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Well, I'm a going far away.
I got on a plane and I was sitting up in the fancy seats and Christine Legarde got on a plane.
We sat down one row ahead of me. We said hello, and.
Sheep dived into the newspapers. Is the French banks blew up? It was a day where basically European banking collapsed. We start straw with the humility and history of BNP Perry By of Paris. There, Victor Hortyort joins us this morning and derivative and bond strategies. Victor, we are so honored to have you here with the French banking tradition. What does your measurement of liquidity look like in the system? Is the plumbing working in our financial system this morning?
So far?
I think it is in the corporate credit world that I live in. One good measure of this is what people are prepared to pay for the spread between derivatives and corporate bonds, and typically when you have liquidity shortage, people are forced to sell their bonds. That's not really been the story so far.
Tom.
You know, we've had a material move wider in spreads over the last few weeks, but it's been mostly driven by hedges derivatives. It's almost like the situation where, you know, you introduce a lot of uncertainty, people reach for the hedges, but they don't feel so negative yet that they need to sell their bond portfolios. And that's kind of where we are right now.
The tension in New York this morning is percolating that we're not there yet, folks. For me, it's four standard deviations. We're not there, but that we're nearing a point where the Fed has to do something. They did that in a medical crisis, the pandemic it BMP perrybod. Do you have discussions that were at a point where any given central bank, including Jerome Powell, will have to step in to write the chaos.
Well, first of all, I don't think that we are actually anywhere close to the conditions where that is that's on the cards. Even primary corporate bond markets reopened, although it was modest in the US yesterday, so the market's are obviously not shut. Then to your point, what do we think about the central banks? You're probably more likely to see the EASYB being proactive here, and the FED it used to be, has actually much easier job here given the lack of inflationary pressures.
Brilliant, brilliant Paul headline out here, this is what's moved the market now now at one point seven percent.
I forgot my glasses, so politic possible the wrong.
Let me know, you know, it's like it's like I'm blind on the golf course, like Damian sass Hour. Here's the headline, and it has directly to do with Duke University merch China raises tariffs US goods to eighty four percent.
Yep, So that Duke sweatshirt from the Champion, the reverse weave sweatshirt, I guess, goes up eighty four percent.
I mean, this is it continues, Tom, this tit for tat for on the tear front. This is kind of what we signed up for here. So Victor, you know, in the credit markets, you know, where where are we in terms of assessing risk? What is the bond market, the credit market telling us about recession risk in the US economy.
Well, spreads are substantially wider, but we're probably nowhere close to actually pricing in a recession. You know, if you look at US investment grades spreads on your Bloomberg index, we're around one hundred and twenty basis points. That usually gets to one hundred and forty one hundred and fifty even outside of recessions. If you're going to enter a recession, you're talking about two hundred basis points. So the credit market is under pressure, but it's still nowhere close to
discounting a proper recessionary environment. It's actually only over the last couple of days, for instance, that the markets began switching focus from pure tariff concerns like auto's, like you mentioned pharmaceuticals earlier, and started to focus on the real cyclicals, including financials for instance. And cyclicals have started to underperform only on the last couple of days.
Victor, we're going to see vulnerability in the credit markets. Where do you think we'll see it first? We'll be in a short term paper side or be in longer term issuance. If we do see some pain where would you see it first.
So the one thing that's different today compared to let's say twenty twenty two, which was the last time we had volatility and spread winding, is on the borer side. So back then, HIEL companies had taken advantage of the easy funding conditions during the COVID stimulus and extended their born maturity profiles. This time around they have a little bit. Lastly, Whey, the born maturity walls are probably three times what they
were back then. So my guess is that we're stay here for another few months, it's going to be the leveraged finance space that.
Starts to look interesting.
That's not the story today, but it will get there if we stay here.
Don't be a stranger. Thank you so much.
I'd like to do the interview in French, but that brilliant Victor or thank you so much with BMB bar about Paris out of London this morning to get us started.
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She does a.
Wonderful synthesis of the moment. Many people do, but nobody does it better.
Than Constance Hunter.
She's the EIU and of course with macro policy perspective as an advisor there as well.
What's the one chart for you, Constance Hunter right now that.
Speaks It's the chart of uncertainty. And that chart takes into account.
Well uncertainty at JP Morgan what's.
Uncertain So it's it's a Nick bloom out of Stanford, and he uses EIU data to chart the word uncertainty in our reports. Plus he looks at changes in the tax code that are coming up. Plus he looks at the divergence of economic forecasts. And when you add all those three things together, we are almost at the COVID level of uncertainty.
But what we know.
Going back to the eighties is that this presage's recessions. You know that those that recession data was backdated, right you you look at the you choose a recession ex post. We know that the GDP data ends up getting revised down usually if there ends up being a recession. And so when we look at this chart. We know that there are certain behaviors that companies and households engage in when there is this level of uncertainty, and one of them is they do not invest.
So are you forecasting a recession?
We are forecasting recession, all right, talk to us about that.
Yeah.
Well, so we were in the process of doing our forecast last night as we were sending you our notes, and so before the latest that's where you were.
I drove by Central Park, so the constance right, doing a recession forecast.
Okay, yeah, I had to have a glass of seltzer, not a glass of wine. Yeah. So, I mean we're I mean, I think that the story is and everybody's going to be in this boat. We're just going to have to keep revising down right. So right now, as of last night, we were at down zero point one percent for the year. I think it's going to end up being lower than that. You don't have this kind of dislocation and then just bounce back right away, right.
And the thing that we were arguing is even if the tariffs get rolled back, which is what people were talking about a couple of weeks ago, you still have that uncertainty level very very high. Now of course it's gone even higher. And what I said at a dinner party this weekend, I was talking about how I had written a note to everybody on my team and listen, I've lived through a few crises. My first one was
the tequila crisis back in the nineties. And there's always something that ends up being worse than you could imagine, right, And so there's some opacity somewhere that we're not going to see, some connectivity somewhere. And someone asked me a dinner party, so when you wrote this note, did you tell them what do you think? Is this going to be the worst of your career? And I said, yeah, very well, could be, because it's completely self inflicted.
Right, Constant Hunner with us. We're going to continue with you're here and a good morning.
We say good morning to all of you.
With the futures negative one on the three, we're out five figures on evics fifty seven point two three. I'm not going to mince words an ugly tape and real talk about to be polite financial dislocation out there, Constants. One of the great things you do, and you've done this for years, is synthesize this into what central banks will do.
We had a gentleman from B and.
B, Perry Boss, say, actually, the ECB has more degrees of freedom hereror to work than a Trump affected Jerome Powell. How constrained is the FED right now to act within crisis because of the politics.
So it's not so much the politics itself, but the political policy of raising tariffs, which we know is going to have an immediate inflationary impulse. And of course the question is when does that get overwhelmed by the negative economic impulse that then reduces to hand and pushes down prices.
If we start to get market dislocation, if treasuring markets start not to clear, the FED is going to step in, right, I mean, so we're in a different as we wake up this morning, we're in a different realm than we were yesterday. Yesterday I would have told you the FED is going to be fashionably late because they don't want to repeat the problems of the COVID. Right, They're going to be a little bit late, and they know they
have enough firepower. But if we're getting into a situation where we have breakdowns in capital markets and market's not clearing, then they're going to have to step in sooner from at least a market intervention perspective.
Yeah, I mean, I mean Jamie Diamond's on with Maria right now. Paul, there's the headline economists or right to say we're headed for a slowdown. Jamie Diamond didn't sleep last night. I mean the major banks, Paul, are doing risk management now against all this contagion, including speculation about losses at hedge funds.
Inflation.
What's your inflation call here? Are we taking that up?
Yes, so we're at three point six percent for the full year, but.
What we were before.
We were at two point five. But what we've cautioned clients is that that doesn't mean there's not going to be a couple months in there where we see a prints above five percent.
Right.
Our expectation is inflation spikes up and then it comes down. But again, this demand destruction is very significant, and the supply effect that you would expect to have a little bit of a lag, The lags are going away. China said they're not importing anymore LNG. They're just not importing any more of it. Right, So everything is happening in a much more compressed fashion.
So where do we go from here? What are the next steps that you're looking for? Just from an economic outlook perspective, is it get starting to see it in the data, because I guess if you look at the you miss sentiment data, we're already seeing it, but we haven't seen in some of the heart that data that the FED likes.
Yeah, I mean, obviously they're going to be watching. I think the next big piece of data that will contain information about this will be the April jobs data, Okay, and we would expect that to be softer. And then you've got to look under the hood, right, what's the diffusion index? How many firms are hiring? Maybe we get a positive print of one twenty or something, but you know the diffusion index falls significantly or ours worked false.
What's your model unemployment rate out?
I would suggest maybe that's the thing that moves this instration. Oh off, there are you modeling a five figure on unemployment?
We were modeling four point seven. But I think we are as we as I sit here, we are remodeling everything, and I think five is absolutely not out of the question.
Cassus Hunter, thank you so much, greatly appreciate with are you this morning?
You're listening to the Bloomberg Surveillance Podcast. Catch US live weekday afternoons from seven to ten am E's durn Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch US live on YouTube.
Greg p is it pigeum.
It's very important to speak, I think today, on the management side of things, of running portfolios, but far more. He combines that with tours of duty at Salomon Smith Barney. This is ancient Columbus just left yep, Salom and Smith Barney and the US Treasury, and of course iconic work when I first heard of him at Morgan Stanley as well. Greg Peters compare this moment to the other analogs out there.
Is it a nineteen ninety eight reducts.
No, I think it's very different this time.
Tom.
You touched on it with the sofa spread. I know that's kind of an in the weeds type of measure. But I think what you're seeing here, and you're seeing it in kind of the correlation and the price action is risk premium being put into.
The entire US rate curve.
And you know, you look at the price action over the past few days.
You know stocks have you.
Know, sold off and you know, you haven't really seen the bond market react or at least react, uh, you know, as a kind of a defense mechanism. So you know, the markets are very nervous on the bond side around debt and deficits, foreign buyers stepping away in a meaningful fashion. Uh. And there's a lot of technical underwater, uh, you know, unlined. So this is a very sloppy, ugly bond market right now.
Within it is the question of liquidity. You've got Trip, You've got Peters, you got Percelli when he decides to show up for work within the holistic page in view, are we edging towards a liquidity freeze up where the Fed needs to step in.
I think at some point that is almost inevitable. And I don't want to be a doom's sayer, but I do think it is inevitable. At the same time, you know, things have actually been reasonably okay and orderly, but there's only so much capacity to absorb.
Uh.
You know, treasuries and the dealer ballance sheets just don't have enough of that capacity. So I think it's inevitable. But but we're not there now. You know, this is an incredibly important week. Of course, we had a three year auction yesterday, we have tens and thirties today. That's that's a lot of duration entering the system. And so we'll have more you know, informational content to see how you know that that notional kind of gets absorbed into the system.
Greg you mentioned kind of the weaker than expected auction yesterday. We have more duration today from the treasury is an issue? How important if we have another week showing today, what would that tell you?
Oh well, it means that there's just somewhat of a buyer strike, right and so and so our read on yesterday's auction is, you know not, you know, not a lot really came from it. From informational content standpoint, I think today is the important day.
Watch watch the tail, watch the bid to cover.
You know, it's important to note that, you know, we can't have a failed auctions, right, the dealers must take it down, but that doesn't mean it can't.
Trade you know, in a sloppy, ugly fashion.
So there's a lot of duration hitting the market at a time when there is a you know, massive selling of you know, treasuries across the board.
So it's it's going to be very very interesting, and.
The volatility is really extreme. I think it's important just to kind of note that the ten year has traversed like almost a sixty basis point range in just a few days. Talk about standard deviation moves, Tom, that's uh uh, you know, that's just eye popping, Paul.
I've got since April four the ten year, and nobody ever quotes price except Liz Goldenberg. See the scar here, Sure that's a that's a Manola blanocute. She got so angry at me, she threw the shoe at me. It bounce off the terminal, hit me in the face. The price of the ten years down three point four to seven percent in one two three days. That annulyzes out to a ninety two per year long boy, sounds like.
A little bit hyperbolic.
Therefore, you know, exactly Greg, what who's been selling here the last several days.
Well, there's been you know, a few factions. There's been lots of talk around foreign selling. Well we'll know that for sure, you know when the data are released. But that's you know, a a a clear conversation in the marketplace. But you're seeing a lot of kind of levered onlines. There was a very popular basis trade that you know, been talked about a lot, you know, over the past couple of years, but you know, kind of entering this year, there was a belief that you know SLR type of
relief would you know come on board. And there was a loading up on that type of investment, which is you know, long treasury short futures. Uh. And the stopouts and the unwindes are you know, pretty substantial. So there's this kind of broad based selling. I'd say, there's a uh, you know, a raising of dollars and you know, exiting
you know, the US bond market. I think it's also important to note that, uh, you know, trading partners, you know, if their trading volumes are going down or going down to zero, the the need to hold US treasuries.
Uh just becomes a lot less.
So you know, that's just a natural byproduct of you know, trying to reduce trade, right and and that's an unintended consequence that you know, I don't think the administration really kind of thought through.
Greg Peters, thank you so much about eight more questions, but we can't get there this morning. Mister Peters, of course, with his work at Morgan Stanley and Salomon Brothers.
He's with pgum a frous the hood.
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This is fun, folks.
In the jargon across the pond is from London to New York. Out on the left coast across the pond is San Francisco.
And the answers Ernie T. Todesky did Chad Jones did.
This too, and I think in the case of Ernie, he went from Stanford to Berkeley, ben which is so I mean, there's no international comparison to this outrage joining us now from Yale with the budget lab is Ernie Tdesky, who did? What was it like going from Stanford to Berkeley?
Ernie?
What did did people like not talk to you for a year?
They did?
They didn't talk to me for a year, And I didn't care because I knew what a real college town was like. When I finally went to Berkeley, I have to say, what is it.
Like going down the hallway and seeing the plaque of like DeLong, Ike and Green in the rest the criminals out there.
I mean, it must have been. It must have been just a colectic as all get out.
I took Brad Delong's seminar on economic history and it was my favorite class. Bar nun at Berkeley.
I've heard that you have a character such an honor to do some panels with him over the years, and he's been a huge contribution to American economics with Brad Delong's study of history. Where are we right now, doctor Tedesky?
Where we are right now?
I mean we're at a very uncertain point right now. You know, with these retaliatory tariffs that we the increase in the China tariffs that we announced, and then the retaliation from China. So we're at a effective tariff rate now of everything announced in twenty twenty five, of twenty four percentage points, we've added twenty four percentage points to
our effective tariff rate. So that brings us to the highest effective tariff rate since nineteen o three as of today for the average family, that's forty six hundred dollars in cost when you add in the extra fifty percent on China that we just announced, So that's another two point eight percent on the PCE price level. So that's you know, like Sarah was talking about before, like on the one hand, the Fed is going to try to
look through that. I mean, on the other hand, that's going to cause economic weakness that is going to you know, pressure the FED one way or the other to move in some way.
I think Ernie Toeski with us and I didn't interview him, introduce him properly. The budget lab at eal and I will not mince words. It's what everybody looks at early.
In the morning.
The work of Martha Gimble, Ernie Tedesky and the crew up there's just been absolutely superb on traditional budget analysis, but much more.
Paul Sweeney, Ernie is your working assumption that globalization economic globalization is dead.
It's it's dying a slow death, maybe less slow than I had thought twenty four hours ago. Yeah, you know, I think that the dynamics now are going to start out across the world. Maybe anti American, counter American might be a better word for it, with this trade war and response to America. But look, you can even see the politics seep into places like Canada, places like Europe.
I think that this is fueling broader populist anti trade sentiment that we all know was already there and already on the rise, and I think that this just punctuates it.
And on the.
Flip side, Ernie, the President Trump is and his administration believes that these trade wars will result in the re I guess, the recovery or the redevelopment of American manufacturing. How do you see that playing out.
I don't see it playing out. So the you know, the place where I see a lot of focus is things like automobiles. The United States already had a symbiotic relationship in North America with automobiles. So it's really unclear how we make much gains automobile manufacturing when it's going to be at the expense of our free free trade partners.
The other thing, and we find this consistently when we modeled tariffs, when we when we kind of look at the long run economic effects of these tariffs, is there's no doubt that if if you focused tariffs on a specific industry like automobiles, you can shift production within the United States to that industry and so you can look at just say autos and say, oh, we can make gains just in auto manufacturing, but it comes at the
expense of the rest of the economy. The United States, you know, doesn't have limitless labor and capital in it, especially in an environment where we're talking about limiting immigration. And so what we also can say instantly, fined is that putting aside any specific sector, the American economy is
consistently smaller regardless of what proposal we're analyzing. In the long run, as a result of what we've announced so far in twenty twenty five, the United States economy is zero point seventy percent smaller in the long run in level lords, which you know as an economist is significant.
We welcome all of you worldwide and your commutes this morning, including good morning to New Haven with the budget lab at, you know, Ernie Tedeski with us here to give us perspective. I want to get to the budget matters in a moment. But we have markets on the move, there's no question about that.
With the Vics out five big figures, we're dashing near sixty fifty seven point three eight SPX down one hundred and six points down, down eight hundred points on futures the yield space, Paul out twelve basis points in the ten year yield. I want to take a moment right now, Aaronie, stay with us, don't run away. The most import orton person in Bloomberg today is Liz Goldenberg. Liz Goldenberg ran all of our bond coverage and once she threw one of her Manola bloonnock shoes at me.
Oh boy, almost took an eye out. And Liz said, Tom in crisis, yield doesn't matter. This is really important, folks, and Ernie knows this from his work on the Left Coast. It's real simple, fancy people in bow ties talk about yield.
The yield.
This the yield that at the end of the day, a fixed income item is a bond, a bill, a note, It's a price, and the right now the prices are declining. That is the tension of the morning that we're trying to encapsulate for you. Greg Peters with us in twelve minutes. Michael McKee on the Fed in a bit as well, earning Tedsky, let us go to what the yell budget lab.
Is acclaimed for. The president wants the free lunch of his new globalization, we'll call it with a tax cut. There's no one I've read who says this may make sense.
What is the what is the path the president's on and what does that mean for our.
Listeners and viewers this morning.
Well, ostensibly he's using these tariffs to at least partially and it's only going to be partially pay for his tax cuts. So if you were going to score everything that they've announced this year, like as its own bill, CBO would probably find that it raises two point eight trillion over ten years if it were to stay in effect. That's roughly half the cost of permanently extending the twenty seventeen tax cuts. So you know they've gotten halfway. Now.
Maybe they're only going to extend the tax cuts for five years. Maybe they're going to use other baseline gimmicks to make up for the rest of that half. Maybe they're going to introduce other cuts like to medicaid or food stamps to make up for the rest of it. But they haven't fully paid for it yet. So Number one, that's one reason to expect that there are more tariffs coming is because literally they need more revenue than they've
already raised. The second thing to bear in mind is that, of course terror fare or regressive tacks they pinch, they pinch lower income families more than number income families, and the benefits of what they're talking about in the tax bill skew to I mean, they help everyone, but they skew to upper income families. So this is kind of a raw deal for a lower income fanies.
I got to let you go, Ernie, because you're driving the market lower.
We just got to get them off there.
I can't say enough folks about the budget lab at Yale University. Everyone Republican, conservative, whatever, Democrat, they're all talking about the work of Martha Gimble and Erninge Tesky in a wide body of academics really thinking about this moment where in doctor Tedeski, thank you so much for joining Bloomberg.
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Right now, we're going to go to Amanda Agatti Aeronworld's set up on Oppenheimer as well, John Turk, I'll give you an important update here in a bit. Amanda Gotti is with asset allocation at P ANDC. Hasn't slept in three days, and we welcome her this morning. Amanda, how have you changed your asset allocation?
It's great to be with you, guys, thanks for having me. We're not making grand or sweeping allocation changes in this environment. Tweaks at the margin are the approach in this environment, and we're really trying to lean into the corrections that we're seeing in both the equity and the fixed income markets to try and reposition portfolios. And we really haven't
had an opportunity to do this in a while. So US over international is still very much the place to be larger over smaller and quality on the equity side or areas that we're tweaking at the margin.
Pere Paul wants to jump on that.
I can just see why do you stay all American given what we get from sixteen hundred Pennsylvania Avenue.
Well, we're not all American. We're leaning mostly American. We have a home country bias for sure, but we do have international equity exposure, both developed and emerging. We just have less, we're underweight relative to our benchmarks, so we're
not betting against international markets here. But I think in the face of this really unprecedented tariff and trade war that we have underway here, you know, the rally that international equities sought at the beginning of the year is fading fast and for good reason, and so we want to have a little exposure, but we want to be really thoughtful about how much, given there's still so much we don't know about the path forward for tariffs.
Amanda, we have a VIX here north of fifty right now. What does that tell you?
It tells me you don't be a hero. You can use that as a hashtag don't be a hero quote for the day. Then that goes back to this idea that we can't make big, grand or sweeping calls in this environment. There's just too much volatility. And as I said earlier, and I think the earlier guest also mentioned, we're in a crisis of confidence. That's a reflection of the volatility that we're seeing. And so you don't have to sort of stay the course and sort of look
past a lot of this noise. The VIX is going to settle down, but We're in a void here of data points and headlines that have real meat to them and frankly earning season, and so until we can get a little bit more solid footing from some of these fundamentals, I think this is just the volatility we have to accept.
Oh go ahead, Paul, please please?
What do you expect from earnings here?
Amanda?
I mean not the green on the screen now was distracted exactly I'm getting getting my face from the grinding crisis over.
Exactly what do you expect from earnings this season?
Amanda?
I mean, I'd be shocked if many companies were able to give you pretty decent guidance, or any guidance.
I guess yeah.
I think that that's going to be the key question. Of course, Delta this morning, first out of the gate, pulls the plug on guidance. So is that the ripple effect for what all of Q one earning season ultimately looks like. I think it's it's tricky because I bet you the underlying fundamentals aka the results for Q one earning season actually come in better than expected. We had the worst revisionary period since early twenty twenty going into
earning season, so the bar is set incredibly low. But it's sort of like nothing else matters as it relates to the path forward except tariff's, the trade war and guidance. And so I think investors are going to be much more focused on how many guidance forecasts get pulled as opposed to the underlying results, which is, you know, frustrating.
But that's where we are, Amanda.
One more question here, and you know that people frame out the analog looking back.
I am in the camp.
I've said this, folks, where other than the.
What we see, I got to be careful here. We'll help me get the surveillance quirk out what we see at the White House. To me, it's got a huge nineteen ninety eight flavor to it. I could be wrong in that, don't don't. Don't bet the bank on that. But Amanda, do you have an analog to the past here?
I would say no, might drop no where it seems I was saying to someone earlier today, it seems like we continue to throw the playbook and the textbook out over and over and over again, and it's we we're just finding ourselves an unprecedented territory here. And so I don't I don't think the history is very helpful in terms of a guide for what comes next.
Don't know if President Trump's listening at ninety nine ONEFM Washington or if he's on Andreid Auto and the golf cart. The President says, quote all caps, this a great time to buy.
Okay, there you go, there it is, Amanda. What does fixing come do in a portfolio these days? Have you, guys changed your allocation to fixed income? You hide out in some short term treasuries? What have you done there?
Well, there's a few things that we're contemplating adjusting again at the margin, and in some portfolios we have high yield below investment grade credit exposure and some emerging market that it's dollar denominated, so there's a little bit of a hedge there, but we are watching that very carefully. Given just the action that's been happening the last couple of days, we may want to start pulling back on that.
But the belly of the curve still looks pretty attractive at five to seven year range and so not going really short, not going really long again, with the volatility at both ends of the curve, the sweet spot still feels like the five to seven year range, So we think there's some relative attractiveness.
There is there any attractiveness to go up one hundred and two dollars an ounce We're almost back to thirty one hundred. I mean, there's some huge elasticities out on the Bloomberg screen right now.
Is gold a legitimate investment within a conservative PNC bank?
We tend not to be buyers of gold in and out of cycles. You know, I don't know that it's really that much of an investment thesis kind of story. So, particularly as you're quoting sort of the levels here, I'm not sure that there's that much further to run in terms of gold prices here at sort of top hashtag top, and so from a thesis perspective, it's really much more
of a store of value story. And we think there's a lot more interesting opportunities in the equity market, even though there's a lot of purple haze uncertainty right now.
There is.
Thank you so much, greatly appreciate it. Amanda go Goti WITHPNC Financial.
This is the Bloomberg Surveillance Podcast, available on Apple, Spotify and anywhere else you get your podcasts. Listen live each weekday seven to ten am Eastern on Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal