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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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. So here's the latest
this morning. How's Republicans meeting with President alec Donald Trump over the weekend to discuss the salt dedunction cam calling the talks positive but saying they got no firm commitments from Trump. The move shaping up to be a key sticking point for passing an upcoming tax package. Joined us now to discuss is mir Becginnis at the Committee for
a Responsible Federal Budget? My welcome to the program. I just want to start in the market and then get to some of the poly How much more expensive is this bond market making the ambitions of Washington day say yeah.
The bond market is a wake up call for when you have trillions and trillions of dollars of debt, higher
interest rates having profound effect on your overall budget. And so the fact that we'll be paying a trillion dollars in interest payments this year, second largest largest item in the federal budget, squeezes out the space for talk of anything else spending increases, tax cuts, and it puts real pressure on the lawmakers to start thinking about fiscal issues, which is something I have been ignoring for the past years.
And it is a reminder that there are real effects of borrowing too much, and we're starting to feel those effects, and this huge debt load is incredibly sensitive to those swings and rates well.
Incoming Vice President elect JD. Van certainly taking notice of the bond market in his interview over the weekend when Fox News he mentioned bond yields rising twice and then net interest payment payments. My you're talking about last year being more than one trillion dollars, what are they on track to be this year? For twenty twenty five.
This year it will be over trillion as well.
Yeah, it's pretty that's pretty incredible in the terms, doesn't really give the incoming administration or Congress a ton of wiggle room if that is how much we are spending, and the bond market is pushing back on some of this spending. What do you make of all the talk of reconciliation, tax cuts, more money for the border. Do you have an understanding from Congress and what the top line figure would be.
No, that's the big fight in Congress right now.
So on one side, and this is the side that I have a preference for, there are members who are saying, my red line is I don't want to add to the debt.
Our debt is too high.
The only way that you change that, that you break that fever, is you start using reconciliation and budgets and other tools to bring the debt down. So there are some members and they're not enough, unfortunately, who are saying, I don't want to vote for something that would make the debt worse.
But the discussions.
Internally are talking about huge numbers because the tax cuts, extending them without offsets would be so expensive that there are discussions of a reconciliation. Number is high as four five six trillion dollars a new borrowing, which would be astronomically dangerous to the fiscal situation that as just mentioned, the bond market is already showing real nerves about how.
Long do you think they will extend TCJA because they want to keep the top line number down, but they definitely want to make sure that they can get these tax extensions through.
Well, you've honed in on one of the possible and in fact likely gimmicks that there is.
So tax policy should be permanent. The purpose of tax policy is to allow.
Individuals, families, and businesses to plan with certainty. But one of the tricks to keep the cost of the bill down when you're using reconciliation is to make those tax cuts temporary. That's why we're dealing with this now, because they weren't permanent. So the first effort will be to have offsets, to have spending cuts that will offset the
cost of extending the tax cuts. But I worry and I think it's likely that in the end a number of those extensions will be temporary, talking about just two or four years, which will hide the costs, massive costs.
We'll be back at the table having the same discussion in a couple of.
Years if they do that, and none of the entities will be able to plan with a certainty that would make their investments decisions much more beneficial to the companies.
How optimistic by are you about the Department of Government efficiency.
I'm a huge fan about the DOTJE effort. I'm really excited about it for two reasons. One, it's so clearly needed. There are huge pockets of places where we could have massive savings in the federal government, from procurement for defense, from a huge healthcare industry that is remarkably inefficient in almost every aspect of how it works, to the regulations that they're looking at.
So I think that's very exciting.
I was concerned when they came out and said we're going to save two trillion dollars in a year, because that fiscal ambition is so far from reality that I was worried this was all bluster and kind of like the California hype cycle more than the reality of how budgeting works.
But as I've seen the efforts that they're.
Putting together and they've walked back that metric saying we're going to get as much as we can at trillions, maybe more likely over a year, I continue.
To be encouraged.
I think that they will find a lot of places in executive orders where you can save money. I think they will find a lot of regulatory changes. I just hope they're not all directed towards loosening regulations and the financial industry on crypto and AI, rather than thinking about where you can make things more efficiently and actually save
the government real savings. The hardest pockets, though, are Social Security and Medicare, and they have said those are off the table, and as far as I'm concerned, that's really one of the tests of seriousness. Are you willing to go to where the money really is So far they have said that that is a red line.
I get it.
Politically those are hot buttons. Nobody in Congress wants to touch them. But anybody who steers about the budget.
Knows that those are where the real savings are.
We talk about they we're talking about a sort of loosely brought together a coalition of people in an area that isn't actually a department, they're not actually government officials. There's a real question about what kind of political cloud they'll have, especially at a time where everything gets watered down, when you have constituents that want everything so at what point do you believe there is a political will to get through some of these cuts that might be recommended by Doze.
There's a great question, you know.
I'm on one hand on the other today, But on one hand, I think we actually need.
To outsource some of this.
Congress has failed to do its job when it's come to fiscal oversight and the fiduciary responsibility for over a decade now, and it's been really disheartening to see that the only party that cares about fiscal responsibility is the minority party trying to stop the other one from doing something. There are very few people out there really talking about how to reduce our borrowing.
So I think that's great.
On the other hand, obviously a lot of the people who are involved in this have number of interests and potentially conflicts of interest with the federal government, and I think that's really worrisome at a time when we need to be rebuilding trust with how our leaders are serving as stewards for the overall economy and not just looking after their own interests. So I think their ability to disrupt and not care about the political constraints is incredibly encouraging.
But I think we have to make sure that they're very transparent. It's very transparent about how they're doing it. Biggest concern I have President Trump. We've seen him in office before. He was not a fan of spending cuts. In fact, he increased spending massively on top of huge tax cuts, and the debt went up under him a lot because.
He hasn't liked to say no to things.
So I think you may see a real political meeting of the minds between those working on DOGE.
Sorry, the opposite of meeting.
Of minds between those working on DOGE and President Trump, who, when he realizes how hard these things are, says, ooh, that politically is going to be difficult, and I don't know how that will play out.
We'll see if it's any different a second time around. May I appreciate your time? Mom aginnis that they commits a if a responsible federal budget on snare of co logic, which produces dates from response to catastrophic global events, joins us. Now for more, Let's get into some of the data and whether you can tell at the moment or it's too early. Just one went wrong care Well.
It's one of those things where because the buyers were still spreading entertainment while increasing buyers, still not containing coming out with the short laws. Estimate your talk not on process, and it's're always subject to change. One of the things we are sort of putting you on is that this is likely going to be, you know, a twenty to thirty billion dollars in short loss event, definitely one of the most destructive wildfire events in the Los Angeles in history, maybe California history.
John This comes to at a point when we've already had housing shortages in California, discussion around where people are going to live at a time where the average price in some of these areas was three million dollars for homes. How do you rebuild in a place at a time when you have labor shortages, having in construction in particular, when you have insurance premium that are going to have to go through the roof, have real questions about what additional risks are going to be going forward.
It's a really good question.
And when it comes to rebuilding, keeping this concept of this idea of mitigation in mind is really important. What we saw in look at historical examples like the campfire in Paradise back in twenty eighteen, rebuilding an entire community with fire risk in mind can do wonders in terms of reducing wildfire risk and actually have a pretty serious
reduction on wildfire insurance premium. Not just individual mitigation at the homewater level class a roof making sure there's no combustible structures and status to via primary home, but making sure that when you rebuilt, keeping in mind natural fire breaks within the community and combining these individual mitigation and
community level mitigation efforts can do wonders. You can reduce wildfire and short wildfire losses by seventy five percent and could have a direct impact on insurance premium as well.
For homeowners you can move back the area.
The issue is john and we've seen this in other areas.
Also, is that a lot of the models, whether.
It's fire risk or whether it's flood risk or not updated.
They are outdated.
They don't necessarily reflect the entire risk zones, and it's more expensive to put certain measures in place that could mitigate the risks. How resistant are officials when you talk with them about planning ahead if it costs more, if it actually does take more resources at a time where their resources are strapped in other places.
It's a good question, and I think officials.
Regulatory officials are more open to the idea of using these forward looking models, the still casting models as opposed to being reliant entirely.
In historical loss experience.
The models are updated frequently and finding we will have you to account for increasing risk, whether that be do the environment or were for example, fuel layers in patterns what have you, or for flood just the higher sea level increase frequency of flooding events. The models are accounting for these changes and the recent regulatory changes calippointed and effective at the beginning of this year.
Right.
Allowing carriers to use surpasital polar puward looking models means that in what we hope is what we believe will be the case, is a more healthy insurance industry within the state. There will be more carries to be able to provide more coverage at actually sound rates so that in the event of another natal disaster, then there will be finance available for home business owners to rebuild.
But John, thousands of insurers chose not to renew home insurance policies of thousands of peoples. The for speaker of the Houses from California. He was telling me his mom just weeks ago lost her Geico insurance. What happens to those people.
Well, they end up going to the sort of the insurer Last Resorts called the Fair Plant in California, and we've seen recently that more and more homeowners and cost owners have moved into the Fair Plan. A similar phenomenal we saw in recent years would be Citizens Insurance plant
in Florida was to win insurance. And as these state backed insurance plants grow in terms of remember poll same place, but means there's a lot more risk, there's a lot more risk sort of within their books and a large an actors after event like what we're seeing at California now could have a pretty seriously impact to that state. Fact that's the fact insure Last Resort now in California carries you right in the state must participated in the
Fair plan. If reserves reinsurance, any sort of bonds cat ponds that are in placed are used up as a result of this event, the insurance will make up that difference so that all quaims are paid. The downstream economic effects of that, how that applies to premiums or rates from forward remains to be seen, but those claims will be paying people will be able to be built if.
They are part of being parent.
John, appreciate your input this morning and your time. Thank you, sir, John Snaiver of Collogic joining usna is Michelle ma of the MasterCard Economics Institute. Michelle, good morning. It's good to see you.
Good to see you, good to be here, great to catch.
Up with you. As ol wis, how disruptive will this tight to be it amounts to come off the back of these fives, Well, of course.
I mean that's probably one of the littlest things that we think about when considering the wildfires right now, in the devastation that's having on people and families and livelihoods. But of course, as economists and we're trying to understand what's happening in the economy in the markets, the high frequency data matters a lot, and it will be noisy in the coming months. So you're going to see a lot of people trying to x out the impact of
California to the extent that that's possible. So a lot of that conversation, without the disruption.
It would have been.
It thill raises some issues, some nodes of pressure that we have, in particular in the housing market, the idea that they're going to have to rebuild at a time where housing shortages already were pretty prevalent in the area. How much room, how much slack is there in the economy to compensate for building to compensate for some of these things at a time was some people say it's a pretty finely balanced labor market.
Well, of course, I mean you have to think about the inputs into the equation for rebuilding in terms of the raw materials, the labor, just the capacity to be able to add that much housing stock as quickly as it needs to be added. But that said, we also should be seeing a lot of stimulus into the area hopefully, which should help encourage and speed up that rebuilding process.
But it's going to take time.
The devastation is tremendous and.
It still hasn't ended. As we were just talking about broadening out, there's a larger question about just where we are and how real the numbers were on Friday, how good they actually were, versus maybe overstating things with the preliminary read that wasn't necessarily verified. In other data, from what you're seeing from the mass card expenditures from all of the secondary and tertiary data. Do you think that this truly is a labor market that has more upside
surprise than people are giving it credit for. I do.
I mean, as you know, at the Economics Instituit, we've been very positive on the traructory of the economy this whole cycle, and a lot of that is because of this ability of the consumer to spend, which represents a positive feedback loop with the labor market. So any given jobs number we know subject to revision, you have to
look at moving average. You don't want to over you know, put overemphasize one report, but if you do look at a moving average, when you think about what's happened in terms of the last several months, it has still been strong job creation and unemployment rate that is remaining sticky low, and measures of unemployment insurance when you look at jobless claims that are still very very low. So the labor
market is supportive. Wage growth is continuing to run at a solid pace above the underlying pace of inflation for goods and services, and that's supporting consumer spending. As consumers spend, that then further drives this feedback back into the labor market. So on Friday's jobs numbers, we had very strong hiring in the retail sector for example. Part of that was seasonality.
November was weaker, December stronger, but nonetheless that does represent the fact that consumers are engaging when it comes.
To that concern about inflation. I know it's or with politics, but University of Michigan is showing that actually consumers are concerned about inflation going forward. Is that driven because of talk of terrorists and policy or is that just driven by they're still not comfortable with the price level they've seen of the course in the past two years.
I think expectations are still resetting to that price level. Right when you talk to an average person out there, they're saying, but it used to be so much less expensive to buy this, and that less expensive might have been a week ago, a year ago, or five years ago, depending on when they've last purchased the item. So I do think expectations are still resetting. It depends on the product.
Right when you think about groceries, for example, the last year and a half now, we've been in very steady and low inflation between one and one and a half percent for grocery inflation, So for food, You're starting to get consumers to feel more comfortable at this is probably the price that is sticking, and it makes sense they're not continuously seeing price increases, but there is a little bit of a you know, a discomfort of course amongst
consumers after seeing such a big price level increase. That said, if you look at long run inflation expectations from the University of Michigan this whole cycle, they've actually been pretty well contained overall. So over the longer term, I think consumers still have a more disinflationary psychology that is sticky.
How do you think the economy will deal with potentially broad based tariffs of the Income Administration?
So it depends, as you know, how you define broad based tariffs. So there's so much uncertainty in terms of what the policy will actually end up being, and will adapt our views as we learn more. But I think in general, what we've seen in the past with tariffs is that it does prove to be somewhat of a temporary price level increase on those private products that are impacted by tariffs, and then it could also just change
in general the cost of production. Going back to the conversation at Lisa before around the cost of rebuilding and housing construction, input costs of matter in every way.
Of course, across the economy is leading.
Twenty pill forward. From the data you've seen people buying juryable goods, any of that.
So you know, it's really hard hard as routine whether or not that's happening. You do hear it and see it more visibly in terms of companies stockpiling and trying to make sure that they're importing as much as they can, particularly from areas that might be targeted in terms of tariffs. But for the consumer, that's something that's really hard to determine, whether it's a pull forward or just an acceleration of spend.
Michelle, appreciate your time as always, got it, Thank you, Thank you very much. Michelle Mather of the MasterCard Economics Institute. This is the Bloomberg Sevenants podcast, bringing you the best in markets, economics, and geopolitics. 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.