Global Trade Is A Growth Engine, Roach Says

The President meeting with Joan Claudianka, the European Union's president today and saying that you should drop all to Harris Barris and subsidies, with the block's trade chiefs set to present him with proposals in that direction, and a crunch meeting at the White House lates today and we're joined by Morgan Stanley. Legend now is Stephen roach l University professor joins us in New York. Good morning, professor. We wait a minute. Richard Burner was a legend. H you.

I hired you, so I'm the father of a legion. Okauyd there we go. There you got even slapped down this morning, and profess, So, what's the minimum condition of success from meeting like this today with the President of the United States and the European Union president meeting together. There's there's not much, Jonathan. The bar is pretty low. You know, in the last twenty four hours, the presidents said tariffs are great, and then he said he wants

to propose to eliminate all tariffs. So if they're so great, why does he want to eliminate him? Uh, they're a negotiating employ He's the master of the art of the deal right now. The art of the deal is giving US retaliation that requires subsidies by the US Congress to deal with the retaliation being directed at US farmers. That doesn't sound like such a great deal to me, but you know, um, well, it remains to be seen where

where we're we're outn here. But but for a global, interconnected world, competing not by countries but by through supply chains and the distribution of value added um to multiple platforms around the world, this is a confusing, perplexing, challenging time with a lot of potential collateral damage along the way. So we have the situation at the moment with tariffs on automobiles and light trucks coming from Europe into the

United States face a huge tariff. Then there's just sort of the basic l autos that were used to talking about, where the Europeans slap on a much bigger tariff to the United States slaps on. Can we get something done where we remove those barriers to entry, we remove those tariffs on watmobiles and light trucks. You know, it was anything is possible, but you know it's is this the

way to get that done? Is the way to reduce tariffs? Uh, to to threaten to raise them much higher than they have been, and to disrupts the supply chains, which um is the essence of the production platform for the for this key industry. So uh, you know, anything as possible, but I wouldn't bet that this is the right way to get there. Do you just assume a g d

P markdown? I mean within all the fancy micro economist Paul Krugman has been great about showing the different dynamics here and the wedges in the you know, the geometry of tariffs and taxes. The answer is GDP goes south right. Yeah, well, uh uh, there's no question that um in my mind that the global trade which has gone um you know from twenty and of world GDP over the last fifteen to twenty years has has been an engine of of

growth for developing and developed economies alike. Global trade has been uh a flat uh. Since the crisis is a share of of world GDP, and so that's made it challenging to to get world GDP back to its earlier pre crisis growth rate. Uh. And if global trade really starts to unwind, then the headwind has become far more severe and the GDP impacts will become more acute. As you allude to dr Roach, I know you're huge on on Twitter. We've got to respond. Have you respond rather

to a presidential tweet this five minutes ago? Every time I see a weak politician asking to stop trade talks or the use of terrorists to counter unfair tariffs, I wonder what can they be thinking? Question Mark? Are we just going to continue and let our farmers in country get ripped off? Question Mark? Lost eight hundred seventeen billion on trade last year. No weakness exclamation point. Well, you

know I'm a broken record on this time. The President plucks out trade as if it occurs in a vacuum, as if it's a result of the way other countries treat us poorly. He doesn't get the fact the trade is the mirror image of our need for surplus savings from abroad that requires us to run balance of payments and multilateral trade deficits last year with a hundred and

two countries. That connection has never been made in UM, the president's mind or in the mind of his advisors, which is even more shocking because presumably he hires UH reasonably proficient UH policy advisors on the economic and international finance front. Either they're afraid to talk to him or they don't get it either which is or or both. Very good, Steven Roach, thank you so much, greatly appreciate what you know you were saying of time to Stephen.

Aaron's joining US now. Bloomberg News Banks reporter joins US from Frankfurt. Stephen, here's the number, the weakest second quarter and fixed income trading since the global financial crisis. The five largest US investment banks saw total debt trading revenue rise by six point seven over the same time span. When does this stop, Steve, Well, if you believe the CEO, it should stop in the next quarter. He said, he's confident, very confident in fact UM that revenue in fixed income

trading will now begin to rise. Admittedly, it's a it's actually a good comparative comparative for deutche Ban because six fixed income trading was really weak last year in the final TiO quarters of UM, so he's got a bit of a comparative advantage there. But of course a lot of it depends on where the cut the cuts have taken place that there are executing in the bank right now. So UM I think, well, we'll need to see him

wait for the next results. What is the catalyst that drag us out of what has been a vicious cycle over the last several years, A sound fulfilling vicious cycle where Deutsche Bank have to cut the revenue folds, they have to cut some more. Are we really breaking out of that stage? Dotr back shortly hopes, and the CEO of course most of all hopes they can break out

of the cycle. And yes, if they do, if Christian Seving actually pulls off the feet of an increase in fixing come trading next quarter and maybe the UH the next quarter after that, UM, that could certainly be some sort of catalyst UH. And of course, if he UM reaches the financial targets he set for example UM cutting or keeping adjust the cost below twenty three billion years this year UM and reaching a return intentional equity of over or four percent next year. Um, that would certainly

be be progress as well. One of the price bosts today quite clearly was the advisory business doing quite well. What did you think of that state? Um. They've been telling us for a long time that the advisory business is actually not doing so badly. UM. And they always say it's it's a long pipeline, you know. UM. I mean when you when you prepare a deal and a lot of work goes into that. It's a relationship business, um.

And sometimes the revenue doesn't show up in the in the income state and until maybe a year or even two years later. UM. So it's it's good to see obviously, UM. But it's actually the fruit of labor from maybe a year or two ago. And now they're cutting corporate financed in the US and Asia especially, UM. So we'll have to see how that affects the pipeline now and that won't happen, that won't be visible until maybe next year.

I mean, part of the reason they keep people, particularly key employees of stock uh Price to book on JP Morgan is one point seven. Price to book on Deutsche Bank is point three. I mean, the disparity invaluations extraordinary. Is this guy able to retain that top ten percent. I'm going to call it eight thousand key employees. Ironically, the price the book actually helps in a in a weird in a weird way. Many people at a bank are extremely unhappy about the share price for understandable reasons,

because you know, the pay depend on them. But since they higher now and the price is so low their pay packages, you know, they share um, they share options are basically worthless, so many are sticking around and hoping the share price will rewrite it. Yeah. Yeah, so you know, in a weird way, again, it helps, but yeah, people are extremely happy unhappy about it. Um and if they have hands to go somewhere else and trade in their share options for better ones in a different bank. I'm

pretty sure many people think about that. See quickly you're from your vantage point balance. How London and New York matter to Deutsche Bank Germany? Is it all about London? Is New York and afterthought? Or do they have an equal waiters? There some nuance there? I don't see, um, I do think. I mean New York is extremely important, London is still a bit closer and many of the executives tend to be in London. More frequently. God Ritchie who was really important how to the investment bank lives

in London. Um, so you know, it's hard to say. Obviously soft factors and so on. Um, it's hard to compare. I do think they're both really important. But the cuts, I think they're more cuts currently talking place in the US, so my senses, there's a bit of a shift away from the US, but New York will will remain a very important place for dutcha bank. Steve, thank you for the briefly learned a lot there, Steve Aarons and Franford with wisdom on Deutscheit. I think ViRGE with US out

of London. She knows American technology and of course has brought that over to great acclaim uh in the United Kingdom is well, you know, Eileen. It brings back all the emotion in all the past and present and even future of technology. Why are we still so riveted by space? Is a last frontier? There's a great question. You're always

throwing me these curveballs. I love it. Um. I think it is just this sort of uncharted territory because so few people have tried to tackle it, and because of the capital expenditure required in order to try and address it. It's just been out of the reach of traditional innovators or obviously any kind of startups because of what you actually need to put together in order to get there.

I mean, within this is is government trying to do its thing, and and and certainly they're assisting here, but that John Pharaoh's really smart partition is in the Business Week cover. This seems to be relatively easy and the technology process over the traditional manufacturing processes is still steeped in the old, isn't it. Yeah? And I think it's as much as you said right before you kind of came over to me, it is about the number of parts.

It's kind of put it down that way, and it is, you know, trying to get a sort of a new factory producing three cards a day, for example, has so much at risk and so many potential points of failure that I think that's doing things at scale is what always sort of stimy is even the best entrepreneurs. I'm just really enjoying Tom walking us through the launch. Where are we at the moment? Second stage? Oh, it's a bright red cone and they're gonna go out NASA showing

some animation. But we're at the second stage, which John goes down to really the technology here of why the US did so better than the Soviets. Eilan, you know this from your engineering background. It's just about basic chemistry, basic physics, basic metals. These beasts that Mr Musk is putting up in the air, are they're way more sophisticated than what they dealt with with a Saturn five launch

or aren't they? No? Absolutely, And I think you're also seeing people like Jeff Bezos doing similar to work with rockets, right, and they're starting to help compete with one another on ego for that. But the technology has run a long way. I think the bottom the sort of underlying physics hasn't changed to your point earlier, Right, they have to think about re entry, they have to think about what happens

in the upper rapmosphere um. But the methodologies and the manufacturing or fabrication that they can use to put together the end a stumble the components has come a long way. Well, I don't mean this is no longer just about really rich men trying to get into space. This is about trying to create a business. What is the business The SpaceX is ultimately meant to be and where is the

competition coming from. Yeah, I think actually the competition it was probably one of the reasons it was probably easier for Elon musk Is because it was such an open field when the government, and I think when sort of you saw defense spending come down for space um and most of the commercial application then moved to satellites and communication technology, that's when he saw an opportunity to kind of go in there. Fortunately, he is heavily satitized by

the government still in the Defense Department. But I think the commercial opportunities absolutely trying to figure out who wants to have access to being able to launch and deploy more sort of communication based satellites for GPS or any other types of communication for private use. Eileen Burbage, thank you so much for a briefly great to bring her in with the technology side of all this. John Faroe and John Norman, John Norman, JP Morgan had across asset

fundamental strategy joining us. Now, John, do we have a currency war brewing? I don't think that's the main issue. I think we definitely have a trade war, which is intensifying the currency consequences, But the the main focus is really trade when the president pushes back against the strong Goodalla, what is that? I think it's a reflection of his

lack of understanding of the linkages amongst his policies. Is very difficult to have tax cuts which are boosting growth and have tariff policies which are pushing down e M growth and not get a strong dollar. So it's it's not obvious to me how he's going to square the circle. If he wants a strong growth through tax cuts, he also wants his very punitive terror policy, but he also wants a weaker currency. January anywhere near inflection points in selected pairs, like if I say yen one eleven oh

five or euro one? S are they in the vicinity of JP Morgan important points? I think you're closer to an inflection point, or I think you're actually tracing an inflection point in the euro. I'm not sure we're tracing one and a yen yet. I think for the Euro a precondition for the Euro stabilizing and and maybe as you hire into year end was that the day to

improve in Europe. And that's happening, and and the reason that's important is because it will reignite the debate about when the USA we should hike for the first time next year. But yeah, and I feel like it's still gonn a week and somewhat because we do have a FED which is pretty minded to hike in September and keep going after that. So I think, if you have to choose, you know, one of these to be bottoming

versus the dollar, it's in the euro. You choose before the end, John, I've got to do a surveillance correction, John Farrow, I said the late great el Hard. I was thinking late because he used to come in late. But the first one and the I can't even I did not even great, not for a moment, did I actually think that's what you meant. I noticed it in good old Marty Schenker said, Tom, you've got it. Has this message? Now how messages? Thomas says, I'm still here.

I was talking about late into the office kind of that got lost in surveilling. You gonna have to pick this up, while says John, why don't you guys save us with John Norman, John Tucker or me. After that one, it's pretty much all down there. There's three Johns around it. Say well, John Norman, um, let's get you back into the conversation and let's talk about China. What is your

reading what is happening with the Chinese currency? Is this the Chinese set of authorities that are just accepting, get tolerating a weaker currency. Are they trying to engineer something? What's happening, John? I think what they're trying to do is stabilize the economy, which was slowing, and they're doing that through monitor easing. And if you do that at a time when the fet is tightening, you're more than

likely get a weaker currency. So even though the weaker currency is not the first order objective, it's a consequence of their monetary policy decisions. So I think this is a pretty ordinary move. Um. I think the tough call is deciding how much weakness they're willing to tolerate as the easy monitor policy, because they're much more minded to tolerate very modest weakness five percent brandum versus a number of other emerging markets which seem to be much more

comfortable with ten moves. So I think this is going to be kind of a low digit, low single digit move for the for the year, and you've had most of it already. But if they keep easy monitor policy in the side keeps tightening. You know your biases that the b is gonna edge lower, John, so far this hasn't been that disruptive for global markets relative to what we saw in the summer of fifteen, And why not? Why is this different and you expected to stay this way?

I think some of the differences is that the the economy overall is in a firmer position. In in China, their newer growth sectors that have been offsetting an investment slowed down, and I think they're also um has been a recognition that China has a fourn exchange reserves to

control the speed at which the currency declines. So these to me are reasons why you can have a low volatility moved down in the Chinese currency going forward, rather than the sort of higher volve, more disruptive, contagious type move that we had in two thousands fifteen, John, how's he am doing? If I look at a d X, why the Pacific RIM Index X Japan? If I look at your JP Morgan Spot Index of EM and all,

how's the m faring right now? It's fairly mixed. I think there's clearly divide opening up between the Asian currencies, many of which are making new all time lows every week, and uh other currencies, particularly that in America, which are more stable, and it simply reflects different countries specific drivers. Mexico is looking a little more stable politically. That's why the currency is farming. Asia is clearly in the line

of fire of the Trump administration. So I think if you look at broad in disease that it can somewhat mask the underlying stories that are a little more interesting. There's that there's a whole lot of branciation play here. This is really important. John. I agree with you where you say ages in the line of fire, but my news low tells me Europe's also in the line of fire. Is Europe the new Asia in terms of trade upset? I don't think quite yet, but more in terms of

magnitude than that. In terms of focus, it's clear that the Trump administration has has labeled Europe of foe, but it's not suggesting that it's going to pursue a scale of terrorists on the order of what is pursuing with with China. So maybe it's just early days and Trump hasn't recognized all the things he could do with respect to Europe yet, but it looks like China is a is a primary enemy, and and and the main focus,

and Europe is a slide slide show. But you know, there's no guarantees that that Europe can sort of leap frog into the into the spotlight in the next couple of months. John Norman, thank you so much, greatly appreciate that. Right now, Pim Fox and Tom Keane with you this morning, we have a spirited conversation with three kamar as you look at the American economy. Three I'm putting out on Twitter.

You'll see it first on Bloomberg Radio. The separate lines of service sector inflation, which every single listener knows is substantial, think three point one percent, and it's essentially been there forever, uh, a lot of inflation every year in service sector, and then goods deflation, which has been pretty moldy going back, you know, good good fifteen years. But with a new leg up right now just below a zero percent statistic

negative zero point two three. With all that's going on, are we going to finally see goods inflation, particularly because of tariffs slash taxes. Yeah, that is the danger I think eventually to both the inflation and to the bond eaves. Tom shot, it may not happen within the next six months because the global uncertainty is more likely to affect total demand and then slow the pace of economic growth.

But if the tabs persist into twenty, then the higher cost get passed on at the wholesale and at the retail level, it passes on in the form of higher inflation. And then you have also the bondies going up. That is, then you have the true risk in tw of stag inflation similar to what you and I remember from three seventy four. You have a severe contraction in the economy

as well as prices going up. Then it was because of a surge in global oil prices, and this time it may be an artificial increase in prices coming out of the trade sanctions. So what you say, Tom, is a real danger in terms of good inflation for twenty but I see the next few months as being relatively benign. On that net, on that framework, we can break out our whip inflation. Yeah, where I still have them somewhere in the in the drawer at home. And you know three,

you know, I'm glad you used that term. Remember, you know, casting your mind back into history, and I'm wondering if you could just digress for just a second. And you know, you used to work at the Trust Company of the West.

You went to Columbia University as well as Delhi University, and now you've got your own firm, and I'm wondering if you could just offer some insight or detail as to what it was like to make that switch to running your own shop and what you can offer to people who may be thinking of doing the same thing in their own specific discipline. Thank you, Pim. I'm happy

to do that. The first thing I think that helps is to have a little bit of experience behind you, so that you do not want to start out very fresh. I did try some thirty five years ago to start my own consulting that was on Latin American death in the early eighties. The first year and a half was tough. Going beyond that, once people found out that this was a new area that the debt crisis was going to continue, then the client team very quickly developed. The second time

around has been a lot easier. It has been easier because another thirty five years have passed by. So the advice that I would give is. First of all, make sure, especially if you're younger than me, to have enough of a bank balance to hold you through for a year and a half to two years, even if you were to go easy on your spending. Second, keep your roller decks open, keep in terms of talking to different people

in the same area. And Third, I would say stay very focused rather than say I'm going to be all things to all possible clients. Decide where your strengths are, focus on it, make sure that there is going to be enough demand for those services, and stay focused in that area. Those would be pim very much. Three or four pieces of advice that I would pass on very useful. I want to pick up on one thing you've said, which is a new area. At the time it was

Latin American debt. Would cryptocurrencies be a new area? Should people be looking for that new area now that I think there's a significant difference. When in the early eighties, when the debt crisis took place in Mexico passing on to other countries, you knew that these countries eventually we're going to come back to health, but you knew the crisis was going to be for a long time. I

wouldn't put cryptocurrencies on the same plane, Pim. The reason is, I think it is more comparable to the Dutch tulip mania of sixteen thirty seven, that you just bid up the price substantially until eventually the whole thing just drops out. If that's the case, you may have a future in looking at specific countries because as my old City Bank, late chairman water Riston used to say, countries don't go bankrupt.

But that's not true of a cryptocurrency. And that's where this job could come to an abrupt end if cryptocurrency alone turns out to be the focus of the new consultant. Come on, you mentioned sixty seven. Let's drive forward all of fifty years to sixteen eighty and I use that really one of the essays of the year. Katherine Rampa on the Washington Post doing a nice clinic on mercantile is um? Is that really all we're talking about, Kamal is the president's nostalgia for a zero sum mathematics and

non marginale within economics where we're just bombarded ourselves. Back to a discourse from free Revolutionary America. That's a good comparison, Tom, because again, when you go back to mercantilism. It was always a case of beggar thy neighbor policy because trade was seen as a zero sum game. Your trade surplus is my loss, so I have to have a trade surplus and inflict a deficit on your country. That seems to be again the very same principle that's being done.

Trade deficit is seen immediately as having been cheated out by the trade partners. Um that is not going to work. Mercantilism simply didn't work because it led to too many trade conflicts. Mercantilism was again tried tom going even futured into the future from sixteen eighty. It was tried in nineteen thirties the Smooth Holly Tariff Act of June increased

tariffs in the United States. The objective was a good one to try to protect American farmers, and but what it turned out to you was to cause retaliation by the trade partners, and very soon there was no victor. And so my fear here is unless we change the attitude, if we continue with the milk untilist policies currently, there will be no no victors. And particularly the global recession

that people fear may become a reality. But sure, you said earlier that the U S economy is basically self contained. The US economy is self contained. But what happened, But still you have a significant chunk of large companies them SMP companies. You're talking about forty five to fifty of earnings coming from abroad. That has a hit. So what happens now is that even though exports are a small part of the overall economy, for some corporations, they are

a big part of earnings. So eventually it then feeds down in terms of reduce most employment, reduced hiding, and then it shows up on in terms of the stock market behavior, and then there is a fallout on the overall economy. So you don't have it immediately as an export GDP ratio measurement PIMP, but you have it when you look at the secondary and tertiary effects of the changes. This has been wonderful. Thank you so much for your

work with us here at Bloomberg Surveillance. Greatly appreciated. Street Comar on the American economy. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane Before the podcast. You can always catch us worldwide. I'm Bloomberg Radio