly pivoting. You heard the President doubling down last night that tariffs were a core part of his economic policy. We might see some tea on the margins, but I don't expect a full scale reversal of any of this policy.
There's also a question of what the IEPA ruling by the Supreme Court does to international agreements, so with some of our trade partners, given that certainly the European Union has already pushed back We're going to be speaking with Ambassador Jamison Greer, the trade representative for the United States, later this morning. I'm just wondering what you're wondering about, what your biggest questions are for him.
Yeah, and certainly seeing the EU hit pause on its consideration of that implementing legislation was predictable. I think the EU in some cases has been looking for a reason to kind of walk away from this deal for some time.
The US implemented back in August.
The EU hasn't cut a single tariff line since that turn Bary agreement. So this isn't a surprise, but I do expect that to escalate. I think in terms of what to ask Ambassador Greer, I'm curious about when we'll see some of these Section three oh one investigations, what the TERRAFF structure might look like, whether it's going to cover all trading partners or just some trading partners.
Really trying to.
Get a sense of what the next five to six months look like. This companies are trying to navigate this new tariff landscape.
Let's talk about the next two months. So A Marie mentioned that matig in China between the President and the Chinese leader KellyAnn, do you sense that he's lost some leverage here, given how constrained he might be now at home and the point that over the last year that China has run a record trade surplus even with these tariffs.
Yeah, I think it's a good question as well, especially going into the President Trump President She visit.
But I guess my big takeaway is long term, the.
United States already has teriff leverage over China. They're doing all of these three oh one investigations to get more terrorf authority over other countries, but we have that existing three oh one.
We also have an ongoing three.
Oh one investigation into China's compliance with the Phase one deal, and there's a host of other levers the United States has, from financial tools to export controls and other mechanisms really get leverage over China. Going into some of these discussions, I think my base case for an outcome is pretty
low to begin with. I think the administration is really looking to just keep a stable relationship between President Trump and President She and the trade arrangement that they negotiated in Busan, not expecting any massive deliverables there.
So I think it's a pretty steady state.
With China remarkably, But it is a good question as to what some of this means in terms of the President's negotiations with other trading partners, where it's not as clear what teriff authority he has to threaten some of these big foreign policy related.
Tariff kumming and we have tariffs on them, But do we have influence since we still have influence, I.
Do, but I do think the next few days are a bit rocky until we do get some more certainty over what the president's tariff agenda is going to look like, the authorities that he's going to use. I think the relationships with most of our trading partners will be stabilized. You know, when it comes to the US China relationship, there's a lot of soft power at play, and I think.
That's what you're alluding to.
And certainly having a core decision which goes against one of the President's key policies isn't the best thing going into this meeting, But at the same time, I don't think it's devastating, and I think there's a really long time between now and March thirtieth when the President goes in terms of actions that can be taken, that's a lifetime in terms of the trade agenda and the negotiating agenda, so we'll see what happens in the next couple of weeks.
This is the Bloomberg Survendics podcast, bringing you the best in markets, economics, antient 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.