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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie 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.
Steve Englander of stand Chart joins us.
Now.
Steve, thank you so much for joining us. So this was pretty much baked in. But really, depending on where US policy goes, is that going to be the deciding factor for this BOJ.
Well, you know, if you read and watch what the boj is saying. Yesterday, they lifted up their inflation forecast, talk talked about upside risk. I actually think that a lot of this is driven by what's happening in Japan. The timing, I think is dictated by concerns over you know, is it going to be you know, full Trump or mini Trump in terms of the policy actions that he's
taking in the disruption that he causes. But it's you know, I think the big surprise yesterday because a lot of people came into the meeting thinking that Boj was going to hike and then say, you know, we can afford to wait. They seem to have much more intensity about further hikes. We think that's all hike twice more this year, going up to one.
Percent, and yet it's a yen that's reaction has kind of disappeared from this market. Steve, your interpretation seems to be one of a more hawkish Ueita and Boj than perhaps this market was expecting. Are you surprised we're not seeing more strength at this moment from the end.
Yeah, I'm actually doubly surprised, because you know, it's not responding obviously to the sort of great differential story and at the short end, and in addition, in the past that's actually been pretty well correlated with CNH and the fact that the CNH has strengthened a lot and yet hasn't said, you know, done much this week.
I think is remains a surprise.
But I think if the market begins to think that the BOJ is serious about hiking.
You know, we'll see those great differentials clothes.
I mean, the rates gap between the UK and Switzerland is actually quite much wider than between the US and Japan. So I think that the you know, that story over time, I think will evolve.
Steve, maybe we can add tripley surprise to this, because this is the week of Trump's inauguration, most asset classes have been trading and arranged. The place that we've seen the most volatility has come from this currency market, whether it be dollar, mex whether it be the Canadian looney. That's where we've seen the even strength coming from the euro.
What do you make of the fact that it's been FX this week, the asset class that's seen the most reactiveness to the things coming from the Trump administration.
Well, the way I see it, and if you if you look at what.
Happened, say from the beginning of October when Trump presidential out started going up to you know, say the middle of last week, dollar strengthened way ahead, way beyond what
interest rate differentials were telling you it should strengthen. And we think a lot of that was risk premium markets were going into the inauguration thinking sixty percent Haras on China, you know whatever, ten percent to twenty five percent, on the US's friends in the world, and a lot of risk premium, I think, and the focus was the FX market because that was kind of ground zero for where all of this would play out. And so I think
what we're seeing is then unwind of that. You know, there's still a bit to go, but you know, euro could go up one percent and you could say it's risk premium. If it went up three percent, it would have to be something beyond that at this stage.
Steve Michael Purvis here this is maybe a slightly bizarre question, but do you think Trump can make Europe great again? And what I mean by that is will if he goes aggressive on Europe, will it put the European countries, for example Germany in a place where they're going to be more fiscally expansive than they have been in the past and maybe even putting some reforms into their economies. There is that a scenario that we should be looking at.
It couldn't be, but you know, I worked at the OECD thirty years ago and in the same structural issues that are still existing in Europe existed.
Then it's a generation and a half ago.
I do think you're right, and we think you're right that there's a chance that say, if we you know, we have a change in government, not to the a FD of course, but to the center and the strong longer cent as government, that they will sort of ease up on the death situation and they could do more fiscal expansion. I mean, if I had to bet on Europe changing policy for whatever reason, they may change macro.
They seem determined not to do the sorts of things that you and I would call structural, fundamental micro structural reforms.
Wow, Steve England or thank you so much for joining us this morning. Begin this hour, though with stocks at record highs after President Trump said he would rather not impose tariffs on China, Margie Patel of all Spring Global Investments, writing quote, Trump administration has announced many changes to regulations and new initiatives. It is too early to judge their effects in the economy and financial markets, but we believe many will reinforce the areas of the economy which we
have expected strong growth. And Margie joins us. Now, thank you so much for joining us this morning. I would love to just get your reaction to the past twenty four hours. And what surprised you the most about what we've heard from forty seventh President Donald Trump and the second administration seemingly touching every part of global financial markets.
Well, I think that's really coming out strong and stating a lot of his positions and positions as you pointed out, maybe he doesn't expect to be achieved, but it's a good place to negotiate from.
And I think the most.
Important thing, frankly, is that the idea of higher taxes is totally off the board. That was a big risk of the market last year looking out into twenty twenty five. So I think that's the number one important thing is no increases in taxes and maybe even some lower taxes as well as lower regulation, which of course will be very positive for the markets.
Margie, you are describing as status quo of sorts though, just an extension of the tax cuts. And Anne Marie got to this when she was reading some of your thoughts. How do you disaggregate the strength that this market is pricing in and the continued strength of equities just being a good business environment from a strong starting place versus actual policy. How dominant will politics actually be for risk assets.
Well, I hope not too strong. I hope that the changes that are made will in fact reinforce the areas of strong growth that we've seen. And I think this year is going to be another year of continuing trends where technology is very strong, data center investments is very strong, Improving electrical grid is very strong, and we'll see more
investment in our domestic energy sector. So those were all in play last year and I think they'll continue and this will be another year of surprisingly good profits and a surprisingly good equity market.
There has been a shift though, over the past month or so, since about mid December, marking what you've seen outperform. It's been energy, utilities, industrials, financial cyclical parts of this market that are sensitive to growth. It is this extreme growth optimism that we're pricing in. Does that continue on or do we have an amend that makes us run back to the safety corners of the mag seven.
Well, I don't think it's extreme optimism. I think when you look basically, putting aside the politics and we may get out of the new administration, is the US economy is really in good shape. We're growing at a sustained level, of you know, say two two and a half percent, and there are signs that growth may even be stronger,
maybe closer to three percent. So that's really very very positive, and that would allow the stock market to be up say a ten twelve percent conservatively this year, maybe even higher. So I think the surprises might be continued growth and maybe even stronger than we're expected. Maybe that's what the market is really telegraphing, is continuation and further strengthening, particularly when we see these other areas that have broadened.
Out a little bit.
Margie, one question for you. You know, we're dealing with a very high valuation on the S and P five hundred and through a lot of the sub and disease there. You know, it's about you know, sort of top two percent valuations here. Do you see at multiple compression as sort of something that's going to happen or do you think the market will the earnings will be so explosive this year that it will actually bring the multiple down to more normalized levels that way, Well.
I don't think the market is you know, an average doesn't tell you the whole story. If you look, you have a small, relatively small number of stocks that have very high growth, you know, earnings growth of say twenty percent. Those are the ones that are trading at big premiums for PE. And then a lot of the market that's actually having very low growth has a relatively more modest PE. So when you put it together, it looks optically a
little higher. But I think the market is fairly priced, and I think that a lot of the uncertainty that we have has has really gone out. There's a more positive outlook. I do think though last year we had a lot of our total return in the standard pores, which was up twenty five percent, was due to expansion
of the price earnings multiple. I think this year we'll probably see more companies whose earnings are high will get a higher stock price, and not that expansion in PE just really look more dependent on the profit growth of companies.
Gotcha.
So PE's going to stay where they are. But are you Are you bullish on the rotation away from big tech in the more cyclical parts right now?
Well, I think only those cyclical parts that are part of this more secular change in secular growth, which is I think the reshoring back to America is real and it's going to continue. I think the investment we need for data centers is a decade long process. And also the electrical grid, which looks very stable for a long time, now suddenly looks as if we'll have growth in demand for power and we need to strengthen the grid expanding it. So that's a lot of additional revenue for the industrial
sector and technology is part of that. So we think those will continue. And the energy, domestic energy, it looks now as if there was sort of a cloud over that energy sector, I think is actually more positive. We may see more investment from the energy sector.
It's something Washington, DC is definitely focused on, whether it's AI data centers or just unleashing more when it comes to American energy. Margie Patel, thank you so much for your time this morning. Of course, of all Spring global investments, Mohammab and Salman made a six hundred billion dollar pledge
to Trump on Wednesday. Former senior US intelligence official Norman Rule calling the pledge quote powerful evidence that real believes the US will remain its foundational security and economic partner for decades. Norman, thank you so much for joining us this morning. He's also part of CSIS. When it comes to the Saudi's investing this amount of money into the United States. Now Trump up a nanny and saying, maybe
we can get to a trillion dollars. Like the way that sounds better at the end of the day is just as Red choosing Washington over Beijing.
Good morning.
In part, this is Riod choosing Washington over the world. But this is also Riod choosing the American high tech sector over the world. Saudi Arabia's drivers are the success of the Vision twenty thirty, transformation of its society as
well as its economy. It believes that artificial intelligence will accelerate that process, provide jobs for a rising generation, transform the kingdom's industries, and all of that goodness, all of that power will come from a long term relationship with the United States.
It's not the only place that Trump made headlines when it comes to Saudi. Norm he also said that he would ask Saudi to lower the price of oil. Is that relationship strong enough? Is what Saudi gets out of the US when it comes to economic security. Some of the things you're talking about enough of an incentive for them to act in a way that might be against some of their economic benefit.
Well, here's it. Becomes more complicated. First, this is an OPECK plus decision. There are some OPECK plus members that might be willing to produce more, but some are at capacity. So this really does just leave Saudi Arabia, the Emirates and Kuwait.
But there's a bit of a tension here.
The lower oil prices become, the less revenue Sadi will have to invest, not only in its Vision twenty thirty domestic plans, but within the United States itself.
So I think you're looking at oil.
Prices that once they would say, reach the sixty dollars sixties, really cutting into the amount of money that Saudi Arabia would have to put it to meet its investment promises to the Trump administration.
That's one of the contradictions of asking for more production if you think it's going to lower prices, because in the end, what you end up doing is saying, Okay, where's that volume versus price argument? And so I think that they probably have the most spare capacity, But you could also vision that there might be a small give back on production because they are holding some back as opposed to a major giveback on production. Do you have
any thought about how that actually plays out? In the real world as opposed to just a request.
Sure, the Kingdom has two primary goals market.
Stability and maintaining a capacity to be a swing producer driver to prevent any sudden shifts within the market. That will drive a relationship with Russia because they have a capacity to impact the market. But the Kingdom actually has less control over what happens in the United States in terms of its market. So we're sort of reaching the end or the high point of what fracking can do. The Kingdom can produce probably another million or two million
barrels of on the market. The Emirates could do the same thing, and I think some from Kuwait. But I think in the end, stability in the market is going to be the driver that shapes where OPEC plus goes.
Norm When it comes to the three big adversaries in the United States, China, Russian Iron we've seen President Trump in his first week really focus in on Russia and putting the onus on Putin to get to the table. What's the strategy when it comes to ending this war.
Well, I think the strategy is clear.
First, he has assigned General Keith Kellogg, a very experienced national security official, to work this and General Kellogg's work is continuing, but it is low profile. Second, he has gone to the Ukrainians and has said, you know, you need a deal. But at the same time, just as Trump produces to encourages NATO to increase his spending against Russia, he has encouraged Ukraine to enlist eighteen to twenty five
year olds in its army. So I think Ukraine, he believes, is ready for a deal, but Russia.
Has yet to come to the table in a meaningful way.
And that explains the President's comments on Russia's the pressure we bring on Russia's economy, which are real. I mean, Russia is spending a tremendous amount of money in this war. We're talking over forty percent of its budget is now devoted to military issues. Its labor market is being squeezed to the limits. You're looking at a collapse of foreign investment. It's lost markets. I mean, this is a This is really a tremendous blow to any of the world's economy.
And I think the President's views of I will put more pressure on that economy is how he plans to bring this forward.
Norman, thank you so much for your time this morning. Norman Rule of CSIS joining US now is Libby Cantrell of PIMPKO. So he's making a ton of news. It's the first full week, basically working week of his administration, slew of executive orders, John voting the Fed, telling the Saudis to add more barrels to the market, and then last night seemingly signaling to China that he has the power in tariff them, but he doesn't want to use them yet. What do you take away from all of this?
Yeah, I mean it has been flooding the zone. You forgot about the big Ai announcement. Course itself would have been a massive announcement that would have driven news for a week, and yet it was a little bit drowned out because of all these executive orders. I mean, obviously a lot of our clients very focused on tariff risk. I think, you know, taking some comfort in the fact that President Trump hasn't done anything at least definitive on
China or other countries. I mean, we think it's a little premature to start celebrating, and we think the direction of travel here is very clear. They did issue an America First Trade memorandum that made it was basically a roadmap for how they are thinking about trade. It goes from everything from kind of rewriting free trade agreements to looking at currency relationships to looking at outbound investment from
the US to China. So I think what we are telling our clients and then also I'm telling our traders is let's not sort of celebrate this too prematurely. This is a deep seated ideology. As we've talked about, there's a revenue component here, but there's also you know, I think you know, he believes in tariffs. He believes in tariff's work in terms of you've seen the trade deficit
as it relates to China. I mean, it is complicated, right, There are other things that I think the President wants from China as it relates to the Ukraine War, for instance, And I think that he will is intentionally sort of slow walking a tariffs or actions on China. I just we should not conflate that though with no future action, because I do believe that teriffs will be increasing, probably across the board, but also in China in particular.
Well, when it comes to the signal he's sending, maybe he's slow walking it. That's been a huge relief rally even just today in Asia, in Europe, in global currencies, you know, the dollars much much weaker. When it comes to China. It's not just the war in Ukraine, it's also TikTok. There's so many levers he's trying to pull. Where does all of this stack up in terms of the priority list.
Yeah, well, I think that's that's an no good question. And I do think, I mean, these are our different dimensions. I think different advisors care about different things here. Of course, you know, as we've talked about, he has a cadre of folks who are advising him under Trump two point zero, who are all so they're under Trump one point zero, who don't necessarily trust the Chinese. They view that the Chinese do not honor the Phase one trade agreement. I
think there's going to be a real review. I mean, in this memorandum, there's an order to actually look at the Phase one trade agreement, to kind of create a scorecard around that, and to publish that. So I do think again, this is you know, actions are likely coming on China. I do think the market, though, should celebrate the fact that it's going to be intentional, it's going
to be thought out. It's going to be strategic and maybe not sort of the worst fear that the market at least was predicted.
Can I just go back to where we started, this very simple fact that we got so much this week. I mean, it is a reminder of what it was like around last time that you have him talking to reporters, making news, posting things on social media and making news, giving different speeches.
It is a lot.
What is your advice to your traders, to your clients and how to sort through all of it, what to pay attention to and maybe what you can ignore.
Yeah, I mean, great question.
I think you know from US from a fixed income perspective, you know what drives bond yields, growth, inflation, currency, and of course obviously the FED at the end of the day in terms.
Of the US.
So anything that really will have a tangible impact on those drivers. A lot of these executive orders, I call them kind of more sizzle than steak. A lot of them are, you know, for the sort of shock and awe value versus actually the substance value. Now, a lot of them will be more substantive, and I think even on the federal workforce, some of the things he's done in terms of the hiring freeze, rolling back the DEI.
While that may have a long tail, that will have an impact in terms of you know, employment of federal workforce and potentially incrementally on the budget. The end of the day, though, the big things that drive the markets are going to be again the big macro movers. A lot of that has to do with Congress, and we haven't you know, Congress, we Van Marie and I Lament.
You know, Congress is understandably trying to get their ducks in a row with navigating incredibly narrow majorities, and so you know, I think that I think the focus will turn probably turn away sort of inevitably from him a bit, and you know, onto on Congress once they start proceeding with this reconciliation bill and taxes and spending. Got someonet, have you?
Levy Jay here, I'm curious as to you how important the foreign investor base is for treasuries. We have a tremendous amount of treasury issuance coming this year, dollars starting to weaken. Foreign investors very heavily invested in US assets. Is there any concern at all that perhaps this can build on itself and foreign investors become less interested in treasuries and pushing the price or sorry, pushing the yields up and price down.
Yeah, And I think that this has been a concern in the marketplace over the last few years around sort of de dollarization, around foreign central banks sort of diversifying away from kind of dollar based assets into a basket of other currencies and other sovereign assets. I'm not sure we've really seen a lot of data that actually supports that.
In fact, when you did see sort of some foreign buyers kind of pull away over the last few years, you actually saw some domestic pension plans and institutional investors actually sort of fill that gap. But recently it looks like, according to the data, that there has been more activity
in terms of foreign central banks. And that's partly just because fields look pretty nice, right, I mean, is the US bomb market actually, you know, looks pretty attractive right now from both a nominal yield but also a real yield perspective.
And if you think.
That maybe he's going to may do something on tariffs, but it won't be the sort of the full kind of manty on tariffs, then maybe you're sort of starting to dip your toe into the water. So I don't think we see that as a real concern. And again, there seems to be a lot of domestic demand that has supplemented.
That does he wait for tariffs because he wants the good news that can happen with a reconciliation what he calls one big, powerful, beautiful, powerful bill to come out. Is that what he's waiting on bake in the good news first the financial markets, and then potentially add in some of the not so great.
Yeah, and may do you think there is going to be a consideration around sort of eating your vegetables any dean dessert, And I think trying to give both to the market, not just trying to chew on one and not chew on the other. And you know, obviously, you know, as we all know, folks in this administration are very markets oriented. You know, they President Trump views the economy under Trump one point zero, the SMP under Trump one point oh, as you know, part.
Of his legacy.
So I do think they're going to be mindful of all of this. Again, though I wouldn't confuse this with the fact that we're not going to see terrriffaction. And I do think, you know, maybe something that in the marketplace that's maybe not being taken as seriously is sort of the threat on Canada and Mexico. As we know,
the USMCA review is coming up next year. It sounds like President Trump might want it to actually pull that forward, and the sort of the tariff threat might be sort of associated with that.
The review started, he's negotiating the review is sorry, and you know who will be negotiating that on behalf of Canada sort of TBD obviously, but I do think that that is.
You know, sort of part and parcel of this. So you know, while I think investors and we have been sort of focused on the China potential China actions, they actually might be you know, much much closer to the United States, our neighbors of North Luby Cantrell of Pempco, thank you so much.
This is the Bloomberg Surveillance 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,