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Terminal and the Bloomberg Business app. Let Me Cantrell with Pimco joins us around the table, Libby, how does the President of the United States come back from that?
Well?
That is the I think the question for a lot of democratic strategies and for the White House. You know, Interestingly, John, you know, even though I think we all saw the same debate and you know, arguably the president really did not meet the very low expectations that were established for him by President Trump. You know, the the you know, the Biden campaign is acknowledging that he you know, as as Vice President Kamala Harris said, he had a slow start, but he finished strong.
This is one debate.
There will be another opportunity for another debate on September tenth. I doubt that debate happens at this point, honestly, So I think that they are, you know, they are at least indicating that this is, you know, this is going according to plan, and I do you know, I just think from a process perspective, it's really important to keep in mind here that there is no you know, party elder in the back room smoking a cigar deciding who the next Democratic nominee is going to be.
This is Joe Biden.
Joe Biden will be the nominee unless he steps down. Unless he decides, really in the next two weeks or so, that he is no longer going to run. That has to be his decision. That is nobody else's decision. That is not the donor's decision, it is not the Democratic strategy decision. That has to be Joe Biden's decision. And
then even then there is no consensus candidate. So the thing that the Democrats risk here is that they don't if Joe Biden does decide not to run, that there could just be chaos, and that then undermines their whole pitch to the American people that they are the Party of stability, but it was very objectively an incredibly bad night for the president.
You've indicated to us repeatedly that a lot of the questions you get asked is about who is going to ultimately be the candidate for the Democrats, And the words that you hear repeatedly from clients is not Joe Biden. You hear things like Michelle Obama, even Jamie Dimond. I think you shared with us a number of months ago. What do those conversations sound like now, particularly yesterday evening.
Yeah, well, I would say that our traders had lots of ideas, had lots of views last night, and we're sharing with them with me, you know, in a very generous way that you know. I think that that, of course, is that narrative John is going to probably is going to reach a fevered pitch if it hasn't already. I just think people have to really understand though, that there is a process here that the Democratic Party has established
and they have put their thumb on the scale. Joe Biden is going to be their nominee again unless the President of the United States takes it not this can only be his decision.
I just can't reinforce that enough.
So yes, I do.
I think that the narratives around Michelle Obama and Jamie Diamond are going to just accelerate, for sure, But I don't think that changes the reality that this is likely what this is, and if it's not going to be, the decision has to be made really within the next.
Week or so.
Libby, you broke up the fact that Biden camp is saying he finished strong. Arguably he didn't. He didn't even end with a real pitch. The American people didn't bring up abortion. It's supposed to be all this money they're going to spend on trying to get out the vote. At the same time, I'm sure your phone was blowing up like mine with Democrats saying this is an unmitigated disaster. Do you see a schism now between Democrats and the White House and the campaign?
Well, I do think that the down ballot Democrats, and you know we've talked about this before that, of course, the Democrats are much more vulnerable in the US Senate. They only control the Senate by one vote. Right now, twenty three of the thirty four seats are being defended by Democrats. Of those twenty three eight are vulnerable. So for those folks and Marie who are in these vulnerable races in the Senate and then also in the House, of course, I think that the Democrats are hoping that
they can flip the House. There is a lot of concern that even though the polling shows that those Democrats are actually outperforming Biden by a pretty significant margin, that Biden's performance last night will just you know, continue to weigh not only on him but on their candidacy.
But again, I.
Just think this is the reality here is this is very difficult to change at this late in the game. This was not some sort of again just going to the conspiracy theories, This was not some plan by the Democrats to show Joe Biden's weakness and then to try to change the taicket. This is I think this was a mistake. This was sort of a political miscalculation. They really were, as you said earlier, they were really trying to reset the race. They wanted this, They set the
terms for the debate. They were hoping that this would be able to recalibrate.
And it's not.
I think from a market's perspective.
Let's see what happens I mean, there was some discussion about terroriffs yesterday, there was some sort of brief discussion about deficits. I didn't hear anything about that either candidate is going to be there's going to be any fiscal consolidation right there. They did not talk about deficit reduction. Only thing they did talk about was reinforcing the importance of Medicare and Social Security and not touching those entitlement programs.
And as we know, that's a big source of the deficit. So, you know, maybe the market starts pricing in some of the terror risks that they've been sort of ignoring at this point. Maybe, you know, yields, you know, maybe the yield curve starts normalizing a little bit with this sort of the expectation that we're going to see, you know, even more spending.
Yeah, yields are up a couple of basis points four point two eight percent yesterday on the ten year today.
It's four point three percent.
Whoo big fear, especially compared to what's going on in French bond markets.
We talk a lot about Biden this morning. We didn't talk about Trump. We didn't talk.
About the fact that it was really the focus on Biden, but it wasn't though Trump really representing the stellar performance. I am wondering about what this does to embolden him with respect to his choices for vice president, whether he leans more to a populist rather than a centrist, whether he feels like he has more of a mandate to cater more to the fringes in a way because there is a sort of a vacuum on.
The other side of the ticket.
Yeah, I think it's a great point. If Joe Biden did not meet the very low expectations that were established for him, and I think arguably President Trump did outperform expectations. He was more disciplined than certainly he was in those first debates in twenty twenty. He was more moderated. I actually think the format probably helped him, the fact that
the mics were being muted. But I do think your point about vice president this is it puts his aper focus now because you know, folks are now, because of concerns around Biden's age, are going to make this much more of a referendum on the vice president than even it was before. And as a result, who Trump's vice president is going to be, it's probably even more important as well, because that debate that is likely to happen either an end of July or August is going to
be you know again, more important. So so I do think that this is, you know, this is this was a win for for President Trump. As we all know, debates are more performed performative. They're more about performance than they are about style. And I think on style, you know, he you know, he definitely he won.
All right.
So you also said that the fiscal is coming into focus, and I want to get a sense from you, given what we didn't here yesterday, which is any discussion about taming this, how long can the United States remain, as John has mentioned many many times before, in this place of being able to have the privilege of acting recklessly. How long before the US starts to feel the same pressure of France does Yeah, And I think that is.
The big question for sure.
Again, you know what we've talked about this many times that you know, you can't replace something with nothing. And the fact that the US is the reserve currency, the fact that the treasury is the reserve asset of the world, the fact that central banks still hold treasuries, that the fact that they still have this flight to quality characteristics. I mean, all of this just sort of speaks to the fact that this privilege is still extended to the
United States. And what we do expect, though, what we're telling our clients is that while we're not expecting the bond vigilanties necessarily to come back and to sort of enforce, you know, spending restraints on Washington anytime soon, we would expect that there would be some term premium that would increase at the long end of the curve. Right so, right now, the curve has been flat inverted for the last two years. You haven't, as an investor, been getting that premium to hold longer.
Dated paper with deficits.
And I think this is interesting. This didn't really come up last night, but the CBO last we upgraded their deficit projections for the United States and that they're numbers that are just really, you know, pretty surprising. They're six percent, seven percent, eight percent. You add back the cost of the Trump task cuts should the if and when they get extended, and then you're talking about eight percent deficits.
And yet the markets don't really move. So we are expecting this to the markets to sort of internalize this at some point and be reflected again and increasing term
premu at the long end of the curve. But in terms of the reserve currency status, the reserve assets status, that does not seem like it's going away, because as we've been mentioning, I mean, look at the other developed countries, look at the alternatives, right, you know, as we've talked about a lot Bill Gross's you know, you know assertion about the cleanest dirty shirt, the US is the cleanest dirty shirt. It's not clean, but it's a lot less dirty than a lot of the other alternatives.
The best thing about treasuries this morning than not French bumps. I mean, that's kind of it, right. But what Lebby said, well, Libby said, I think is absolutely vine. So Deutsche Band could talk to about this as well. The extent to which is going to go on to pursue a very aggressive protectionist trade policy is something you have to take much more seriously this morning, based after what we saw last night.
Even an independent government agency, as Libby was talking about, is ringing the alarm bells and saying that we're going to see deficits unlike what we have ever seen in our history. That is akin to more of an emerging market, and nobody's really noticing it, saying we'll be able to work it out.
When do they start to notice?
Lebby, thank you, it's good to see you. Thank you.
A focus on the process, let me Cantrell of Pinco. The former World Bank president David Malpas writ in this in the Wall Street Journal, Mister Biden has blamed everything except the actual cause, expensive regulations and massive government spending. Donald Trump's approach to inflation should be he returned to office is likely to be different. Let markets produce more so that growth goes up and prices go down. David joins us now for more, David wonder for to get
your perspective on the program. So I'm sure you've read the piece, the letter that came from the sixteen Nobel laureates earlier in the week warning about the risk associated with a Trump presidency and how it would reignite inflation.
What would you say back to that this morning?
That Trump was pretty clear on how you could get more growth and that's going to have a big impact on whether you have inflation. I think you know, I don't want to say PhD economists are off base, but the group really has a model that hasn't been working. Think of all the huge mistakes that have been made on inflation forecasts in the past. So what we know is that Trump articulated this plan where you have more energy, that holds down prices, that allows interest rate cuts, and
you have more growth within the economy. He was really clear on how do you get jobs for minorities, you cut off illegal immigration, and you have more growth than the economy. I was surprised by the contrast with Biden, who was talking it seemed like almost as a senator talking about pell grants, talking about first time home buyer credits, the small things that aren't really getting to the core of the affordability crisis that we're in right now.
David, let's just go through some of the policies extending the twenty seventeen tax cuts, potentially implementing a flat tariff. You've heard those same economists talk about why that would lead to higher inflation on those two specific issues, why wouldn't they contribute to higher prices.
Yeah, I think if you raise taxes, you're going to get less production, and that actually will be inflationary. And Biden is proposing big tax increases and that's factored into the growth forecasts that CBO put out. You know, the deficit forecasts that they're projecting under Biden are dependent on the idea that the economy will stay slow growing into the future. Trump is really going the opposite way and saying, no,
that's not the economy that we want. We want a better economy that would generate more tax revenues and also more prosperity for people.
David, this is something that we've just discussed before, and it's a controversial point, the idea that you can grow your way into the deficit by cutting taxes versus having to raise revenues. I don't want to have that debate right now. I do want to talk about the idea of tariffs and what that does going forward, which is
something that Donald Trump could unilaterally do. Do you believe in your core that if the former president does become elected and does engage with pretty significant tariffs across the board, which you can do unilaterally, that if the market sells off, h would reverse course.
We've seen Biden continue the tariffs that were on China, and the market is able to digest a whole lot of things, as it's doing this morning.
So I think the.
Market adjusts to the policies, and the overall question is is the US going to be a strong player on the international scene. Trump talked to I thought very effectively last night about Afghanistan and the disaster that that created, and it's spilling over to all the other world situations. So you can create a better world by having an
actual plan that's based on production. And so you're saying, what about tariffs, Well, there's a whole there's a whole plan, or excuse me, there are lots of things that can be done in the US to really allow this strong economy to move forward.
Well, but David, just to sort of pick up on the tariff point and what I was getting at, there is a belief in markets that potentially the former president would reverse course on tariffs that were highly negative for the market. A lot of people have come on the show and said a lot of the tariffs that have been proposed would increase inflation in this country and would actually create a real negative situation for a number of companies.
Do you believe that if the market does sell off, that will provide a check to the former president and the hue reverse course.
Huh, Well, that's a real hypothet. So really, I think what we have to do is over the next five months, survive and then see how do you resolve some of the wars and how meaning resolve them quickly and allow energy production to start. And then as you look at tariffs, I think there needs to be a real rethink of how do we interact with China, who has been this giant overproducer or very successful industrial producer that takes away jobs from rest of the world. There needs to be
a world discussion of that. You're seeing the politics in Europe. You were just referring to it of people in Europe realizing that this cost on climate is really hurting their competitiveness. So Germany's economy is in deep trouble in part because energy costs are so high, So that drives people to other answers to try to deal with and interact with China into the future. I think that'll be an important part of a new administration.
David, Let's go where you almost went though. What is the plan on tariffs? Are these just talking points right now or is this a plan? If we were to get Trump to be president again, that is going to be ten percent tarifful for all imported goods and fifty plus on Chinese imported goods.
You have to have a room with people in it, with lawyers in it, with how do you what is the legislative process with it? So I think there will be a very detailed discussion of how do we protect or excuse me, how do we have sectors in the US that are able to stand up to subsidize production from abroad. And that's a valid discussion to have, should have been happening already and needs to be done more deeply.
We had on Miyamaguinness today from the Committee for Our Responsible Federal Budget. I'm sure you know her well, and they put out some numbers this week about how President Trump approved eight point four trillion dollars of new tenure barring during his full term and Biden during his first three years and five months approved four point three trillion of new ten yure barring. Do you honestly think either of these individuals are not going to add a substantial amount of money.
To the deficit.
To the deficit, so let's talk about debt and deficit. If you have a faster growing economy, you won't have as big a deficit, as Biden is projected to have. CBO is operating from the economic plan that's in place now, which is one where and you heard it all last night in great detail. The government is going to be the solution for each thing. And interest rates are going to stay high for a long time because of the inflation.
So if you project that out, you're going to get huge deficits into the future, which is what shows up in the CBO forecast. If you redo the forecast based on a growth program, you don't get those deficits now. I think there also has to be very strong restraint on spending. Washington is spending like crazy, and it's out into the future. It's every month, it's trillions of dollars going out the door. President Trump talked about the Paris
Agreement costing one trillion dollars. I think he's understating it. It's worse than that. So on the energy front alone, that's the The subsidies and credits that are being put out on that side are super expensive. Some of that can be saved still, and the market will react positively if you say anything that causes them to think you're going to have some restraint. Right now, they're operating on the idea of no restraint and that keeps interest rights high.
David, you're close to the campaign. It's all quite on the VP front. Who should we be focused on?
Do you think?
No, I don't have a you know, that's up to President Trump, and I think what you saw last night is somebody that's going to make a lot of decisions on things. He landed a lot of blows, and one of them was that Biden hasn't fired anyone. You know, this is a really important part of management and of governing, of choosing people, and Trump will have the chance to have really strong people in across the board, and I think that can really help. There just hasn't been enough
strength within the US administration. That's that's operating now, and you see it in every policy meeting that that I was in. You see it in the results that came out of those programs. It's not working and so we need change.
David scrat a catch ups as always, and I will continue this conversation over the next four months or so. David Malpass, the former Will Bank president, joining us now to continue this conversation. And police are Saize Mohammed Aaron of Queen's College, Cambridge Mohamed, Let's talk about the fatality of the day.
I'm going to sound like a FED official.
When you look at the totality of the data, are you seeing concrete signs of the economic slow down, a loss of momentum? And do you think a conversation about reducing interest rates as soon as next month is warranted?
Yes?
And yes, John, So if you look at the data as a whole, the economy is slowing, and it's slowing faster than most economists expect, and certainly more faster than what the FED expects. So yes, on the whole, the economy is slowing. And let's remember this is an economy that has very few buffers. Most of the buffers that we've had in terms of personal savings, in terms of
debt capacity, they've been run down. And that leads you to the second question, which is a forward looking FED would certainly have the possibility of a July cut on the table.
How much daylight do you think there is between what you think they should do and what they will do?
Too much?
You know, if I were them, I would seriously look at July as being a live meeting. I don't think that's the case. I think that's even a question mark in the market. And certainly if you look at what the narrative of the last few days by FED official as to whether even September is alive. Right now, the market gives less than a fifty percent probability of a weight cut in September. So the narrative has been pushing back the weight increase towards the end of the year.
Had one or two federal officials would like to keep open the pusibility of a hike, and I think that is a long way from where they should be based on what's happening to the economy. But unfortunately, John, that've been burnt a couple of times or ready. And let's not forget there's still excessively data dependence, so it it takes quite a bit of historic data to get them to change.
So I'm not going to sound like John here.
Let's not talk about the totality of the data or a FED official.
Let's cherry pick.
Let's talk about some very specific numbers. I want to cherry pick personal income coming at zero point five percent versus the expectation of zero point four percent, that is up from zero point three percent in the.
Prior month, Mohammed.
Just looking at personal income and the fact that it's increasing even as personal spending declines, does that give you a sense if we just wanted to cherry pick that number, understanding the totality of the data is different, that maybe people are actually in a better place and have a greater ammunition and set of financial tools to keep spending at a pretty robust pace.
Lisa, I'd love to be where you are, okay, But there's a problem even if we cherry pick, and even if we say one month's data has a ton of information content.
So these are big, two big assumptions.
I wouldn't know if the increased savings that comes from income going more than spending is it voluntary or is it forced? Are people voluntarily saving more or do people feel forced to save more. So, as much as I would like to go to where you are in terms of that number, I hesitate because you first you have to assume a way some pretty important things. But secondly, we don't know whether it's voluntary or forced.
That's a fascinating point.
I'm sitting here thinking about that at a time what other people might say the reason why they're not spending is because they're not buying homes and they're not feeling like they have the capacity and the mobility to do so.
One argument that some of the more inflationistas out there have made is that if the FED were to cut rates by twenty twenty five basis points next month, that would reignite a surge of interest in the housing market and then you could see actually prices climb much more substantially as a result.
Do you believe that to be the case, and if not, why so?
I don't think twenty five basis points is going to make that much of a difference sort of housing market. That's the first issue. I think you'd need a lot more than twenty five basis points. Don't forget how much we've moved the other way. That's the first point. And second, on housing, it gets even more complicated because supply has been impacted in a way that most people didn't expect. So most people thought that the demand for would come
down as weates went up. What they didn't realize is that the supply of housing would also come down as people hesitated from going from a very low weight mortgage to a current mortgage. So you know, again that market has been distorted by what happened during this long period of rock bottom rates, and we must not forget that a lot of distortions occurred, and in slower moving asset classes like housing, it takes time to get these distortions out of the system.
I'm just wondering if twenty five basis points wouldn't necessarily reignite the housing market. Is there still a reverse argument that if they don't cut by twenty five basis points next month, that they could be accelerating a tipping point that the US labor market is already reaching.
So that's where I am.
I think if you look at the tails of the distribution, or if you look at type one eraror type two error right now, the one that scares more is that they are too slow. They are too high for too long, and that economy slows in such an extent that two things happen. First, they can't moderate the slowing, and second they end up by having to cut weights much more than they would have otherwise, just like they ended up by hiking weights much more than they would have had
otherwise because they were so late. So when I look at the tails of the distribution, and remember I put on the table the notion that a soft landing is fifty percent thirty five percent is that we end up in recession because the FED doesn't react quickly enough, and fifteen percent is the bigger but not hotter that you get a supply, a positive supply shop something like that.
When I look at that distribution, yeah, I do worry.
I do worry that the more likely error right now is that the FED will not start cutting early enough, and then we'll be forced into cutting aggressively, but it's not going to have the impact in terms of slowing or moderating the slow down, and then will overshoot on the way down.
Yet again, maham, there's a new wrinkle.
How independent is all of this from policy out of the White House in twenty twenty five?
So, John, I've been fascinated by the discussion you've had as to why are markets so calm about US politics? Why are so market calm when the yen is at one sixty? Why are so markets calm when French Germany the spread is at eighty four basis points? And the list goes on and on. Why are they so calm on the Middle East conflict? Can intensify. And I think the reason is because we here in the US have
three things going for us. One is it belief in economic exceptionalism that we can soft land the economy or even no land at all. That's still actually the central scenario for a lot of people. That's number one. Two that we ultimately believe the FED will cut. And three we believe that in Video and the Ai revolution is such a positive supply shock that it's going to keep on.
Giving and giving and giving. You know.
On the three I worry most about the economic assumption. And that's why if that economic assumption is tested in the months ahead, then the politics, what's happening around the world, suddenly all these things will become will capture much more attention in the marketplace than they have so far.
Muhammad, that we're waking up after a moment where the sitting president had what everyone is calling a disastrous debate. Obama's former campaign manager went on MSNBC and called it def Con one. Alarm bells are ringing what would be enough between now and November, or potentially what political movement could move the markets between now and November.
So this is your world and much more than mine. I think the market truly believes, despite what they hear from some economists, that when push comes to shove, whether it's President Biden re elected or whether it's President Trump comes back into the White House, the degrees of freedom is not going to be as much the degree of freedom what there will be maybe on tariffs, but we've seen that both of them actually are very similar in
what they end up doing. So the market i think senses that despite what the economs are telling them about fiscal policy, tariffs, everything else, that when push comes to show, these two individuals when in power, will be relatively similar in economic policies. Why because we've had four years of each and the market has been able to observe what they've done. Now bring in the possibility of someone new, and that suddenly changes that whole construct.
So reponding to your question, you know, that's the big question is that if.
You bring someone new into the equation, how will the market evaluate and what degree of confidence will markets have? It really helps them out that they saw both individuals in the White House.
MA, I'm gonna just want to finish on this and get you to elaborate on a final detail. In the UK, the guilt market has been a constraining regulating force on all kinds of policies coming out of either party in this election race, and you can see that in the nervousness they have talking about the deficit. You're seeing a
similar thing take place in France right now. Do you think this treasury market could become a regulating force over the next administration in this country in the United States? Or will we retain that unique privilege to do other things?
We will unique that we will retain that unique privilege, John, because the rest of the world is so messy. So I think of it very simply. Whether it's France, whether it's the UK, they solve an absolute space. If there is physical irresponsibility, then they will feel it regardless of what's happening elsewhere. The US solves, the US bond market solves in a relative space. As as long as other countries are more irresponsible than us, then we can continue being irresponsible.
Muhammed al erin that 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.