It's Still a Goldilocks Environment, Meyer Says

U S products including soybeans, automobiles, chemicals, and aircraft. This in response to proposed American duties on Chinese high tech goods. All of this in the last twenty four hours. To draw a distinction, a line between what is the proposal and what is actually policy, Chris Rapki joins us now MFUG Union Bank chief financial economist, Chris, Let's drain the draft just for a moment and look at what's on the table. Is this a negotiation or the first shot

of a trade war? Yeah, I mean it sounded like China was just putting this out here, this is what they could do, but they didn't announce the date of enacting these tariffs, So it sounds like both sides are hitting each other pretty hard. In terms of rhetoric. But we're aways away from finding that exports between the two countries are going to slow down. Here, well, let's go, let's go into what's on the table to The United

States has unveiled proposals for tariffs. They will be discussed over the next sixty days, and the Chinese have said, here are proposals, and in sixty days, if you implement these tariffs as policy, we will respond and this proposal will become policy. This seems to me, Chris like high stake negotiations for the next sixty days. Would that be an accurate description of what it is? Yeah, it is high stakes, I guess one of the one of the problems is that the president and his trade advisors have

have drawn a line in the sand. It's almost a campaign promise that he's not going to back off of the president and that is they there's a three seventy billion dollar deficit in goods trade deficit in goods between US in China. He wants to cut that by a hundred billion. Well that a hundred billion out of three seventy five. That's a big, big number. I don't think

he's gonna get that, So that's problem one. The other thing that disturbs me that may make this story have some legs besides just people pounding the table is the intellectual property idea. The fact that the administration seems to be going to bat for US companies doing business over there, doing joint ventures that they don't own, giving up their technology secrets to China production secrets for the goods they produce, and then walking away and getting nothing. That is more intractable.

I don't know how they're going to resolve that, because that's like a thirty year trend towards that. How how are they going to reverse that? I don't know how. That's good. We can get into the China made proposals a little bit later with you, I'm sure for me, what's on the table from the Chinese was was a little bit of a heightened rhetoric kind of move from the Chinese themselves by bringing soybeans into the conversation. That's

an escalation politically speaking for the United States. What's ironic about this whole situation is for the United States, they are reciprocating their own move from the Chinese tariffs of their own and the Chinese are saying well, it's only polite for us to reciprocate. The irony of that is is that it's the United States doing the reciprocating here and it's the Chinese escalating things. Would that be Would

that be a decent read of what's happening here? This is an escalation from the Chinese, perhaps more from the United States to bring soybeans into the conversation. Yes, and

it happened so quickly. It happened very very quickly. And I think what they're doing is they're reading the political tea leaves for the president and saying, you know, the heartland of the country year supporters produced soybeans, and they're going to go out of business if you can't offload these crops to somewhere else in the world, which of course they can't. So I think they're needling the president directly.

I mean, John Farrell, I thought your data check was great, and yes I'm watching doll again as well, John, One of six eighteen is really not correlated with no In fact, you know what my take is this morning something the real price action is just sort of isolated into equities. It's an equity volume selected a real risk of story broad based risk off would be a big bit at the front end of the tracery curve and a market deciding that we're going to price out hikes right and

see that right or wrong? John, What I've emphasized this morning is the complexities that are out there. Chris Repki Michael McKee had a brilliant observation that the China US back and forth on soybeans. Good morning all of you on serious SEXEMP Channel one nineteen in Iowa is Argentina because at the margin, I believe Argentina's the number two exporter to China on soybeans. So there's a game theory read to this that Dr Navarro and President Trump seemed

to downplay. Where are you on the game theory the tip for tip of trade, I mean, it's a proven fact. There's a game theory, right, yeah. I guess what it illustrates is that there, you know, it's very difficult to be a winner in this environment. I mean, if you go back, didn't we slap some trade tariffs on I believe it was steel in the Bush administration which ended

up coming back off. I think the problem is that it looks good that you can pound the table and put on a tariff, but it doesn't work like you thought it would. And and again, by trying to do this, you're trying to interrupt a trend towards globalization that has taken place over three decades. You can't pound the table and say we want to change it now. It's you don't reverse something in one day that's been a thirty

year story. The problem is though, it's the Chinese haven't been liberalizing here, Chris, and at some point someone has to stand up and say enough is enough. The Maid in China program, and I promise that we would get there is a very very transparent program of the Chinese to say to the rest of the world, here the

industries that by we want to dominate. Now. I think it would be pretty naive for the rest of the world to stand idly by and talk about glorious globalization and free trade while the Chinese keep their protectionist barriers to entry up and say, look, guys, in five we're going to dominate all of these industries. Enjoy your free trade, enjoy your globalism, and in your wake up and we'll be leading the world. Why should you stand by and just let that happen? Chris? Well, I guess that's what

we're seeing happen. By the way that the way you painted, it's almost frightening, isn't it. It's kind of it's the battle of who's going to be great again? Are we going to make America great again? Is China going to become great? There has been a completely naive, naivety about the administration has gone by in the United States from America for the last twenty years about this Chris. There has been a wish, some optimism that the Chinese would wake up and be more like America and be more

like Europe. And the message of the last few years is that is just not going to happen. Isn't the president onto something here? Yeah he is, but don't forget it's going to be very They can say they want to dominate certain industries, but it's not necessarily going to happen. There's a lot of cars coming in from South Korea right now. I don't see that changing. Um you know, I know China wants to develop to develop their own car industry like trucks and try and export those goods

to the rest of the world. But it just saying it doesn't mean it's going to happen, So I don't know. I mean, I wouldn't go too far with the story on the part of China taking over the world. John Ferrell, how far did you grow up from Lancashire? Is that the said it right? They have a small team that was Red Liverpool. Well, now that's what you've got to live up. And then you've got Manchester United. Manchester United is in Lancashire, Mancha Manchester United is more of a

Lancashire type of club. I did not know that it's more than Northern. You probably have more money. United supports that. I just pronounced it like John Lennon because of the son Chris roski Let's lecture Mr Farrell on the Great Debate here and John brings up an absolute classical economics take we all learned from William Stanley Jevons of Lancashire,

England a million years ago about marginalia. How does the inherent Washington Trade Group explained to the president the marginale of William Stanley Jevons that the next action is more important than John's good idea of getting the marginal trade dynamics work right. Yeah, I mean, well, I mean to me this just shows you how what a slow process this is going to be. And if you know, there's nothing slow about the president at John's point, I know,

but he wants that. But it's just, yeah, it's going to be very slow in occurring putting these tariffs on, seeing if it adjusts the trade flows. I mean in a certain fashion. I mean, uh, tariff, maybe that's not going to slow the exports coming in as much as you think as well, we don't. We don't know. There's so many unknowns here, Chris Rocky, We've got to leave it there. But great have you with a semifug Union Bank chief financial economists. Let's just raise the question why

is BMW starting production in China? Should I tell you why? Because you have to produce in China. Otherwise, if you import those BMW's into China, you face significant tariffs for bringing luxury autos into China. It's because they have significant barriers to entry that many of these manufacturers have to actually produce in China. And this goes to the heart

of the debate. Tom in Washington, d C. The heart of the debate is that the Chinese needs to open up, and this is what is happening Michelle Meyer with No Bank of America, Mary Lynch on international economics and really how it folds back into the g d P of the United States of America. Michelle, you're expert on American housing, but you do a lot lot more for Mr Harris and company. Do you change g DP models off of nasty trade tip for tat Eventually you do. UM, It

just depends on how severe it gets. So for right now, our simulations of what's been put into effect thus far suggests a very small impact on the aggregate numbers UM. So it is a bit more inflationary, but um, you know, we're assuming somewhat limited paths through to overall consumer spending from this increase in in in and import prices UM. And then in terms of aggregate trade flows, again, it's not a huge number that's going to move the needle

very much. So potentially it's light drag to GDP growth,

potentially a slight increase in inflation UM. But where it becomes obviously a lot more problematic if it persists, if we continue to see this back and forth, is retaliation UM, where we put something in place, trying to put something in places other economies put UM some some sort of trade specifications in place, and it also ripples through the financial markets, and then we have a whole different ball games, Michelle, assuming these proposals actually get put in place and they

actually become policy, I'm going to ask that really horrible question that economists have to answer, the percentage chance that actually these proposals become policy. Do you have any idea right now? Michelle, we don't. We don't, and luckily, as

you know, as economists, obviously we have to do different scenarios. UM. But my approach in this environment where there's just been so many political unknowns is that I wait until policies have actually been implement did before we put them explicitly in our forecasts. Because there's so many moving parts. The headlines are changing a daily basis, so trying to calibrate

your forecasts UM in real time is just virtually impossible. Well, ultimately, Michelle, you'd be kind of righting your forecast at a risk of something happening. Does the risk of something happening damage risk appetite in any way? Does it damage the economy as opposed to the reality of something happening. Well, again, that goes into the linkages and and the risk factors would be shown through financial conditions rather than the real economy.

So until the policies are put in place, for the most part, economic actors are not going to change their their models. Maybe you have an uncertainty shock, you have some draw down in terms of production, or some concern in terms of how how companies are are are allocating their capital um. But really, until you have the actual policies and you have the clarity on what those policies look like, it's hard to say that you're going to see a reaction in the real economy. And your micro

analysis was the first quarter we're getting huge invariable opinions. Yeah, well, the first quarter is plagued by residual seasonality and that's what's happening now too. So GDP growth is tracking sub two percent um. We're talking about one point seven percent for GDP growth UM, and that's not so surprising because we've seen it year after year, and you continue to have this divergence between what the GDP numbers are saying

versus job growth. Job growth is very strong and GDP is very weak, which means productivity growth in the first quarter was John I saw residual seasonality open for Elison Crows there there were outstanding You're but honestly you're out of control this morning, Michelle mar you talk about GDP track and staff of two percent. What's your base case

for the rest of the year. Because a lot of people would talk about this firm macro backdrop and that the fundamentals are still okay relative to expectations, things weren't okay through Q one. Does Q two look better? It does a little better in our opinion. How does it look better? I'll tell that we're looking for a rebound to mid three percent pace on for the following reasons. UM one is we do anticipate the consumer bounces back in the second quarter, and I think that generally speaking,

conditions are favorable for the consumer. We've had strong job worth, we've had hints of wage growth UM consumer confidence measures are at very strong levels, and tax cuts kicked in UM in in their early spring, so UM that should

then further boost consumer spending. They've already brought back their savings rate to a bit of a higher level, so I think to get that strong rebound in the second quarter, the onus is on the consumer UM and for right now, our expectation is that the consumer will show through goldilocks growth, Michelle, Is it over the story of low inflation and really stable output numbers out swhere? Were we're gonna be talking

about that Friday? Um? You know, I think it's still largely an environment of goldilocks growth in that I don't think we're going to see big inflationary press sure's this year? Um? So you know, again to find goldilocks, is it three growth, three and a half percent growth or something softer? Um? I think it will end up seeing something a bit softer than that. So, yes, momentum will still be there.

We will still see output improved. Um. And I don't think we're going to have a real inflation scare the next few months. Though very importantly we should note the base effects are favorable for core inflation, so we're going to see core inflation trend up on a year of year basis. But I don't think we're going to see signs of consecutive months and months surprises. Let me go to let me Michelle, let me go to what made you famous, which is housing dynamics. What is the elasticity

or responsiveness of the thirty year fixed mortgage rate. Is that a fossil study or do you get value in gaming American housing by looking at what happens when we have higher thirty year fixed mortgage? I mean, I think you have to look at mortgage rates when you're analyzing the housing market. It's an important input as this um income creation and expectations for future income creation and where you are in terms of evaluation. Home price is relative

to income and rent. So mortgage rates certainly a factor, and that is certainly a factor that said it higher, and it's it's potentially, you know, weighing on affordability. Now. I do think there are offsets from the fact that income creation has been stronger and that confidence generally speaking around housing has been strong An important fact when you think about home price appreciation and how mortgage rates are

going to feed into that is the supply side. We still have a very thin market in terms of housing supply, so even an environmental mortgage rates are heading higher, it's obvious that's going to curb home price appreciation when you have such limited supply out there for the majority of the country. Michelle Ma, great to have you on the programs.

Thank you for for Bank American maror Lynche. It is great to see a Bloomberg people go viral is Shira overdate did two days ago where they're brilliant work on Spotify and on their interesting transaction. Everybody picked you up, Shira, Mike Gallen over to a CEOs, gave you major face time. What was the distinction of the way you approached this novel transaction? What set your gad flight coverage apart from all the other bladder that was out there. I appreciate

the compliment. That was very flattering. Uh So, look, one thing that really struck me yesterday as everybody was declaring victory about this unusual not I p O stock listing from Spotify, is just how few shares traded out of the gate. So normally, if you have a conventional ip O, companies look to sell, you know, a healthy percentage of

their total shares, something like and Spotify. Again, it's not a conventional I p O. So these rules are a little bit different, but at least out of the gate, Spotify sold fewer than six million shares on Tuesday, which was about three percent of total shares that standing. I get the idea that the tech people are playing by their own rules. It's like class A, class being A, it's like Class A class Z. There's all sorts of

stuff we go into. But the heart of the matter is Wall Street was boxed out of a traditional transaction, and yet you, in a select group of others say, wait a minute, they weren't. Goldman, Sachs, Alan and Company and others were actually involved. How can you have it both ways? Yeah, I agree with you that the narrative about this not I p O right, was that Spotify, uh defied conventional wisdom. They cut out Wall Street, cut

out Lloyd Blank find right. They had three of the most prominent tech financial advisors working on this transaction, as you said, Allan and Company, Golden Sacks, Morgan Stanley, and they paid them thirty five million dollars, which is a lot of money. Yeah, but that's what Farrell gets for a week er review. I want to understand. This is critical. This is the dirt of the industry the way it works. As you call a black Rock, pim Cone, Fidelity and six other victims, and you say, what do you want

for this dog? They set the price? Did that really happen here? Even though we're all pretending it didn't. Sort of so, I mean, I thought there was a really interesting details in our colleagues. Alex brinca story yesterday which was basically the bankers spent many weeks before the not the stock listing of Spotify calling up both owners existing owners of Spotify shares and potential buyers of Spotify shares to see at what price sellers might sell, and and

took canvas for potential buyers. The real breaking news head at Tom Kane has stood up for this conversation in the studio. This is the first time I've seen you stand up for a story. There's a quality of lunch at the road shows, and Touch companies are notorious for not to mean like a real lunch. You always leave hungry. But John, what she just said is critical, which is there was really a pricing discovery going on, even though everybody was standing around outside of the price discovery share.

The real story here, for me, at least from my own perspective, is that it was another tech company that didn't actually need to raise capital because they've been so well shounded in private markets. Isn't that the future here? We'll see? So A, I'm not sure that Spotify did itself any favors by not raising money. So this is a company that, yes, they have been cash flow positive, but they have ambitious plans to branch into new businesses

that's going to require investment. So I do wonder if down the road it's going to look like a mistake that they didn't choose to raise money when they could have in a in an I p O um. But you're right that. I'm sure other tech companies that you know, like to defy conventional wisdom, or like to pretend that they defy conventional wisdom, will look at Spotify's direct listing

and want to do the same. But the fact is, there aren't that many prominent tech companies, private tech companies that have healthy enough financials to go public without raising money. So Uber, you know, notoriously wildly unprofitable, you can't do a non I p O kind of event. Assume there's no rush for them to come to the public market to raise capital, because despite Uber's problems, sure you've you've picked up on this many a time, people throw money

at them. Absolutely, and I think that is true of you know, a small elite category of private tech companies. They don't need the public markets to raise money, Sure Overday. It's been great to catch up with you. Some tremendous, tremendous columns coming out of Bloomberg, Gadfly and Shara in front of the Pack For me and Tom, I have to say, I've never seen Tom Kane stand up for a story in the Student. I'll take it as a compliment. I've never seen that baroness over date. You gotta shure

some credit. I mean, folks, this is what it's like. I mean, shares in the wrenches on this thing. And she gets global pickup of you know, amid all the eighties seven other articles that were out there, which is very good. Sure of a Day on Spotify as well. It is good to get a calm and reason voice in here with the tumult that we see in economics

in the markets. Stephen Friedman is with BMP Perry. But Stephen, I want to go back to a meeting I had over a decade ago in Beijing where the senior management of Paris be and p Perry bout Line being up with one of your chief representatives in China, and it was a private and scintillating conversation on the new capitalism of China. B mp Perry bid has an absolutely unique China view that really goes back more than two even three decades as well. What does your Asian death USK

say about the Chinese view of these terror force Uh? Well, our China economists believes that the response from China will be um proportional, but ultimately keeping the doors open to negotiations. And I think that's what we're seeing so far in the response from China. Yes, they're clear that they will retaliate, but there's no date. There's a sense that we should be talking this problem through. It's supposed to jumping right to tariffs. You were at Wesleyan and Russian studies. You

then did initiate the Johns Hopkins University. And part of this is time function. China has a far longer time function than any president of the United States. Do they just wait President Trump out? I think it's challenging in this situation because when I look at the Trump administration, it really does have this America First trade agenda, and we have a president who is relatively impatient on this front.

So I think the administration is serious about moving forward with tariffs if absolutely necessary, and I think China would like to ds late the situation, and I think they're very willing to negotiate. Does it put a damper on economic growth in the United States if you had to bring in a few tweaks your g d P numbers.

Not yet. No. I think if if we can steer a road towards negotiating on some of the I P practice UH questions, technology transfer, market access, that means that in the end, actually this could be enough positive for the U. S. It's a question of whether we can get there without going down the route of tariffs first. But as of yet, I haven't had to tweak my forecast.

I think what would be um I opening in near term is if there's a sense that this is going to escalate, you have further declines in the stock market. There's a shock to business confidence, and that ultimately reigns in business spending and hiring. Because Q one, the estimates I'm saying, you know, is a general statement all over the place. I mean, nobody really is a hindle on it. Is Q one a one off in the United States? Is that, just like now a permanent theory that first

quarters always nudgie. I think they're a little bit less confidence in projecting first quarter growth, there's a sense that there's some residual seasonality in the data. So I think we, along with many others, tend to look through any weakness uh in the first quarter numbers, seeing that a lot of the other indicators, survey data, for example, tells you that the economy is on a strong footing UM. I look at the FED in the certitude to three slash

four rate hikes. Guy Johnson mentioned today offer London Desk that European inflation once again came in maybe on planning even a little light. How will chairman Power react if we don't get the inflation pick up everybody's presuming. So I think he's a bit different from yelling and that he's really more in the show me camp. He wants to see evidence of inflation moving higher. He's not going to move rates higher just based on what a model

tells you inflation should be in a year. That being said, but we are seeing some strength in the inflation numbers as of late, and I think we get to the end of the year, core PC inflation should be a two percent maybe even two point one person. Now the question is whether that lasts uh UM beyond this year. Some of the strength that we've seen recently, it's likely to fade. For example, where is the strength services are goods, So it's been in service is very consistent, it's really

hasn't lifted or turned around still and still basically in deflation. Yeah, so it's really a service of story, and we know that dominates the price basket. Where we've seen strength recently is in healthcare services. But that's that tends to fade over time. You tend to get these increases at the beginning of the year when the government resets Medicare parts

Medicare prices. So we're getting almost like Europe where we've got union or quasa union labor resets which filter into the numbers in this case in terms of medical care inflation. I think that's that's exactly right. But the mix of this for our listeners that are buffeted by by the news flow in the president's tweets, whatever their politics, they agree or disagree with the president. I go back to a cross st data check is John Farrell mentioned today.

It's full disclosure. It shows calmness out there without the new equity volatility. Do you do that? Do you separate the equity tick by tick from everything else out there and what it says about our system I do I I tend when there are there's breaking news like this, I tend to look first at the bond market. I think that gives me a better sense as to the level of concern out there. And we're seeing yields this morning are just down by a basis point or two

across the curve. Within this again, is I guess the idea of going back to the Fed. And we've got John Williams coming over to the New York Fed. He does a thing called our Start. We let our coverage this morning with what is our start? I guess it's an inflation adjustment? And what to expect with John Williams our starret Are we going to a lower terminal rate where the new three point four percent g d P is under three and even something lower? You know? I

don't think so. I think, Wow. What Williams has said is that, uh, the neutral FED funds rate is probably low by historical standards, and we'll remain low, but not not going lower at this point. If anything, I think there's a little bit more confidence on a committee that with the tax reform efforts increases in investment, that trend growth could be heading a bit higher. That might pull up the long term terminal FED funds. And then what's really cool it maybe less to me and our listeners,

is productivity. And I go back. You know, it's almost like every other discussion is horse and cart. Does better economic growth make America great again lead to better productivity or is it the other way around? I think that I think it's an open question, to be honest. I think there is some suggestion that perhaps a pretty hot labor market and scarcity of labor could lead to investment that will improve will improve productivity over time. I think

that's the car and hope. Uh. In the final time we've got you want to circle back to the news of the morning, which is the Terroiff's obviously in China, and that is in this folks. The late wonderful Alan Meltzer of Carnegie Mellon would take my head off for this right now. Alan Meltzer always said, aggregate the American economy. We're not smart enough to disaggregate. What the markets doing today is they're disaggregating Iowa and soybeans. They're disaggregating Washington

State in Boeing aircraft. Can we do that in the modern economy? Can we disaggregate to the labor effects of Senator Grassley's Iowa or do we really still have to stay all in holistically as clearly as the bet of the president. I tend to look holistically and think that the scope of what's been announced so far is relatively small.

But it's important to go down to the details as well, because we know that the tariffs that that are aimed at certain sectors that are politically sensitive can have longer term repercussion. Should I just call him import Texas? I mean, we're I read this and I don't remember it right now, folks, but there was a point somewhere out there where they invented the phrase tariffs two smooth the text word. It's an import text right, pretty pretty much so, and Trump

has actually used language like that. I think he's often called it a reciprocal tax. Okay, well, well, how's this going to play out? I mean, it's tipped for TAD and that's easy media talk. I know there's going to be a delay, there's going to be meetings and all that bologna. The markets tell us this is playing out right, now. Yeah, so I think we should expect more announcements from the administration on trade just to get that even going beyond China.

But as for this specific set of measures, there's a lot of time for negotiations that the administration isn't actually committing that it will definitely implement tariffs. So there is a way through this. So I think we can be cautiously optimistic that maybe there is an agreement reached through negotiations over the next several months. Stephen Freeman, thank you so much for the BNP parabout uh this morning. Wonderful to have him in a huge day of new slow

Thanks for listening to The Bloomberg's Banlast 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.