Bloomberg Surveillance TV: February 3, 2025

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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. Let's get back to

Oh yeah, look, I thought there were too many tariffs, and Frump's first term, I thought they were too poorly designed. But this is just at a massive scale relative to those, and these are against close allies, and this is less than you know. This is basically two weeks in to the administration, and he's promised us he's just getting started.

Jason, it seems like on Wall Street people believe that the US economy is strong enough to withstand the hit, the growth hit from these tariffs.

Do agree.

First of all, it doesn't look to me like Wall Street has priced in these tariffs going into effect on a sustained basis.

And by the way, I hope Wall Street's right about that.

Some things are crazy enough that you touch the hot stove and you pull your hand away, and I think that's what Wall Street things would happen. So you can't look at the market right now to infer what would happen if over the next year, we keep these tariffs on, escalate them in response to their responses, add tariffs to the European Union at a universal tariff. All of that, I have no doubt, would would be quite a big hit.

To growth, Jason.

As you know, though, of course, USMCA is up for renegotiation next year. How much are these tariffs a part of that Caroenen stick approach for that renegotiation with Canada and Mexico.

You know, USMCA was President Trump's trade agreement, and look, it's sort of ironic. In twenty sixteen, he campaigned on tearing up NAFTA and he ended up doing a renegotiation of it that was pretty good, and that got everyone on board. This time around, he actually did not campaign against NAFTA or USMCA, did not really campaign against Mexico and Canada, and he's straight out of the gate with

He did campaign though, on making sure that he put a halt to illegal immigration and stopping the fetanyl flow. If you look at our own drug enforcement data, twenty one thousand pounds with seas at the southern border of fetanyl, forty three pounds of fetanyl from Canada. Two milligrams of fetanyl is lethal. There's more than four hundred and fifty milligrams in a pound. If that is the direction that Trump is taking and it comes to national security, do

He First of all, you just said the number for Canada was tiny compared to the number for Mexico. And by the way, fentanyl goes from the US porter to the Canadian border as well, do you think they should be putting tariffs on us to stop that flow of fentanyl? Absolutely, we need to put pressure on Mexico. But it's not like they have a switch that they could choose whether or not to push.

This has been a big issue for them.

It's undermined a lot of their country the drug trade as well. And by the way, destabilizing the Mexican economy is going to increase.

The amount of immigration to the United States, not reduce it.

Jason, there's a larger theory here that the US needs to produce more of its goods at home, both for national security reasons and also to give jobs to people in areas that got beaten up during a lot of the globalization shifts that we saw in the economy. What do you think it would take to bring production back. Do you think that's a feasible goal and how long would it take?

Yeah?

I think what would take to bring production back is to have an integrated market in North America where inputs for American manufacturers can come in tax free, where auto parts can go back and forth across the border multiple times. That's the way you have an American auto industry. You don't make every single piece that goes into the car. You have, you know a lot of the you added a lot of the key stages of the process, but spread production out around the world. That's what makes the

Globalization has been a key part of that.

This is going to destroy American manufacturing if it continues and escalates.

Jason, can you make the argument that globalization destroyed American manufacturing.

Productivity growth has been the biggest factor in reducing American manufacturing. Manufacturing jobs have fallen in China, they've fallen in Germany, they fall in the United States because you can make things.

With fewer people.

And by the way, even if you want more manufacturing jobs, you don't raise input prices for manufacturing. You don't strengthen the dollar to hurt exporters. You don't weaken the economies of our trading partners. You don't encourage them to put terrorfs on manufact Every single aspect of this is bad for American manufacturing.

Jason, just to find a word at the one minute we have left with you, just on prices. By definition, the importer pays the tariff. So let's just put that all to one side. What's your base case on how the cost will be distributed? How do you see this playing gap? Will it all get passed through to the consumer? Will it be eaten elsewhere?

He'll be a little bit of it eaten by the Canadians and Mexicans in terms of the appreciation of the dollar, some of it eaten by margins. So I see something like an extra half point on inflation, and if you go from you know, two point five to three percent inflation, and that's a big difference for the.

Fat, big change. Jason, appreciate your input and your insight. Thank you, sir, Jason Furman there at the Harvard Kennedy School. I'm ready sent of energy aspects joined us now to extend the conversation and RITA, what does a tempt per tariff on four million pounds of crew today? Due to this energy market?

I think you look, the ten percent tariff in itself doesn't break us refining, but for sure it adds to the cost. US refining margins are not great to begin with. We've calculated even if Canadian heavies takes seventy percent off the tariff, you still lose about a dollar from Midwest margins. And I think the critical thing it also is to watch for is the Canadian dollar that's weakened a lot,

I'm reading you mentioned something in there that I want to pick up and exporting more to Asia. How easy is it for Canada and Mexico to shift its export lines to direct more of it to China in the Southeast asiancy rather than the United States.

Well, because Canada now has the TMX pipeline. In the past, they wouldn't have been able to do so would have been a lot harder, but now with TMX, it actually gives them a lot more optionality. And if I may say so, I think these tariffs have essentially handed a boon to Asian refiners. And it's obviously bullish for pad One margins because pad One is losing product exports from Canada,

How long before the United States could produce the kind of crude that would be good for refining. How long before the US can compensate? And I've set that with the energy that Donald Trump was talking about.

They can't. I mean, the reserves are light shale. It's a geology problem. We can, you know, scream and shout out as much as we want about the volume of oil produced. But every refiner on the Gulf Coast and a lot of them in the Midwest are complex refiners. They need the heavier crude and that's why they were designed, because they had availability of Canadian and Mexican heavies. Gulf of Mexico producers some medium sour crudes, but it's not the heavy material that these refiners need. So it's a

So I'm rida, where can they import this type of crud? Not going to be from Mexico or Canada.

So I think the Canadian imports will still continue because again, like I said, the ten percent tariff, again, we'll get it split between refiners and Canada, but I think those will continue. I think the challenge is going to be on the Gulf coast. We do see more Middle Eastern barrels arriving potentially from Iraq. Even some Saudi Arabia and other Latin American countries can swing, but it's going to be a tough ask. And by the way, we don't

We also have OPEC plus.

Members meeting today. Is this a moment for them to want to add barrels to the market.

Today's a GMMC meeting rather than no OPEK ministerial meeting. The GMMC simply, you know, just take stock of where fundamentals are. We've maintained our view that they will appselutely have to see outright supply disruption, not just trade floor ships, which is what's happening right now before they change course. So we maintain the view that you know, the earliest you're going to start seeing or back plus unwined is April.

I'm rich, I appreciate your time. As always, I'm ready to send there of energy aspects. Steven Stanley as Santander, saying tariffs are likely to be negative for growth, especially if there is retaliation. Steve joined us now for more.

Steven, good to see it, good to be here.

Chair and Pound in the news conference said he'd wait to see policy articulated. And we've said this morning a few times that it has been what does he do now?

I think you have to wait. I mean, I think this is a day to day thing.

President Trump is speaking with the leaders of Canada, Mexico. There's a I mean, there's at least a non trivial chance that we'd never see these, these twenty five percent tariffs on.

The margins, though given that a lot of companies aren't sure what to do with us Jim Bullard for our Saint Louis fed President was earlier on in saying he sees this as more of a growth shock than an inflationary shock. Based on everything that you've read and seen.

So far, would you agree totally agree with that? Totally agree.

So the inflation story's been the one that's gotten the most run in terms of tariffs.

But the problem with that story is that tariffs are a.

One time change in the price level, right, It's not a persistent change in the rate of change of prices, which is inflation.

And so in theory, the FED is supposed to look through that.

I realize easier said than done. But if you go back to twenty eighteen, I know very different economic landscape, but the main issue back then was growth, not inflation, and it definitely had a significant impact on growth.

The argument that people make against this is that the US economy is so strong and this is such a minor hit that the US will power through it and it will barely show up.

Why do you disagree, Well, we may very well get through it.

I don't think this would necessarily be inflationary, given that the economy does have a lot of momentum, but I do think that the growth hit would be significant.

We would notice it for sure.

And I think again, if you go back to twenty eighteen twenty nineteen, it seems to me that the biggest takeaway from that experience, at least for me, was it wasn't so much the tariffs themselves. It was the uncertainty in the environment that it engendered. And I think a lot of businesses were, you know, taking a step back until they had a better idea of what was coming at that time. And now I think businesses are already in that mode. They're waiting for tax changes regulatory.

In addition to tariffs.

And I mean, if I'm a business person, I'm not making any you know, smart, I'm not making any big decisions anytime soon.

The other side of that growth, though, is what if there is a fifteen percent corporate tax, right if you produce in the United States? Right, isn't it the cart and stick approached?

Well, this is yeah, this is what the president is aiming for. Is he wants to bring production and home. I mean, I think that's realistic, perhaps for some industries and not so much for others.

But yeah, I mean it is a mix.

I think that if you look at the administration's proposed policy policies in a totality, the tax piece and the regulatory piece are likely to be very positive for growth and then on the other side, you've got tariffs and maybe to some degree immigration, And you know, he's leading with tariffs, which it seems to me maybe not the right way to go because that's the one that has the potential to be negative for growth.

But you know, we'll see how that plays out.

I mean, I think it's you know, I'm not a political annalys but my sense is.

That for him, this is all in negotiation. The point of this isn't to slap tariffs and slow the economy down.

It's to get what he wants from Canada, Mexico, China and others.

And he's flirting now the European Union. Last night he said we'll definitely happen with the European Union.

So in that sense, how do you model.

All of this if it's basically just going to be paralysis businesses waiting on the sidelines because they could be waiting for months or years.

Yeah, it's definitely moving target. I mean, you think about are the arffs going to happen?

Are they not going to happen?

Then if they are, next question, are they going to be exemptions? Are certain industries going to get which that happened a lot there are a lot of exemptions in Trump's first term on the tariffs that we're in posed. How do our trading partners respond, are they retaliatory?

Do they want to deal? How does how does the broader economy respond to?

Do producers and retailers pass everything through? Do they eat some of the of the margin? You know, there's so many questions that I think it's impossible to have a precise estimate. I mean, I think, you know, we know the direction, but I don't think that the magnitudes are very difficult. You can, you know, you can kind of throw numbers out there, but it's all very tentative at this point.

Can we throw some numbers at that few? Let's got back to twenty eighteen and talk about the experience from twenty eighteen. We know a whole different range of things can happen. Exporters can drop prices, we can eat it on the margin. It doesn't all have to get passed through to the consumer. You would be the first to say that's very dependent on what goods and what sectors, And I would agree with you. What do we learned from eighteen about what corporations did then?

What happened?

Then?

Yeah, I think the difficulty is that the environment is very different now than it was then. I think back then, inflation expectations were incredibly low. Firms had very little pricing power, and I think in many cases they were forced to eat at least some of the cost increases. This time around, firms have a lot of muscle memory raising prices when their costs go.

Do they have pricing power right now?

We'll see, We'll see.

I think that consumers are probably, you know, the anecdotal evidence is that consumers have started to fight back a little bit. But at the same time, again, consumers also have muscle memory and paying higher prices. And you know, if if it feels like tariff's is a good reason, then maybe they're more inclined to accept it now than they would have been in eighteen.

If we still have these tariffs by Friday, what am I looking at the payrolls report for? Is it of any use at all?

I don't think it's irrelevant.

But I think it's definitely going to be the case that the markets are going to pay a lot less attention to the normal data flow than they would have otherwise.

That's for sure. Stephen Stanley of Santanta's Stephen. Thank you, sir, I appreciate it. Let's cross over to Earl Davis of BEIMO, who has more Welcome to the program, Sir, I've asked this question a few times already today. Is this bullish or bearish for treasuries? Which one ol?

It's bullish for tips, not treasuries, and tips will all perform both on a rally as we're seeing today in the tenure sector.

And they will outperform on any sell off.

The reason why it's hard to answer that question ultimately, other than tips, is that the market only has the ability to focus on one narrative at the time at a time, and there's four possible narratives that could have happen now. One is inflation, two is growth, three is risk off.

And four is fiscal.

Two of those, inflation and fiscal are negative on bond yields, and two are bullish. That's risk off and growth. The risk off is what we're seeing now combined with inflationary fears.

Do you think on the tax on the fiscal, Earl, the actions like this make it more likely than not we'll get bigger tax cats than some people expect.

Yeah, I could go both ways. There's so many unknowns.

That's why we said our approaches, you know what, we expect nothing, but we plan for everything and so that we could take advantage of it now. So it's possible, but there's so many unknowns, right are the what is the revenue actually used for?

How long does it?

Does this last a little bit's a short lived tariff war, then we can expect to be more see more pressure on fiscal but if it's longer lived than yes, it does help to fund tax cuts.

Another spending choices.

Oh, do you have a base case going into this evening because after midnight they're coming on in less as an eleventh hour deal.

Yeah, you know, it's one of those things where you know, you hope for the best, prepare for the worst. So our base case basically is we don't have a base case, but it's to react to the market, to acknowledge when a narrative has run out. And I named the four things that we're looking at as possible narratives if you were.

To ask me right now.

The way I think, the way I believe I see this going is first you have your risk off trade. You're seeing that through credit spreads wide and you're seeing that through a rally inenominals and tips, even though tips are rallying more than treasuries, so we'll have this risk off verse. Then if the tarers are implemented and grow,

Rally in bonds.

So it's very interesting the possible sequencing of this. One thing I do want to highlight, there's one thing where it changes this to an inflation shock from a gross shock.

I do believe it is a gross shock on the real economy.

But what changes it to an inflation shock is if you get money printing, if you get to QI again, because that's putting more cash into the system, which will fuel the inflation and fuel growth so it's one thing to watch out for where it could pivot from a gross shock to an inflation shop.

Oh do you think it could be more inflationary as well if we get more terrorists.

Trump last night is talking.

About the fact that they're going to be coming as well when it comes to the European Union.

Yeah, you know what, it's a very interesting thing. This is why I brought up QE. So if you think of the economy US economy as a pie, the pie is not changing shape without any QE or q T.

It's one solid size. Now you bring in.

Tariffs, people have to spend more, so the bigger piece of the pie is now going for tariffs. That for inflation and to pay prices. That means there's less that goes into investment. That's why without QE you do get a gross shock ultimately, but there is a very large potential. I think the trigger for a QE or something more stimulative is the risk off. You start getting a big sell off in risk assets. I do think the FED put is in play and that is adding stimulus to

Oh just briefly though, do you think the thread just the mere possibility of inflation picking up again just constrain the FED put the FED spias to wieze.

No, not all FED puts in play. And the reason why is because we're still we're not the peak of inflation. You know, we're not where we were in twenty twenty two, so they still have room. And the reason why it's in play is because of that potential growth shock.

So they could look through.

They could say, we're looking through this supply shark because we do see the press demand, and we're going to the press demand because we believe inflation will ultimately end up in the range that we want that one to three percent.

You one of the best, really thoughtful stuff. Appreciate your time. Thank you, Oh Davis there of BMO. This is the Bloomberg Sevenants 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 out mm hmm