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Bloomberg Terminal and the Bloomberg Business App. Max Ketner of HSBC, writing Goldilocks, has had a few scratches in the last few weeks. Data misses have started to cast some down over the idea of US exceptionalism. However, we'd argue this is precisely what we're looking for. Max joined us now from more Mask in morning. Good Welcome to New York. We've got a lot to catch up on. What's that last line about? This is precisely what we're looking for.
I think overall, if you think from a more strategic perspecse, then actually this is the kind of stuff you want for US exceptionalism, Because the problem is I think two months back, the consender's opinion was, you've got to buy the dollar, You've got to buy US equities, and actually, when we look at anything else, don't even look at it. It's not even worth looking at. It's just the US and nothing else. And here we are two months later,
and all of a sudden, nothing's worked. So one of the you know, one of the key ingredients for both this idea of US exceptionalism but also the idea of goldiloxers is that you've got these persistent doubts around it that you know, people are saying, oh, Ai, how are we going to make money with AI? And how about you know, this big, big discount of the rest of world equities, international equities versus the US, isn't the US too expensive? So this perpetual question around valuations, now that's
the strategic question. Right then you're saying, hey, that idea of US exceptionalism is not dead, absolutely not, because you know, we've got lower corporate taxes, the S and P effective tax rates, much lower your Roe gap. I think I would always argue, look, you can look at valiations as a really really negative sign from a strategic a longer term perspective in the US. But you can also look the other way around and say, your roe gap between the US and the rest of the world has more
than quadrupled in fifteen years. So fine, you're paying a higher price, but guess what you're getting more than four times as much profitability. Again, that's the strategic perspective. Doesn't tell us, unfortunately, an awful lot about the next couple of weeks.
This has been the most exhausting five percent pullback I think I've ever witnessed on the anquity market on the S and P five hundred. Do you buy this weakness or chase the strength in Europe? With banks up twenty five percent today on the stock six hundred, Yeah, I'd rather.
Look elsewhere right now.
So we've just put out a note this morning saying, look, guys, probably the US is not the place to be right now, at least tactically, because those tariff headlines are probably not going to go away. I think for the FED put to come back into action, there simply isn't enough weakness yet. So you said, this has been the most exhausting five percent pullback, and I feel it.
I think all of us for fe Have you ever seen anything like this when sentiment seems to have shifted so much but the market's only done so little.
It's amazing. I mean it is.
We've actually done someone analysis on this this week when we look at some of our positioning and some of our momentum indicators. The drawdown that we've seen so far is almost only half of what we would usually see when our indicators go down by that much. So you've got a big, big shift down in those positioning indicators. But normally you'd say, yeah, that's probably like six seven percent down, but by that time it was only three four percent down.
So that is exhausting. I get it. But the problem is for the FED put to.
Come back, we need we would need more weakness. You know, you're saying five percent, Yeah fine, but is the FED really going to go in? It's like, oh my god, and videos down, So yeah, we need to cut right for.
About a second.
There is this question about the journey mattering, and this is a sort of bit of theme over the past couple of weeks. How much does the journey matter if the destination is a good one, And we're talking about how it's only a five percent pullback, but it can be uptime, then down twenty percent, and then eventually what's a five percent in one day? So it raises this
question about risk reward models. At a time where you cannot model this type of volatility, you cannot model headline risk, how much is that alone pushing capital away from the United States right now?
I think on a tactic basis, Yes, I think on a tactic basis. So that's exactly what you want to do when we look at you know, the US, when if you have predicted what's what's happening now from a policy perspective in US, if you had told me that a month ago, I would have said, risk off everywhere, don't buy Europe, buy Europe even less, don't.
Buy China, don't buy em No, no, no, don't buy anything.
Now you look at it, I'm like, actually, you know what, Europe's really looking great? Like Germany, you know, as a German, I look at this, I'm like, this is as watershed as you can imagine, right, Like the Germans spending money and I know that from myself.
To get myself.
I'm in New York and I'm just like, really, coffee seven dollars.
I'm like, I'm not going to have coffee.
Actually, no, I'm going to go to the Bloomberg office every day, get my coffee for free, and then I'll go away.
I don't have to spend money. You can find it in you know.
But it is genuinely it is such an extremely watershed moment for Germany.
And then you look at the banks and we've.
Just you know, when I came in it's like twenty five percent.
You still want to buy that? Heck? Yeah, absolutely.
So when do you think that the optimism has gone too far? We were just talking to Jane Fowley trying to pour some cold water on this optimism that we're hearing around. When do you know that we're overstating it or understating it? What are you looking for?
Once you stop having the conversations about should we worry and what could stop it?
I think then were they right?
So it's a bit like the where the idea of you as exceptionalism at the end of December beginning of January. Once everyone's super bowled up, then yeah, fine, you're probably done. But to be honest, when you look at positioning indicators, when you look at flows, certainly flows have been starting to come back into European equities, but they've only just started. Right, two months ago, you'd have said, why are we even looking in Europe?
What's the point? Right? What is the point?
And now we look at it, I'm like, wow, this is like the best thing ever.
It's been two months.
It might again because it's so exhausting, it might be like two years, but it's genuinely just a couple of weeks. I'll give you an example. I was in Frankfurt literally three weeks ago. The amount of conversations with clients I've had about fiscal stimulus, about infrastructure, defense, spinning was zero absolutely three.
Yeah, because three weeks ago were like, never gonna happen.
Come on, you need a two thirds majority, Come on, why are we talking?
Yeah, let's talk about the next sing It's three weeks ago.
This is as honestly, this is as watershed as we can imagine. And then you look at you look away from the US and you're saying, hey, why would I not buy German mid and small caps or European smaller mid caps.
You look at China.
You look at the ags tech trade, right, the broadening AI trade.
You look at China Internet. Yeah, that still makes sense. You look at Japan.
Japan, Hey, rates probably going also a bit higher. Japan banks fight, they've rallied, they've rallied a lot, but with rates maybe going another twenty five bits higher than the market is currently pricing, great, still good for the banks.
So you look outside of the US and there's loads of things happening now that are actually really uncorrelated to the US, Whereas four weeks ago I would have said, if this happens in the US, everything's going to be correlation is one and everything's going down, And it's exactly the opposite.
Which is in fact really good.
You know, we guys have this conversation about correction and in exhausting five percent. If we were sitting in Frankfurt, we'd be happy, Daisy, I mean, we'd be like freaking cowboys right now?
Are you and you're Frankfurt German friends? Thanking the President of the United States for this?
No? I think, you know, that's probably a bit too far.
I honestly also don't really care what the you know, what the what the catalyst is sort of the catalyst is the important thing from a market perspective is number one, is it happening?
Is it likely happening.
Number two is a sustainable and that looks like it's happening.
You have a lot of conviction though that this is happening and will be sustainable. You don't think this is a head fake from the German politicians.
I think we've gone too far for that to be be a headfake, right, for that to be like, oh, actually, never mind, Like we just thought we're going to spend eight on a billion.
Pretty focal when it comes to spending.
Yeah, but that is mostly red tape and mostly bureaucracy, right that is, and I think that's more the longer term issue. So then we get to your question on it, like, is this a headfake tactically it's not.
Is this a great three six month trade? Absolutely?
Is this the watershed moment where we're burying use exceptionalism and the next three to five years we're only buying European equities and now European.
Profitability is going up relative to the US.
Probably no, because you know, you've seen what Dragus was saying two weeks ago around implicit tariffs within Europe, that we've got implicitly forty five percent tariffs within the EU on goods and one hundred and ten percent on services. You look at the EU Recovery Fund now, it's that the uptake on the Recovery fun from almost five years ago keeps being subpart in subpart because it's not like
corporates don't want it and governments don't want it. But there's so much red tape, so much bureaucracy within the EU right that needs to be tackled. That's not going to be tackled with infrastructure and defense spending.
But those are two separate things.
And you know, we can talk about the strategic asset decision, the seven to ten year decision, or the sort of six month decision where you're saying, is this is the spending the watershed moment for the next six months.
One in six months time, can the bond market absorb it when we're having a real conversation about a massive tax bill going through Congress him in the United States?
I think so. I think Union in Germany as well, and.
Than the global bond marketing. Yeah, globe Germany's issue in more. US might have to issue more. What does that look like?
But I think Germany traditionally basically starts issuing more on bills, so that actually, at some point I think will be bringing in natural buyers foot bones. It still means, obviously, as we get more issuance that probably bones are going to continue to achieap and versus swaps in the next few few weeks and months, but that that trade has gone an awful long lot already. But you know, I
think I'm not particularly bothered. I think in the US, I'm also not bothered because you know, we can look always at the government debt side of things, but when we look at the corporate the private corporate debt side of things, massive de leveraging in the last fifteen years. Now you look at in TRST payments of corporates.
When you look at those, we're on a We're like on a twenty year low because you know.
Corporates have been hoarding cash. They get the high cash rate, and they've locked in maturities.
You look at the S and P.
You got almost sixty percent of debt that's maturing after twenty thirty. Why would I you know, when people are like, oh, yeah, but there's all this stuff from corporates, I'm like, great, call me in fifteen years.
Oh okay.
So from that, like you know, the corporate sector and the private household sector actually looks way way more healthy to absorb sort of that bigger issues.
The Europeans just sounds so happy right now, don't they.
Have You never seen me happy? Like blame the coffee.
I blame the free coffee, you know, give the German free stuff, and yet he's happy.
All I can say is watch him go buy a seven dollars copper coffee and all.
Of a sudden.
You know, these fiscal stimulus plans, they're real.
Yeah, come back when it's like eurote dollar one twenty one, twenty five, back to one fifty again.
Max is going to see it. Thanks, that'll make a difference.
Max Kenna of HSPC, Jen Folly of Rabberbank, writing the return of US growth concerns has clearly been a drag on the dollar. However, the change and the fundamental drivers behind the euro have been even more dramatic. Jane joined us now for more. Jane, welcome to the program. I have to say we talked about this a little bit earlier this hour. It takes time to internalize a shift this large on the continent. It will take weeks, months,
maybe even years. Jane, could you just communicate from your standpoint how large a shift we're seeing from Germany.
Well, certainly as a significant shift in terms of the news that we've had, But of course everybody in Europe is aware that things take time in order to come into fruition, and this is a real issue I think for the but the people who've been buying euros, you know, aggressively this week. Is this just a sugar rush or will we actually have a different determination of the time frame it needs to get this money through from Germany, from the EU, into the economy, into the defense sector.
And if there are disappointments along the way in terms of that timing, well you know we could see one oh five again in your adoration, and potentially quite quickly, because we know that there are hurdles. We know that if this change in fiscal policy gets through Germany, well it's with the outgoing parliament. The new parliament after March twenty fifth could have legal challenges even to this. And then what about capacity. Europe doesn't have huge capacity in
terms of defense. How quickly can it actually spend all of this money? So we know that the timeline for Europe could be quite disappointing.
So Jane, you raised your forecast to You're a dollar to one oh seven. You said that you're going to update that by the end of this week. That means you have one day to really look at all of the facts and figure out how much is real and how much is overly optimistic. What are you looking at to make that determination, and what's the range of potential outcomes.
Well, you know, I do think anything from the FAD is going to be really important here because you know, we're hearing the arguments about the slowing in US growth. You know, we can see also, you know, the stock market and how that in the US could affect confidence
for the US consumer. But even though if we were to accept the fact that the US economy is slowing, well, what about inflation, Because yeah, okay, maybe we were a little bit optimistic or pessimistic in terms of the inflation push from tariffs at the start of the year, but taps are still inflationary. And even if the FED is worried about growth, it's unlikely to cut interest rates aggressively if it's concerned on the inflation front. So I think
that's a really important part. To what degree are the FED able to cut interest rates in an environment where inflation has been looking sticky. It was looking sticky because of the Biden month through the end of the Biden administration, likely took sticky now because of tariffs, and we just don't know the impact of those tariffs, so the Fed
likely to be cautious on that front. So whereas that give the dollar a little prop higher, it's possible that the worries about timing about German fiscal spending could actually not the euro a little bit lower from the perch that we've seen over the last couple of days.
Although if you take a step back, Jane, I wonder if Bob Michael is on to something and whether you would agree with this idea that more broadly, maybe it's not this week, but maybe it's this month, Maybe it's the next couple of months that we're seeing the peak in dollar exceptionalism, and with all of the money looking to be raised elsewhere, there is going to be a sucking sound away from the United States and dollar assets.
Well, you know, I think this is a question really for about US exceptionalism, really for the next decade, for the next two or three decades, even I think it's going to be able to be answered in a very
short term. I mean to me, you know, one of the definitions of US exceptionalism is the fact that the dollar has its own fundamentals, and that derives from the fact that about fifty percent of the world's invoices are in dollars, and that means that even when negative news comes from say the US budget, people need their dollars. They buy their dollars. That's why it is essentially a
safe haven. And for that to change, we're going to have this very slow and it's already started, this very slow progression away from using dollars as an invoicing currency and therefore, you know, as a reserve currency. That that has started. It's quite possible that that Trump's policies with respect to Europe, with respect Canada, Mexico, et cetera, made people move away from the dollars, but that is a very slow process and I don't think we're going to be able to answer that question quickly.
Well, what fills the voya, Jane, Well.
You know precisely, and that is why the movement away from the dollars from the dollar, use of the dollar internationally will be very very slow. I mean, clearly what we've seen over the last few years is you know, China wanting to use the remimbia is more of an invoicing currency for instance. That will carry on, and some of its trade allies will continue to you know, be pushed in that direction. It is going to be interesting to see whether or not there is a European response
over the next four years. That perhaps will depend what happens between Trump and Europe in terms of tariffs, for instance. But again, I think the question about de dollarization is a very slow one.
Hey, Joan, I appreciate it. Jane Fowley there of Rammerbank on the shifts we're seeing out of Germany.
So here's the latest this morning.
Market's looking for more terifily from the Trump administration delaying levies on auto imports for a month. Jason Firman of the Harvard Kennedy School, writing, I've rarely seen an economy turned negative as quickly as this one has.
But people shouldn't get over their skis.
I expect all of this to slow growth and add to inflation, but don't expect anything dramatic in the data right away. Jason joins us now for more. Jason, welcome back. To the program sir, and I'm totally with you. I think we all are. This shift was seeing its sentiment in just a month, so big and so quick. What does that more constructive tone come from at the end of that quote that why should we ultimately avoid anything too dramatic.
Look, there's no debate that the Trump administration's impact on the economy has been negative. Just about everything they've done has been negative for the economy and is going to hurt it. You can debate the magnitude, and partly I'm reacting to there was the Atlanta Fed's GDP now said that the economy was cratering in the first quarter. I think that number was flawed. Things move slowly, you know,
consumers are really really nervous. But my guess is that they're probably still spending and they're going to wait and see how things turn out. So the types of problems we're seeing now, they take time to build. They don't just go straight to recession.
Jason.
We do have a carve out though for the auto sector, and there's lots of conversation. Maybe agricultural will be next. If your USMCA compliant, you get a carve out. Basically does that mean, the twenty five percent tariffs came and went, and what's the impact going to be.
You know, there's twerts that are going to come, those tarifts that are going to go, and then there's more tarersts that are going to come back. I mean, you just showed Howard Lutnik. He expressed pretty clearly that there's going to be more and more and more, and as he just said, they're going to stick. So, yeah, you can do carve outs, but there's still lots and lots and lots of tariffs on Canada and Mexico. And remember
we're less than two months in to this administration. In Trump's first administration, it took him nearly eighteen months to get to the first set of tariffs. That was after an extensive and judicious process, and it was on a much smaller set of imports than anything we're seeing.
Now, what do you make of the April second argument that they're looking for reciprocity basically trying to make sure they can rewrite the rules of trade so that it actually is in their mind free and fair.
We already have reciprocity if you look at other rich countries their tariffs against the United States tend to average about one two percent. Are tariffs against them average about one two percent. On average, they're the same. Now, there's some things they have higher tariffs than we do. Some things they have lower tireffs than we do, but they average out to about the same, So we have reciprocity.
If they want to sit down and do a free trade agreement and get those tariffs from one to zero, I'd sign up and be wildly enthusiastic.
Jason, you said that it takes time.
This is a barge, and to shift to the US economy will take more than just a couple of weeks of bad sentiment. At what point do you think that we'll actually start seeing some of the uncertainty and some potentially the expectation of higher prices begin to show up in the economic data, the hard data.
Yeah, I mean, I think you're going to start to see it right away, but it'll start pretty small and grow. Some of what I'm most worried about here is actually what it does on a five or ten year time horizon. When you're talking about how businesses think about their integrated supply chains, how they organize themselves to have maximum efficiency. Now, they're going to have to think how they organize themselves
to be resilient against an extremely uncertain political system. But I think you'll start to see it a little bit right away, but it will really grow. And of course it depends on do these tariffs escalate or do they end up dropping all of them, And of course anything is possible.
This is a pretty significant regime shift, at least when it comes to tariffs. And yet what we've been talking about a lot of this morning has been Europe, and has been China, and has been what's going on there with respect to fiscal stimulus and supporting their defense sector. And it's raised this question that JP Morgan's Bob Michael raised yesterday where he said we saw the peak in US dollar exceptionalism this week.
Do you agree with that?
Is that something that you're seeing in terms of the slow drip feed of rearranging supply chains and even maybe invoicing that we see around the world.
I feel pretty good about the dollar and pretty secure about the dollar, although if you wanted to do something about dollar supremacy, you would throw a massive amount of uncertainty into the US economy, which is what we're seeing right now. But I think even that won't be enough. And look what we're seeing in Europe is good. I'm glad that Germany is untying its hands. I know that's a little bit for the bond market to adjust to upfront, but absolutely the right move. And Europe has been behind
in spending on its own defense. They do need to shift to something more closer to a wartime economy that they can really be in a better position to defend themselves.
They've been massively behind. Jason's going to hear from it as always, Jason Furman there at the Harvard Kennedy School. I think you refer to the US economy as a budge, more like a supertanker joining us now, Constant Hunter of the Economist Group, You're fuvery worried about that on Constant joined us now from more Constance. Welcome to the program. Let's talk about the jobs data first. So no drama
in jobless claims, that's good news. Are you expecting any drama in the payrolls report tomorrow morning?
And we're expecting a soccer play role report than we've seen on the three and six month average, So I would say about one hundred and eighty thousand. What we're going to be looking for though, is under the hood what's happening, right, So it's not just government employees, but that services employees and consultants. That's where you've seen a lot of layoffs, right, So there's a multiplier effect from what's happening, And so there are a lot of people on the.
Job market with very highly qualified skills. If we continue to have a.
Fairly strong labor market and strong economy, I think those people will get sort of hoovered up in into other jobs. But if we don't, then you're looking at some more longer term damage to the US economy constance.
We were talking earlier this morning about this being really a big economy that takes time to really damage that some of the sentiment shift has happened a lot quicker than the actual underlying data.
Would you agree with that?
Yes, absolutely. I Mean, one of the things that we look.
At to think about forecasting payrolls is the ISM Services Employment Indicator, and that AD is still ticking up even though that's a real really a real time indicator.
But another thing that we look at that's really.
Valuable is an uncertainty in text that combines three things so it combines uncertainty gleaned from actually EIU documents.
On our own website behind our paywall.
It looks at changes in the tax code, so of course we have the tci JA up for possible extension, and then it looks for differential between economists forecasts. And when we look at that index, when it has spiked up, it has presaged a recession is coming. And we are at levels that are well above the two thousand and eight financial crisis, well above what happened during the dot com bubble, and well above what happened in the nineteen ninety SNL crisis. We're not quite at COVID levels, but
we're pretty elevated. And so what we're doing is we're using that to forecast how is this going to impact capex, How is this going to impact household consumption?
How reliable has that kind of sentiment data that open constants at a time. And I know that there are other things that go into this, but right now some people are pointing to the sentiment and talking about how negative it is. And Mary's been talking about the Beige Book all morning, and she's right. And the word uncertainty or some variation of that came forty seven times in addition to the forty nine times of terrorist I'm just wondering we're not saying the shift though in consumer spending
habits just yet. I mean, people are worried about it, but we're not seeing it. So is there a chance that what people say and feel and what they do just isn't going to cohere like we've seen in previous cycles?
So are humans going to keep being humans? Yes?
We have a lot of dichotomy right in between what we say and what we do, So yes, that's a significant possibility, And I think we also have to think about some of that front Bloating is happening in terms of consumer behavior as well, right people buying things. If they were planning to buy a car this year, maybe they're saying, well, maybe I should buy it now rather than wait until April or May, when perhaps it.
Will be more expensive.
With that said, though, you'd rarely have you seen this level of heightened uncertainty without seeing it cause some pull back both in capital expenditure and consumer behavior. I would say one thing underpinning this that we have not necessarily had in previous cycles, right, is we really are in the midst of an incredible productivity boom, and that could give us a bit more cushion.
Than we would normally normally have.
And then the other thing is that the Fed knows that it can afford to wait should things get wobbily, because we have such an immense amount of mortgage equity in homes and so you saw yesterday all it took was the slightest move down and you had a huge increase in applications for new homes and applications for refinancing. So there's a lot of capital there on the sidelines to be deployed in the economy should we get into a weaker situation and should the Fed need to lower rates?
Constants, what kind of impact are you seeing DOGE have on the labor market?
I mean, right now, I would say it's negligible, right like we didn't see it show up and claims it's a large economy. So, yes, these federal workers are getting laid off, but they're really highly qualified individuals generally speaking,
right with advanced degrees and important specializations. So if are not rehired by government once people realized that they were actually doing valuable jobs, then it's very likely that they'll get rehired within the economy, and then, of course, some people choose this opportunity to take an early retirement.
Constant Hunter, the of the Economistic Group, a constant thank you for joining us to break down the latest on the labor market. 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.