Bloomberg Surveillance TV: March 27, 2025

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and am 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

It's very frustrating. It is very hard in my seat to try to predict what's going to happen, and that's what my job is, help people figure out the future and how to invest around that and you just hear all this noise and just doesn't feel like liberation Day is going to be clarity day. And so I think a week from now, we're still going to have a

You still see a path though for the s and P. Five hundred to go to sixty four fifty by the end of the year, that that still is your base case. At the high end of that range is.

Predicate on earnings growth, and this is the challenge, like what does this do to corporate spending behavior, consumer behavior? We don't know yet. We're still we had a really strong quarter last quarter earnings. We'll see in a few weeks as we start to get their earnings again if this continues.

What do you make of Neil Kashkari's point that the uncertainty and the kit to consumer sentiment that we're seeing around the sort of on and off tariff announcements itself will be potentially more punitive to growth than even the tariffs themselves. What point do you say Okay, this has gone on long enough that you can't make it up by providing some clarity on Liberation Day postponed.

Yeah, I think the next few weeks are going to be critical because if we don't get any sort of calming around these headlines, I do think you start to worry with this seeping more permanently into consumer psyche investor psyche. Right now, investors are saying this might just be a negotiating tactic. It's noise, it's not gonna it's transitory, to use that tricky word. But the longer this goes on, the more I agree with him that this will have a permanent impact on people. Most clients I work with

Just to ask a least's line of questioning, are we putting so much faith in the Fed's ability to respond to downside risk of growth with a potential inflation we spill over?

At this point, we still believe the FED put is there, But again, there's just so many moving pieces, and I need to see the most important thing for me in the equity call is how their earnings look. The other question then becomes one evaluation because with this much uncertainty, is anyone willing to pay twenty times for you?

How much?

I think that's the concern. It could be eighteen or seventeen and then suddenly you're down fifteen.

We'll just pick upon that the valueition point. How much? If this story, have we already discounts it in the US?

I think we think we've discounted what we see right now, which is the chaos. Right so you've had valuations come in. But again, if this is more persistent and this continues into the summer, then I think there's a real question about is twenty times the right number? And that's what our valuation is predicated on that kind of multiple, you have to start questioning that if we're still grappling with these kind of headlines come May in June.

At the end of last year, people are questioning valuations on a bond yield a basis saying if bond yields continue to remain sticky or go higher, then it starts to raise the risk reward and going from bonds to stocks. At this point, what you're seeing is that bonds on a day like yesterday actually lost value, yields rose, And it goes to the question of toggling between inflation and growth. At what point does that become a hampering factor to valuations as well?

I think it is. I think that's sort of where

At that point, what does diversification mean?

You know, for years, equities were the game in town, right it was all growth rates were low. You had the AI tailwind, and by the way, that still exists, but the challenge and becomes people are probably still too far over their skis in broad risk assets, probably too focus on the US I still have a lot of

I continued a.

Ton of calls on gold goal is of twenty eight percent last year. People still want to buy more because of saying, how do I diversify outside the US, how do I have something that's a buffer my portfolio? And lastly, hedge funds looking for uncorrel returns. I couldn't get anyone to talk about hedgehness for years. Now they want to talk about hedgehunes again. So it's it's interesting since I was old as new, like this playbook became very boring for a while. Now you have all the tools again.

Yeah, and you've seen some spill over the places like Europe, even China as well. Equity markets there have stout as pick up. Do you think mainply we're whistling past the graveyard and places like Europe.

I you know, just saying Europe is cheap is a dangerous game. But there are certainly pockets where I think there's opportunity, and so even in the US this has become a stock pickers market, So I would argue the same thing. In Europe. We still are constructive on Japan. There's still you know, evaluation story there, you have reforms still continuing. So I think you should be looking more outside of the US. Again, most of my clients are still heavily weighted to the US from an equity perspective.

Lacey.

European equities down today with down a half of one percent on the Docks, but that's where the app performance has been over the previous few months.

Yeah, but to your point, the reason why the Dacks is down is in part because German auto manufactures are going to be very hard hit by some of these twenty five percent tariffs and are going to have to really shift some of their supply chains. Considering how much of their business is done in the United States. Have we fully priced the hit to the rest of the world from tariffs implemented in the United States.

This is the argument that Michael Hahnt of Bank of America made on Friday going into the weekend that the sell off that we've seen in US secuaries was more about deep Seak and Doge than it was about tariffs. That for him and many others too, we haven't seen the tariff trade really realized just yet.

And we don't really have a full understanding of what the terariff trade really means because it's got a lot of hair on it right now with the uncertainty as well as some of the tip for tag and what negotiations there are. I remember when this week was supposed to be a negotiation week and suddenly now is something else.

It was the Europeans were here.

That makes us square here I know, people were hopeful, and here we are. Monica is good to see you. Thanks for dropping by. Monica is sents her there, JP Morgan Private Bank. Don Schneider of Piper Sandler writing the announcement of the twenty five percent tariff on autoast today shows Trump is to get on with the broader trade agenda. Auto tariffs are a core part of the industrial policy and revenue agenda. Much more to come. Don't join us

I think a meaningful amount is coming, even if it's not over the next week. I mean, what we've seen so far is about a half a percent of GDP in tariff revenue that's been announced.

We have now the.

Highest effective teriff rate since we've had since the nineteen forties, when you add up to twenty percent tariffs on China, twenty five percent on steel and aluminum and derivative products, twenty five percent on autos, and then reciprocal tariffs are forthcoming.

So there's much more to come.

Don't We've seen this movie before.

Only a month ago auto tariffs Canada, Mexico and then we found out they were exempt under usm and I was watching that news conference yesterday desperately waiting for a journalist to ask the question.

The question never came.

Have we got a decent understanding of whether those auto exports from those countries to the United States are exempt under USMCI?

It sounds like a pro portion of when will be the value added that's attributable to US production, if it's still coming from Canada Mexico will will be exempt. Takes time to implement that. My sense is where at least I group things into kind of four different buckets. China is its own trade war, Canada and Mexico is another.

I think that's still you know, a.

Bargaining chip going forward that eventually those can either roll off and be replaced by reciprocal tariffs or by a rewrite of US MCA.

Do you think there's still room for negotiation, given that President Trump said yesterday about the tariffs on autos in particular, this is permanent one.

I think, you know, there's two objectives. One is used tariffs to achieve non trade concessions, and they can range you know, a lot of different things you see from federal legal immigration, whether it's digital service taxes, even the acquisition of TikTok. But then the other is true revenue and industrial policy. And I think anytime Trump is threatening tariffs on a product, there really isn't much negotiation to be had. He's saying clearly, this is a critical industry.

I'm glad you went there, don Yesterday there was also this from President Trump. I view it as reducing taxes and also reducing debt. Talking about the tariffs and the revenue from them. Within a fairly short period of time, I think we're going to have a balance sheet that's going to be outstanding from a practical point of view don how much could to revenue from terrafs head toward offsetting the deficit that is set to potentially climb by three trillion dollars of the next decade.

Here, so I think about it. Last year, we had have six and a half percent of GDP deficit. Six point four of that is our primary deficit excluding interest costs three interest costs are three point one percent. If all we did was extend the twenty seventeen tax cuts, by the end of Trump's term, we had that seven.

And a half percent of GDP deficit.

So there's structural upward pressure on spending from entitlements while revenues stay flat as the share of GDP and interest costs continue to grow.

What we he's announced so far is basically.

A half a percent of GDP and tariffs that may go up to maybe seventy basis points maybe higher that will subtract for growth basically.

One for one. So you will reduce economic growth.

His tax and economic package, muiltch, you will include spending increases on defense, border security, spending cuts on things like medicaid, and then tax cuts. I think leaves us with roughly six and a half percent of GDP. Deficit, and then tariffs give us a little downside from there, so we're kind of getting pulled maybe closer to six percent if there's not that big of a growth hit. So I don't think this fundamentally changes the trajectory of the deficit.

Does it give more breathing room down to some of the Republican representatives who been pushing back against some of the proposals and some of the debt ceiling extension and raising the debt ceiling on concerns about an expanding deficit. I mean, can they point to some of the revenue that was being raised by tariffs as an offset to justify their vote.

I don't think so. I mean, of course you could.

I think the people who are most concerned about the deficit, you know, say Freedom Caucus members, what they're really concerned about is spending. They want spending cuts, and you know they're not necessarily going to be placated by tariff revenues or likewise, consider Rand Paul in the Senate, you know, libertarian, he is very he doesn't want to vote for a debtlimiting pre six, et cetera. And he doesn't like tariff.

I don't I appreciate the update and your reaction to the announcement yesterday afternoon.

Dun Schneider that of.

President Trump's executive order sending shares of GM Ford a stellantislower This morning, Danives of Webbush writing, in our view, these initial tariffs, if they hold in their current form, would be a hurricane like headwind to foreign and many US auto makers and ultimately push the average price of cars of five K to ten K. Dan joins us now for more, Dan, welcome to the program. Let's just start with the basics from the top. Who's most exposed in the United States.

Well, I mean four GM stilanas, right.

I mean, I think part of the problem there is that even if you make it in the US, I mean you're talking a lot of times forty to fifty parts could be from outside the United States. And I think you have thirty thousand parts in a typical vehicle. So I think that's what when it comes to Detroit, I mean, this is a gut punge to the three one three if this actually holds in this forum.

Let's assume it holds Dan. Where does it leave Tesla. Let's do some single name work it make for them?

Well, even though their cars are built in US.

In terms of Texas in California, when it comes to parts.

I mean, you still have a good amount.

Of parts that come from outside the US, and I think that that's what must talk about it.

And in terms of downstream, no one is unexposed. When it comes down to this.

You have half the cars that have been imported into the US twenty twenty four are imported from outside the US, but the ones that are made in US they still I mean, you have forty percent of engines that are basically essentially have parts built from Japan and Korea. And that's why what I can tell you is talking to many in Detroit last night, Europe overnight. I mean, the view is that this isn't almost i'll say, a non starter. It would be a backbreaker for the auto industry globally.

What you see right now is some estimates talking about forty percent of total operating profits for Hyundai and Kiya combined, for example, is one kind of here that some auto manufacturers would be taking if this were the final negotiation, if we took President trumpet his word that this is a permanent one, that there is no room for negotiation. How barisshed would you be on the names of auto manufacturers?

Okay, I mean if this held and it wasn't in Penal, and it was in pen and it actually got enacted, it would be an army getting Like you know, I think tariff for the auto industry. Others could could sort of would be less exposed. But at least my old point is is that it would take three to four years to build a new factory.

So the reality is in terms of this and.

Actually how US car companies meet parts, it's just I view it as untenable and that sort of the street reaction you see more exposed to GM four to whittle on Tesla. I think investors are looking at this being like, look, the supply chain basically almost makes this impossible to actually get some of these parts, even from US built parts because there's no factories, which is.

The reason why I keep going back to this is permanent one In response to someone asking President Trump is their room to negotiate? Where is the room to negotiate on the edges? Based in the rhetoric that you've heard.

Look, and I think that continues to be the uncertainty.

I think maybe the overall mark reaction is okay, there still needs to be some sort of negotiation because the reality is, Hey, building in the US, but fifty percent parts are from Fearn, and there's sometimes there's parts that you can't even get in the US.

How do you build a factor It takes three years.

So I think that's part of the you know, the devil's in the details here. It sounds great, but I think that's why the reality is, especially when it comes to GM ford stillanis. I mean, there's so many scenarios that they've sort of been, you know, going through, but the reality is this cannot happen overnight. I mean would take years. I mean ouron it would take three years to move ten percent of the supply chain fully within the US, within the auto industry.

Down that word negotiation. Let's break some life into that negotiation between who. There was this interesting moment in the briefing when the President was asked about Tesla and Elon Musk, had you spoken to him?

And the President said no, I hadn't.

That would be a conflict of interest, which begs the question, who's speaking on behalf of Tesla, who's doing the negotiating, who's doing the lompying of the US government?

And remember, like you know, there was that letter that Tesla had that was unsigned, and I think that book it adds another complexity for Musk and Tesla because with everything we talk about with Dige and all the political blowback and the third rail issue and everything we've seen in Tesla, the reality is when it comes to negotiation or at least having sort of you know, someone that has to save for Tesla, they're actually at a disadvantage because of Musk in this situation.

That's the irony of it all.

You've said it on the story. Still bullish on the name, but sow it on the story. What needs to happen over the next month to turn this around for the stalk.

I mean must needs to take a step back. I thought last week.

Was a huge step in the right direction in terms of the all hands meeting. We've talked about arm's length, in terms of when it comes to Douge. You need to balance in terms of being CEO of Tesla and Douge because you know, it's a moment of truth from Musk and Tesla and this is a political symbol that Tesla's become. It's a third rail issue and that continues to be our view. It's about balance, not him getting out of Douge. There needs to be a balance. But

Tesla is a perfect microcosm of a larger point that we've been wondering, which is can you put this Jennie back in the bottle? Once you come out with some of these terriffs are the ramifications in other countries, the retaliation is going to get a bit ahead of themselves,

Yeah.

Look, and I think part of the problem is if you're actually looking at supply chain, let's just talk with the reality, right, If you're looking at changes in the supply chain nine to twelve, eighteen months ahead, you have to start that now.

So part of the problem is you can't just start and stop it. So I look, I do.

Think this, and I've seen it, you know, across the easier over the last you know, called a month I started in Europe, the last six weeks I've seen Detroit.

I mean, this is kind of.

It's caused chaos, But the reality is the enactment of it is almost impossible because it comes down to if you have no parts in the US, how could you.

Now go into the US? It will take three years to build a factor.

So the average car will go up ten thousand, twelve thousand, some could be lower.

But that's the reality is the consumer.

I Dan appreciate the update. Dan Isay of Wood at Bush on the lysis of the auto sector. Amanda Lanam a black crock with a snap for more, not a picture. Amanda wants to see a man a good morning.

It's good to see you.

Thank you having me.

What do you make of this difference between Chair and Powell one you've heard from the officials out of the last week is the running Is there some daylight between the two groups.

Well, I think it absolutely underscores the uncertainty. And going back to the point you were raising the disconnect between the sentiment data and the hard data, I think part of it is the growth backdrop is much weaker now versus a few years ago. Real wages for consumers have declined, so their purchasing power has declined. The labor market is not as tight, and so I think that's actually what's manifesting. Because I agree with you one of the questions we

It seemed like last week, just to build on the point that John was making, it seemed like last week people heard fedshare J Powell essentially lean into the idea that they would prioritize any kind of downshift and growth over any increase in inflation.

Do you think that that was an.

Incorrect interpretation or do you think that maybe that is his opinion and isn't the mainstream of the Federal Reserve.

I think during the press conference it was couched with a lot of uncertainty. He did say, we're not quite sure if we'll be able to look through this. I

There's a larger point here, and we keep coming back to it, this idea of have people had the idea of a FED put that is now obsolete in a very different environment. The idea that if growth slows, the FED can engage with some sort of stimulus by cutting rates. Is that fundamentally being challenged at a time where people are raising their inflation forecasts and lowering their growth forecasts.

I think the reaction function is constrained, is the way that I would phrase it. And I think they really do need to see deterioration in labor demand in the labor market before they actually further normalized policy, never mind ease policy. And so I think that's really the delicate balance that we're in right now, is that they are attuned to downside risks and growth, but I think they are hesitant, and I think even President Bastik said this, They didn't actually want to get ahead of it until

And then these Thursday mornings starts to sound a lot different when we get jobless claims at eight thirty Eastern time.

You said catch down.

Let's build on the catchdown, not just a hard day to down to self, but also the catchdown and credit as well. How you've spread is still pretty tight around three intred basis points what degree of catchdown even the team looking for.

So I agree with you. Credit valuations have not kept track with either of the deterioration in sentiment in the equity market or just more broadly, so I think there's some room to widen there. The median is for sixty right, So should we argue that there's more uncertainty in this current environment relative to the median of the post financial crisis era?

I think absolutely.

Now there are to be clear, there are some important counteracting forces that would keep that widening from being that extreme. The technicals are still incredibly strong. Most investors that we talk to are waiting to buy the dip and buy the widening, So to me, that says that most widening episodes may be short lived. The new issue technicals are really favorable. Not a lot of new money, most of

Do those technical factors reach the volume of the canary and the canal mine?

Well?

I think market structure shifts do alongside those technical factors, and so typically corporate credit is a very growth sensitive asset class and it should respond more swiftly to growth detereriation. We've had the growth of the private credit market, which on net we think is a positive for funding access because private credit has shown an ability and willingness to step in in periods of market volatility, importantly, something that's

To build on what John's asking, are we looking in the canary in the wrong place, that the idea of hyaled spreads, traditionally as a leading indicator for risk acids has no longer the same kind of telltale effect, and that really it's private markets that we need to be looking at. Are we seeing signs of stress in private markets in any capacity?

You aren't really seeing a lot large degree of stress in private markets either. I think what that means is that the nature of the shock is not emanating from

You get the sense this market won't really take these headlines seriously until we see it in the hard data.

I think we.

Are seeing signs of it being taken seriously. So, for example, we're seeing certain sectors underperform even though index level credit spreads are tight. As you noted, we are seeing some underperformance, I would say on the margin. Investors realize that the administration is focused on raising revenue and so tariffs are a means to do that. And so again we don't dismissed the sentiment data nor the potential for significant policy shifts.

Amanda, appreciate your time. I's always it's got to see a fantastic Amanda linam there of Black Crab. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 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