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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. We begin the sour with stock steady as investors prepare for a week full of event risk. Muhammad al Aaron of Queen's College, Cambridge writing a heavy data week on tap for the US with the monthly jobs report, lots of speaking engagements for policymakers including Treasury Secretary Besson and Fedcha J. Powell, and the latest on tariffs and DOGE. Mohammed joins us now for more. Mohammed, Welcome to the program, Sir. Where to begin?
I think we start on Friday and the rupture in Transatlantic relations and the breakdown in the Oval Office. When you saw that and when you think about the consequences it could have for the economic picture in Europe, for military spending, and for what it could mean for financial markets. To Muhammad, what are your thoughts at the moment?
Thanks for having me, John.
My thoughts is that that feeds into some existing themes, both top down and bottom up and intensifies them. So, top down, we've had issues of fiscal realignment, and that's going to feed into fiscal realignment, including putting pressure on the dead break in Germany, including the question of how does it interact with what.
Dodge is doing in the US.
Secondly, it feeds into the energy market and how you think about the energy market. And third it feeds into the realignment of the global order that also has a trade element to it and a currency element to it. So you have all these top down factors that are being amplified, and then the bottom up factor that's being amplified defense and we are seeing significant sector differences occurring as.
You would expect.
So I think of it, John, not as unprecedented, which is the words that the political science and the international relations people are using, but in the field of economics and finance, it is amplifying things that were there already.
So Muhammed, a number of weeks ago, we said on this program that the president of the United States may well push the Europeans into doing things that might be good for them. You wrote in the Financial Times about a month ago, the mounting risk to US exceptionalism. How does some of these things across these dimensions play into what you wrote about a month ago.
So, John, both the good news and the bad news is we have a very action oriented administration has come in. It has hit the ground running, if not sprinting, and if you are business, it feels like you're trying to drink from a fire hose. There's energy issues, there's the immigration issue, there are trade issues, that public sector issues, including public sector contract their regulation issues.
So you're trying to.
Absorb all this and what we've seen is sentiment has come down and there's been a wait and see attitude because most of these things impact both your income and your expenditure, so it's really hard to figure out how all these things are going to play out. Then there is the international relation side of it, your trading side of it. So the worry that I have is that the lack of ability by the public sector to absorb
all This results in a wait and see attitude. That wait and see attitude comes at a time when we already have a bit of a whiff of sackflation going on. And next thing, you know, people start questioning US economic exceptionalism. And if they do, two things happen. You start questioning the only reliable engine of growth for the global economy, and you start questioning the shield that markets have had against all sorts of geopolitical and political aspects.
That's a lot of hair on the American exceptionalism story. And we've been talking to people about it for the past couple of weeks about the concerns, the lack of certainty, the on hold kind of nature of a lot of CEOs. And yet when you ask them, they still say they prefer to invest in the US over the rest of the world. If Europe went through with a nine hundred billion euro spending package on defense and infrastructure, would that shift for you? Would you see brighter shoots in Europe?
No, it wouldn't shift for me.
I would still prefer to US over Europe for the simple reason that Europe doesn't have a genuine and durable growth engine. So maybe defense contributes in the short term to growth, but they need to get a handle on
some really fundamental things. I encourage everybody to read the Dragi Report, the Driver Report, a really good assessment of what has gone wrong in terms of investment, in terms of competitiveness and productivity, and what needs to go right, and that should be your benchmark when you assess future growth prospects in Europe.
So what happens, Muhammad, if this American exceptionalism story is challenged to the degree that you're laying out and a lot of people are worried about, but there isn't a brighter alternative in Europe.
That's the concern because remember I've always said the good and the bad and the ugly of the global economy. The good is the US, the bad is China, and the ugly is Europe. And if you don't see China and Europe converge up to the US, there's a risk that the US will converge down to the other two.
It is a risk scenario. It is not the baseline I want to stress.
But in mid January, no one was questioning US economic exceptionalism, and now, as you point out, a lot more people are starting to worry.
About it, Muhammad, what do you make of the tariffs? Do you think they're actually going to come on tomorrow or do you think the market consensus of that. Maybe China, of course goes on, but there will be a pause, another pause or pass when it comes to Canada and Mexico. Is the accurate way to view this?
I don't know, and Mary, I really don't know. I don't think anybody knows about the president. But what has become clear is that there are three sets of tariffs, and that explain why the President was pursuing so many objectives with tariffs. You know, when he came out in October when he said it's my favorite word. He said, it can weige revenue, it can result in fairer trade, It can put pressure on both adversaries and allies, and
in addition, it can protect US industry. And the initial reaction of the economist was too many objectives for a single tool. But we're seeing now what is happening. You have a set of general tariffs that do the revenue side and the reciprocity side, the fair trade side. You have a set of sector specific tariff aluminium steel that protect industry, and then you have a third set of
tariff's aim that particular countries to get particular outcomes. And I think that that's the thing we're going to live with for the next few months, is not the next few years, which is multifaceted trade policy, Muhammad.
For the first time in a long time, there was a FED official in the last week that considered stagflation. I'm sure you notice the same comments downside risk to growth and upside risk to inflation. If we were to have a fedsjior mandate that went into conflict, how do you suppose would be the best way to approach that situation.
It's tough, is really tough.
Stagflation is the nightmare of policymakers and it is the nightmare of FED.
With the dual mandate, as you point out, So it's really tough.
I worry, like you had an introduction that we've had a reactionary FED. So the FED is not going to be getting ahead of this anytime soon. I hope it understands it, but it's not going to be getting ahead of it anytime soon. So the risk is John, that monetary policy continues to amplify volatility, rather than acting as an act of stability.
That's the risk we face right now.
Mohamma, can you just give us a sense of the trajectory of your belief that the economy can withstand all of this in the United States. As the year has progressed, I realized that it's the beginning of March. But how much more worried are you now than say, two weeks ago, about a real calling into question of American exceptionalism and a real rolling over of the US economy.
You know it's my natue. I've been worried for a while.
I put out an ft UP head on February fourteenth saying be careful that slowly we may see the erosion of US economic exceptionalism, and that's bad news for everybody, not just the US, for everybody.
So I've been worried for a while. I've seen sort of three elements that have made me worry.
One is the way business is reacting to all these policy changes, which increasingly is wait and see. We think it's going to be fine, but let's wait and see. Second, we know that the lower segments of the household income distribution is under enormous pressure, and that has been a concern for a while and then the third issue is the risk of a FED policy mistake. So these things have been there and now they've amplified because of what's been going on.
Muhammed always appreciate your time, A good front of this program, a good friend of ours. We appreciate it. Thank you, Sir Mohammed Aaron of Queen's College, Cambridge. There tariff deadline fere than twenty four hours away to open markets of Wolf Research writing, if Trump follows through with his threats, it increases the risk that he'll go big with this eight full second reciprocal tariff policy. Tobin joined us now
for more. Tobin, I guess the first question will the President follow through on his threats?
In some ways, the.
Setup looks exactly the same as it did in early February, when I was fairly confident that he wouldn't end up following through and at least not doing so with long duration. I have to say I'm less optimistic this time. I think he's been, you know, quite resolute that he's going
to do something. Even over the weekend. The comments from Commerce Secretary Lutnik that people are taking encouragement from you know, point it to some flexibility in the rate, but still, you know, kind of double down on the likelihood that they would go ahead and do something. So it's hard to have total confidence, but you know, I think it's also impossible to write off the risk that he'll actually go.
Through with it.
Scott Bessett, the Treasury Secretary. Tobin said to David Weston on Bloomberg TV on Friday that the Mexican government made a proposal matching US on China tariffs and then said it would be a nice gesture if the Canadians did it. Also, is that a big enough concession to potentially put another pause on these twenty five percent tariffs?
Conceivably, the terrifts have never really made a lot of economic sense for the US. In the Canadian case in particular, they are way out of scale with the actual problem that we have in terms of migration and drug trafficking, which is obviously much more of a Mexico problem than
a Canada problem. So, you know, it all comes down to Trump's assessment I think of whether or not he's kind of accomplished his political goal here in the Mexican case, again, there is much more in the way of actual policy cooperation that we need there have been some indications that they're making progress in terms of cracking down on some of the cartels. So if he wants to, he certainly, I think, can do what he did last time and just points of progress made and new commitments and call
it off. The question is what he wants to do, Truman.
One of the tariffs is going to be a ten percent, basically the Trump administration signaling that they understand how important Canadian heavy cruit is, especially to the Midwest. But the Canadians are also saying they can maybe have recipable tariffs on energy. How ugly can this get?
Hey?
Can you get very ugly?
I mean, you know, the initial give order imposing these tariffs back on February first made very clear that the United States reserves the right to further escalate if there is retaliation, and I think that the sensible expectation would be that there will be retaliation because the Canadians and the Mexicans can't just take this sitting down. So, you know, I think there are absolutely is upside to the rates
if things go really badly. I think we saw as you were just talking about in the confrontation with Zelensky last week, when things get personal. You know, I do think there's a risk that things can go south in ways that don't totally line up with either side's objective interests.
Wait, Tobin, can you develop that please, this idea that actually what happened on Friday will influence the likelihood that these tariffs go on tomorrow.
I don't know that there's a direct influence. I think it's more just a case study. As Trump themselves said in the true social posts that he put out afterwards. You know, you sort of you it's telling what can come out under emotion. You know, if there is an actual move to go forwards to these terrafs, even at a reduced rate, like the likelihood of tiffer tab retaliation
is definitely thing that we need to worry about. And if we're locked into a confrontational stance with these two countries, you can't rule out the possibility that, you know, sort of interpersonally, things go wrong and we find both sides kind of dact into their corners, Tobin.
Tomorrow, we also have a joint address to Congress from the President of United Age, which basically is a different way of saying we're going to have a state of the Union. What are you expecting.
Yeah, they've done very little in terms of previewing, even talking to Republican sources on the Hill. There's not a lot of rumors and gossip going around about what it is that he might announce. My guess would be that it's mostly focused on accomplishments and that we have kind of a Promises made, Promises kept theme where he points to the massive amount of activity that's already gone on, much of which they feel very good about. I'm sure
they'll have some, you know, tidbits of news. Would be uncharacteristic to go into this and have nothing that's that's new and headline grabbing. But I think a lot of it is going to be, you know, rehearsing and framing up the totality what they've done so far.
Hi Tobin, I appreciate your time as always, sir. Thank you Tobermarcus of war for research things could look very different tomorrow. Coming up on the program, Liz Young Thomas of SOFI on the momentum reversal, Joe Faudman of TAUSE the Advisory Group looking ahead to target earnings, and Steve Roshutto on why he's constructive on the US economy, we're begin to saut with stock's looking to rebound following last
month's losses. Liz Young Thomas of SOFI, writing, there's been a notable shift in which stock sectors and assets are leading or lagging the broad market, and it's one that can be best described as a reversal of momentum. Liz joins us now for more, Liz, I just wonder in your mind whether it's anything just more than that. We've had discussions about a growth scare, and based on the conversations we've had on this program, it feels like there's
been a massive sentiment shift. And then you look at the equity market, it's down by not even five percent. How do we square that circle?
Well, I think there has been a sentiment shift in the sense that everything that got us here for the last two years has now gone a little bit out of favor. And you could have seen some of those markers in the second half of twenty twenty four in terms that you look at just the AI related stocks, the big tech stocks, there'd been more scrutiny over the
spend and the expectations. So now coming into twenty twenty five, investors started to look for growth in other places and then layer on top of that the fears about economic growth. So when we're looking at this rotation that's occurred under the surface in sectors, I think it's quite healthy. The difference is that you need a number of different sectors to keep up and to pick up the slack if technology stocks are not going to be the darlings again in twenty twenty.
Five, so let's pick up on the growth scare theme. Discretionary has had a difficult run of it, but you could say a lot of that is just tesla. We have seen the bond market start to respond though, seven consecutive weeks of lower bond yields on a ten year maturity. Are you seeing high yield credit confirm some of those growth jitters.
You do see high yield responding to that consider and that's been something that if you look at just high yield spreads over the last few months, you've seen this grind lower and spreads. High yield, as we know, is highly correlated with the equity market. But there has been a spike in high yield spreads over the last let's call it three to four weeks, which I think again is healthy. There should be a correlation with the equity market.
The big change that's occurred so far in twenty twenty five is that yield started to respond, and I'm talking about ten year treasury yields started to respond to growth fears more so than inflation fears. So what we were seeing in the latter half of twenty four and even the early weeks of twenty five were that the ten year yield was rising because of inflation fears. Well, now the ten year yield has come down quite a bit because of growth fears.
The shift, though, is that that.
Drop in the ten year yield has not served as a tailwind for stocks, So you're seeing those growth fears bake through into stocks, into high yield spreads, and into the tenure treasure yield.
The reason why it is such a difficult market right now is because there's so many different themes that are layered on top of each other. We started the show talking about the potential for tariffs to come on on Tuesday, a potential response from the European Union to different geopolitical developments,
including the meeting on Friday with Vladimir Zelenski and Donald Trump. Liz, from your perspective, what is more interesting to you this week and has the bigger catalyst effect potentially on the markets. What we get on Tuesday with respect to potential tariffs in the state of the Union, or the economic data that culminates with the non farm payrolls report on Friday.
Well, of course, if the non farm payrolls report is a surprise of some sort, that'll be likely the more market moving event. The tariffs, if they do go into place as announced tomorrow. The market really already reacted to that back in January. Now, of course there needs to be some repricing. There's been quite a bit of volatility since then and a lot of uncertainty. But if we do get a surprise on the payrolls report, I think
that's a more market moving event. The trouble is that we have to make it all the way through the week before we get there, so I don't expect a huge surprise on that payrolls report.
Yet.
I do think that as the first half of this year progresses, we're going to get some bumpier data in payrolls, largely because of some things that are going on in Washington and just weather patterns other things that could be going on. In the construction market, and the fact that mortgage rates have stayed so high, so the construction market has slowed down a bit, but I don't expect a huge surprise this week in payrolls.
Okay, So given all of this, are you actually leaning into some of the selloff or do you think that actually that this is a sign that things are going to be jittery for a while and people probably should reduce risk on some level because of that uncertainty.
I think you have to, first of all, to find what you mean by reduce risk as an investor. So if you're looking at your portfolio and you are overweight naturally some of those meg seven stocks, technology certain themes, maybe it's the AI theme. Many investors have become overweight those themes just because the performance has been so strong
for the last two years. So if you're looking at reducing risk by diversifying out the drivers that you're exposed to in the portfolio, yes, absolutely, I do think it's time to do that, and I think you can broaden out into some sectors that have the opportunity to produce growth but are trading at lower multiples and aren't quite as exposed to some of this volatility that's occurring on a day to day or week to week basis. Those sectors for me would be healthcare first and foremost. I'd
be looking at things like materials. If we're worried about inflation heating up again, you can look at industrials, you can look at financials. Financials haven't traded great for the last few weeks, but that could be an opportunity. And then I still really like gold here. Despite the fact that it's hit new all time high after new all time high, there continues to be a lot of appetite in that market, both institutional and retail.
Massive run over the last year. Lets appreciate your time as always and enjoyed the race of note as well. List Young tell us that of sie flying States shoots off. Miszoo says the US fundamentals are healthy. He runs the following. The underlying strength of the business cycle is evident in the heart attanks of releases. They will dominate in the longer run. Steve joins us now for more stave good morning, morning to thank you sir, A lot of paint become
almost bearish. Give us the constructive take of the US economy.
Well, I think there are a lot of people who've been wanting to call recession. Okay, when you think about it, since twenty twenty two, we're now in our seventh recession theme. Each one has not pail that paired out, and I
don't think this one will either. The concept that DOJE is going to create some kind of major lapse and employment growth on the government side of the equation that the private sector will not be able to absorb over time, I think is just incorrect to the extent that people worried about the fact that we're reducing immigration and where
all the work is going to come from. Well, now, if you have a transfer from public sector to private sector employment, maybe it's actually a healthy thing that takes place in terms of the economy. A leads terms of the transition. The thing you do have to worry about
is negatives usually come before positives. So yes, you're in this environment now where a lot of the soft data has turned negative, a lot of people have turned negative, and therefore everyone's willing to jump on the recession story again. As I said, this is the seventh recession story since twenty twenty two. Think about that seven in less than three years, and everyone's convinced each one is going to be there, and everyone wants shock and all type headlines.
We saw a major investor in the marketplace they screaming about a global debt crisis. We saw Warren Buffett over the weekend talking about tarifs as basically a moral equivalent to war. Everyone's going for big headlines. The reality is, look at where the equity market is. We've taken out the Trump bump, that's basically what we've done. Look at the bond market. We're still well up from where we were in September, even though we're well off from the four eighty HI but four eighty has been a very
very strong resistance level repeatedly. So I think what we're really looking at is consolidations within markets rather than really breaking out a new trends.
We'll let policy define bad versus good. They're in the business of doing just that. Who's the angel, who's the devil? They can decide. We're interested in markets of betsa versus worse. It's growth is going to be bets are in twenty five versus twenty four three percent GDP down to two point five or up to three point five? What do you expect to think.
Well, to be honest with you, I think if we're in that two point five to three area, you're the fifth year of above trend economic growth. That's never happened before, and I don't in the post war period. And I don't think that's a bad performance. It's certainly a performance that's consistent with where bottom up earnings expectations are for this year, which is around twelve and a half percent.
And then when you look at all the negative headlines about earnings, our earnings revision tracker is minus twelve point six percent, which means twelve point six percent more companies are downgrading earnings and upgrading them. Twelve point six is basically correction phase. It's not contraction phase in a market. And I think these are the important fundamentals. The headlines are getting out of step with reality.
Hold on a second, because it's a little bit of a straw man argupant. I've got to be honest, because honestly, there have been a number of headlines that have said recession, but when we talk to investors, most of them do not say that the recession is their base case. Most of them believe that this is a slowdown, but it is a market slowdown, and maybe it's catch up from some of the post COVID period that was inflated by
some of the spending by the government. How do we measure whether this is something that is underpriced as a risk in the economy in markets the idea that the slowdown is more significant that people thought, even if it's not recession. Right, at what point is it not workable for you anymore?
When you've got to get below trend gdpay and you've got to have an argument that you're going to sustain below trend gdpay. And we're sitting in an environment right now where the Federal Reserve is cutting strains one hundred basis points, the forward structure of rates is again anticipating fifty basis points more rate cuts. We've taken tenure note
off the peak by sixty basis points. So all those factors are coming in against the balance sheets that are very very hell a liquidity that's still very ample in the system, excess savings globally that's being generated. Going to be looking for the best alternative. So I think you have to get to a sustained period below trends GDPAI, and I don't see that in the car.
So this is ultimately comes down to a FED argument, This idea that if the FED cuts right now in response to a weakening trend, that you think it could be the policy error that could rejigger some sort of inflation or some sort of maybe positive growth shock. Is that what you're saying.
If the FED were to cut again in this environment, I think you'll quickly see bond yields retrace theirself back to the four eighty level. Not so sure they break the four eighty level, but I think they'll push back because people will realize fundamentally this economy. As you said, a lot of the investors you talk to the same people the issuers I talk to, and the investors I talk to. All of these people are telling me business
is really good. You know, things aren't a problem. And yet you have this negative headlines continuously beating on people, and I think as a result of that, you're holding down the expectations. If the federal deserve to come in and cut interest rates again, I think people will quickly rethink the story.
Do you think the negative headlines, though, are actually creating uncertainty? People are on the sidelines.
I think there are people who are sitting there saying, why do I get involved at this particular juncture by the same thing the investor side of the base on the issuer side of the base. Look at what they're doing in terms of the number of issues coming to market. They're willing to sell at these levels. They're telling you these levels are attractive, These spreads are attractive longer term.
So I think what you have in here, and again the bond market investors have pulled us down from four to eighty to four to twenty five, so there's been a substantial move. So I think they've put a lot of money to work. I think we're just getting to the point now where so much negative news is and negative economic news and positive bond news. Think about what's priced into the bond market right now, seventh recession call.
Not only that Besson's going to come up with something sleight of hand to reduce eight hundred billion dollars worth of borrowing this year. Doge is going to save this a trillion dollars every year for the next ten years. All of this is priced into the market.
And where.
Why aren't we at two percent?
So contortion'slock puts it this way, we're in a modest stagflation shocked to the economy, not a recession. Do you see any stagflationary fears? Muhammad Alarian said the same thing to us this morning.
Stagflation requires that you believe inflation is accelerating in an environment where the unemployment rate is rising. I don't see the unemployment rate rising.
Four point one percent is.
Still below the natural rate. I mean, where do we have to be three point four before they turn around say the labor market's tight. So the reality is the labor market's healthy and inflation is at three not at two.
Is that the end of the world. No. Does it suggest bond yields are expensive, Yes, but it's not the end of the world in terms of average individuals out there in the country, two percent inflation versus three percent inflation not get a bank or them in a world where hourly earnings growth is going at four point one percent. And that's the other thing to look at in terms of the payroll numbers that come out on Friday, is
that hourly earnings number and the unemployment rate. Besides the slowdown that we're probably going to see a employment one hundred and fifty thousand perore employment is very consistent with trend GDP. Question is how much of that is a function of weather. How much of that was a function of for as far as how much of that was a function of DOGE, we don't know. The reality is when you look at the moving average of these things, they're all doing fairly healthy, especially when you look got
on a year of a year basis. There's still well with in areas that support growth to the economy.
You acknowledge in the air term, though we might see some weak prints. Based on what you said at the start of the conversation, the destination might be good, and I agree with you. You could increase the dynamism of the American economy by removing the government allowing the private sector to step in. That all makes a lot of sense in the net term, though, how much weakness would you expect to experience in the next couple of months. You might describe it as a head fake if we
get here, because we'll still end up somewhere good. But I'm trying to understand what you expect in the next few months.
I mean to be honest with if we got to two percent GDP, I'd be fine with it what you saw in terms of the Atlanta FED numbers. When you think about we had this massive trade fics chock right, it didn't show up in wholesale or retail inventories, and everyone sits here and says, well, it can't be a manufacturing inventory as well. If you're manufacturing and you're pulling in a lot of intermediate product, we don't know the
manufacturing inventory yet, we'll see them. Maybe the manufacturing inventories were very, very big. Maybe it's a big one time shock and manufacturing. Maybe this data all gets revised, Maybe the consumer numbers get revised. The reality is you're jumping on every little marginal change when the reality is the fundamental trend has been healthy. We've caused called seven recessions since twenty twenty two, and we've had an economy that is growing above trend for four years, going to be
five years. Think about it. There's a disconnect between the logic and the reality.
Steve, It's going to say and catch up as a west Thank you, sir, Steve A shits so of Miszilo. This is the Bloomberg Seventans 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.