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Dominating constem with a holistic view on the economy, Your note is breathtaking pushing against the gloom is a regime of lower rates from within the ambiguity of all those dynamics. Is it a positive trend of lower rates or a grim tend of lower rates?
Well, I think the idea is the economy is under a transformation thanks to the policy of the new administration. That transformation involves basically rebalancing away from the consumer, if you like, towards investments and nests, exports.
And what goes with that.
Actually, first of all is a weaker real exchange rate, a weaker real effective exchange rate for the dollar. And then as regards interest rates, it's sort of like not necessarily lower or higher, however, it is steeper in terms of real terms to real rates. So the idea is that in the end we're going to have a very low real funds rate and a relatively elevated if you
like long term real rate. And so when you ask the question, our rates lower, there's a pivot point and the answer is yes at one end, but not necessarily at the other.
I hate you you send in a thirty six page power point.
Nothing's changed since you and Irah Jersey at credits we few years ago. What is a distinctive slide in your thirties six page PowerPoint?
What's the one our listeners and viewers need to hear about.
Well right now in terms of the evolution of the economic outlook, the main point is that inflation is relatively benign now and if anything, it could actually go down a little bit more in the next quarter or two. However, there's a lot of risk that inflation actually goes back up again at the end of next year. So the idea is that the FED has a window to cut rates. So our sort of mantra is cut and rais the FED should be cutting rates suggressively. I don't disagree with
Stephen Myron. However, they need to be prepared to raise rates at the end of next year, if not in twenty twenty seven, which sounds a little odd, but that's kind of the nature rates. Get them down and you may have to take them back up again.
You mentioned mister Myron in my conversation with Waller of Bemidji in Washington State. Does Dominic Constant have a favor to be FED Chairman?
Well, I sort of feel risk reward in terms of giving some sort of confidence at the long end, sort of favors someone like Kevin Walsh. I would think, I know, I mean, I think a Hasset would be would be fine too. I just think some of the ideas that you know, the FED needs to have a radically different, you know, different approach.
I'm not not sure you know that that's going to.
Serve the administration very well right in terms of long term interest rates having.
Get one more in Isabelle's ready to go? The answer is and Waller was big on British descent. You've lived the descent of the United Kingdom. There were fistfights at Cambridge when custom was was there. Should we have a more fractious FED dialogue like the Bank of England.
I mean, doesn't doesn't hurt having friction among the different members? Absolutely not. I mean, but you know, at the end of the day, that they need to. I think absolutely they need to retain inflation credibility, and to do that you probably want a more U fide approach around that.
Daminic Houston with US of Mizio this morning, here's Isabelle.
Isabelle, let's talk about your big, big thesis, three percent FED funds rate before Powells term ends, and that's a bold call a special win. Market pricing are still hesitant when it comes to aggressive easing. What's the key catalyst for the FED to speed things up?
Then?
Well, I mean, clearly the balance of risks has shifted in terms of the labor market. And I think the thing that I look at that i'm sort of I find very compelling is if you look at the unit profit data for corporate America, and this is kind of domestic corporate America. We're not talking about SMP, of which half of it is sort of international. We're talking about domestics. There is absolutely no pricing power for domestics and you see that in the data, very very little.
And that means that.
All of the cost pressures that come from say tariffs, that they're being absorbed effectively, and that leads to other forms of cost reduction, which is really in the labor market. So it's all very well to say that, yes, you know, job creation is lower because you know of the immigration thing of reversing, et cetera. But at the end of the day, companies are being obliged to cut unit costs where they can, and that is on the labor side. And the risk clearly is that what is currently a
weaker aggregate ours worked. Clearly, the riskers are going to be laid off at some point, and we have.
Lauri Logan floating removing the FED funds target entirely. And you seem to agree, what's the argument.
There, Well, that's a brilliant question topic and it's very interesting, and.
I'm saying my questions, yeah, continue with well after something out there, just you know, basically, not a lot of people are buying treasuries, Let's be honest.
And there's a lot of treasures supply out there. And when I say not a lot, it's obviously foreign demand seems to be waning from the traditional sources. Banks are buying more treasuries. There's definitely a whole push to get banks to buy even more through deregulation, but the big treasury owners believe not are.
Through the basis trades.
It's obviously showing up in terms of a non bank financial entity that are buying a lot of treasures. And in a way, you know there's nothing less say wrong with her because you know there's a liquidity risk, but there's no sort of duration risk. They might eventually be credit risk, but you know, why not have you know that expanding If Laurie Logan goes out and gets sort of the funds targets and targets repo, you actually take away a big sort of liquidity concern for the HESH
funds that are doing this trade. And in a way it might be another avenue by which you get a lot of treasuries absorbed in non traditional areas and you don't need to rely on the Chinese, for example, all the Japanese to buy our treasuries.
Dominic Caustim with us, and we continue here he's with the Miszoo and extended conversation.
For Global Wall Street Isabelle Lee.
I have real trouble with the Meyron certitude and others. Given the Newtonian plug and chug of the tailor rule. We really don't know our start. I told Wili. There's two our starts for this split torn as under America. We don't know the output gap. How blind are we Dominique right now?
Well, I think we're always fairly blind.
But the best way to discover neutral rates is always is the way.
You know.
It's like driving the truck and you sort of know the you sort of vaguely know the direction, you know the speed, and you think you're going to know where it's going to end up, and if it doesn't, you recalibrate. That's how our star is basically calculated. So basically, if you cut rates, you know, down to say two percent, instead of leaving him around three or three and a half, then you'll know whether neutral rate is substantially higher after
the event. But you know it's a little bit hid and missed, but you can you'n always raise rates if you need to, And that's kind of how I would see it. So the balance of risk kind of tells you you should do more. And then, let's be honest, there's another side to the interest rates story, which isn't just about calibrating interest rates perfectly for the labor market or even inflation. There is a side of this rather nasty sort of debt service sort of spiral with the deficit.
You kind of you are obligated to some extent, say, look, have shorter rates and let's maybe finance more.
Can I go mathy? Let's go mathy and debt service? How nonlinear is it? I mean, if it's an accelerate through a higher yield. Do you have in your head where we lose the linearity of the calmness of debt service all of a sudden boom?
Yeah, absolutely, it gets very nonlinear. You in take Japan, I mean, Japan has short rates in thirty years time that are like six percent.
I mean that's crazy.
I mean they blow themselves up completely if that were to be realized. And that's in the forward markets. You take countries like France, I mean, they have big issues at the moment.
The US does not.
The US is not quite as bad as that, but it could be as bad as that if it's not careful. So it must get on top of the debt service, especially if it's finding it too hard to cut the deficit in other ways.
What about when it comes to tariffs.
Your read seems to be the tariffs are being absorbed quietly for now, we have profit margins weakening, but prices staying benign. What will happen though, when consumers run out of purchasing power?
So well, first of all, I mean consumers obviously have taken a bit of a hit on tariffs. I mean clearly consumptions running in a few hundred billion below let's say trend, but not nearly enough to be pushed into recession. One thing to bear in mind is we've only really had half of their potential tariffs we might get. You know, the China truce is extremely important, and if it continues, and then that's that's the sort of good thing from
that perspective. So I think the only other the main thing though, is really that profit margins are so large in the US and the domestic you know, US sort of economy. They were large when COVID because of egregious sort of you know, pricing power if you like, that, companies were able to sort of extract really because of the fiscal stimulus. And in a funny way, what the tariffs are doing is by forcing these companies to absorb them rather than pass them on to consumers.
It's really that the federal government.
Taking the money back that they indirectly gave to a corporate America via the consumer and that egregious pricing. So there's a there's a there's a nice little holistic world that's going on and I and that's why we don't don't actually think we'll go into recession, even even though obviously with the risk of the label market we can perhaps avoid it.
Dominic Coust to Missoua.
We continue with them, thrilled that he could join us today working with Stever Shuttles, surviving Stever Shuttle's brilliant dissection of American GDP on a daily basis. We welcome all of you worldwide, particularly Global Wall Street in India, in America and the Pacific RIM in the continent of.
Course as well. I want to go back to the.
Transfixedness of your work with ira at Credits sweee years ago, and you guys owned the chart of how Wall Street was so wrong modeling out higher rates. It's going to happen, these little fan We had a time series, folks with little feathers of how wrong we are right now? What does that chart look like right now? What is the best on Wall Street that once again will be wrong?
Well, the current bett on mall Street is that the FED is cutting, but it's cutting let's say, relatively slowly, and doesn't really get to a terminal rate of three percent or so until the second half next year. So where we think the risk reward there is that the FED does end up cutting more aggressively and you bring that forward, so you basically sort of have a sort of more aggressive if you like, you know, flattening out
of the forward short rates. But then where it kind of gets I would argue, you know, wrong again, is when you get into twenty twenty seven, where you have an unusual sort almost a flat lining of the funds rates, Like once they come down, they stay down. So not only do they not you know, not come down far enough, but the very fact that they're staying down for that prolonged period seems to me, sorry, incorrect.
Are you suggesting that we need to get away from two point zero percent target and that we're going to have a new central bank regime in twenty seven, twenty eight, twenty nine, which is a new set higher.
Yeah, I think the I think in the it it kind of depends on what the administration wants to do about inflation.
I mean, whether they tolerated or not.
So I think in a conventional way, if they tolerate same inflation up around four percent for a while, and they do that because of say the debt service things, then you will have a lot of christ are you model?
I'm going to make some news here Isabelle needs news? Are we modeling four percent inflation?
One of my very one of my models?
And I'm very proud of models four percent core CPI and rising in twenty twenty seven?
Yes, Wow, that's a headline for me there. What about?
Okay?
So then the market doesn't seem to be fully bought in when it comes to the FED accelerating rate cuts. So is that a communication issue from the Fed? Or is that inflation anxiety? Why do you think there's a disconnect there?
To be honest, I think pal would be much more committed to bringing rates down further if President Trump wasn't sort of so interfering in FED policy. I think it's almost a kind of like a pride moment. I'll end up doing it, but he just can't sort of preemptively say he'll do it.
That's my perspective.
And the shutdown the shutdowns market impact is usually limited, but you say that this time might be different, right, Well, I.
Mean shut shutdowns are limited if they're short, but if they they're at long, then it does impact consumption. What is long at least a month, and you know this shutdown is approaching that, and I think if it goes even longer than that, obviously you're going to see a consumer spending taker hits. And we model, we model that relative to consumption trends before shutdown and then afterwards. So clearly there is there is some impacts.
Yeah, do many costumer and AI they say it's outside you remit, I don't buy it for a moment. I mean, we got sailor coming in here and coming up here in thirty minutes, twenty minutes, the laureate from Chicago and the behavior of the structure fine dominic constant and AI and the overlaid of productivity which we're not going to know for three, four or five ten years.
Yeah, well, I'm I'm a big big fan of the productivity sort of miracle stories, you know, through through the trends. Absolutely, I think AI is a massive positive for productivity and it's going to go hand in hand with very little labor input, which we're kind of already seeing. So when I look at the GDP, you know, I look at the expensiture side, let's say, and all that kind of translates into higher productivity, you know, because of the underlying
thing AI. And it totally when I talk to our clients basically you know, in the in the in the real money hedge funk community, more and more saying you know, they're obviously using AI and they're not hiring graduates in the way that they did before.
That's a really big impact to I mean, I.
Look at bazoo on what you're building over there. You pick up Jordan. This is like picking up you know, some baseball player. You pick up George Rochester and foreign exchange human rashudo have to battle over nominal GDP. Are you guys all on the same page. Given a four percent constant cav.
We all always agree, it's amazing.
It's really a all of a TV yeah together there.
But I think the diversity of opinion is good. I mean it challenges each of us to sort of go back and rethink and refine our arguments.
What's your future for your United Kingdom? I can't glean it reading the papers.
Yeah, I mean it's all it's a little you know, I think the future is my old schoolmate Nigel Farage becomes Prime Minister. I think it's a little bit like the same as in France with you know, with the from that's now you know that the populism is is you know, it can't be held back for too long
and it's really a dysfunction of the established parties. I mean, you know, the Labor Party never really you know, it never had a massive popular vote in the first place, but unfortunately it's made a lot of missteps and it's hard to see how they're going to keep out that that the Reform Party.
If mister Farage comes calls on his own class as old classmate, will you look to serve as Chancellor of the Exchequer?
Of course I would constantly there's from a Zoo. Stay with us.
More from Bloomberg Surveillance coming up after this.
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Elina Show.
Tavid joins us right now and has frankly, never been a more important conversation. She's with the Conference Board, which goes back to nineteen sixteen. Full disclosure, it was religion to my grandfather. They are different. They have a huge history of data collection and the mood and in a massive government shutdown. It's not that you're it, but you're the ones that have been tested time and time again and shutdowns. What is your message about what's really going on? Is where data lists?
Well, I can guarantee you get another data point from the conference port next Tuesday when the CCI Index will be released and will get another gauge of how consumers are feeling in this economy. And another data point I would like to talk about is the CEO confidence that we received last week, and that hasn't been much of an improvement on the CEO confidence front. Actually they're saying that, you know, things are probably okay, but the CEO confidence is still below the fifty break even level.
Testing and CEO confidence. Is it a legitimate time series?
Absolutely.
It tracks investment, business investment, and the thing that I watch mostly is business investment plans. So that's a gauge for telling you what happens to business investment going forward.
Yes, and only four percent of CEOs are expecting a recession, but growth is still projected to decelerate. What's behind this cautious optimism and what does it signal to the business I A Heading into next year.
There's still a lot of uncertainty. There's still a lot of uncertainty about the tariff's woodland, that's a lot of uncertainty about the AI impact and regulation and geopolitics as well. So those are top concerns for you know, the c suite people, and I think that's an important thing to remember when you talk about outlook for next year.
So the shutdown is having ripple effects not just in GDP but in conference also where are you seeing the most visible science of disruption when it comes to the data, whether it's employment or the CPI printed.
For US economists, the data flow is disrupted. That's it already is happening, and we have much lower visibility in terms of how to think about the economy. But in terms of the overall impact on the economy, it's still moderate, but it will be nonlinear, so it doesn't go like one to two tens of a percent each week. It's non linear. So first week, it's minimal. Second week, third week, when people start missing the paychecks, that could be much
more significant. And I think if it moves into November, we will talk a little bit more about the economic impact.
So, speaking of inflation, we may we may be heading into a hotter print this Friday. Do you think that the Fed can afford to stick to the gradual plan of easing if inflation holds about three percent?
Absolutely, That's what Chef Powell said at the NAPE meeting last week. It was an amazing speech by the FED chair and he just basically confirmed, you know, it's it's about the risks. It's about the risks to the labor market, not particular data.
So is that the implicant target now three Well, that's that's a tough question.
I think they still believe they can get lower, but you know, you're not really speaking about it explicitly.
Yoanna, Thanks so much for Jolena Shila Tavia with us with the conference board.
Are they're important data coming out? Stay with us.
More from Bloomberg Surveillance coming up after this.
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Sri Coyle off, what I you know, we didn't do it enough on this last week the International Monetary Fund with their meetings and.
All the different work.
I look at the green book, the Global Financial Stability Report. It's one hundred and twenty six dense pages of really PhD level thinking about where are we ro He's gone beyond that and he joins us now on are instabilities maybe within the calm? Rahie, what do you think of our global financial stability right now?
Hey Tom, thank you so much for having me. It's a pleasure. And no, I mean, look, I've done the Global Financial Stability Report for almost a decade now, and you sort of get tuned to looking at the left tail of the distribution and what can go wrong throughout. But where we are right now, I think things are going pretty decently well. I mean the big question is that And the perfect example are these IMF meetings that
end the last week. When you went to them six months ago, it was all about despondents that you know, there is a tariff shock and everything is going to get tripped at the seams. Now it's all about resilience. That global economy has outperformed expectations, Global markets have perferred expectations are not just US, pretty broad based. So from that perspective, things seem to be going pretty well at
the margin. In terms of instability. I would still argue that the biggest risk in the market remains on the US born market side and how inficient people are sort of passing it by. But I think in my view that's some mistrikes.
Is that the IMF there's wonderful stress tests.
I'll look at, you know, stress episodes is what they call them, where they pretend bad things happen. Are we prepared reheat right now within global Wall Street for the next marginal stress?
I think to a great extent, I would argue is the issue is that the unown unknown is something which nobody gets prepared for. But the other stress test, which we saw in terms of the banking crisis, in terms of the regional banks getting an issue or any stress in the tragedy bond market. I think from that perspective,
the fed and the policy makers are pretty prepared. The issue is more of a self gool that cutting rates at a time when the inficion is sort of picking up sclically can take people by a surprise, and that I think can be a sourceful issue.
So you spoke with over twenty finance ministers, which is a real pulse check, and one of your big takeaways was that trade is moving beyond the US, and fact, what are the countries doing to reapply as supply chains and why do you think investors need to take that shift?
Seriously?
No, I think Look, this has been a fascinating start. If you look at since twenty sixteen, which was from first term, ninety percent of countries have seen an increase in trade to GDP. US is one of the only major countries which have seen a decline in trade to GDP, and four of the fastest going trade corridors are outside
of US. So while we do make a big deal out of the US addic situation, the reality being that other countries have been preparing for this event for a while now, especially when you talk to all these policymakers. As you mentioned, I met almost twenty finance ministers last week, and the big picture feedback was that luk US is extremely important for US and it's impossible to sidetrack it. But at the same time, US is just fifteen percent
of GLO bullet boats. There is a big world outside of us that we need to partner with, and now, especially now we're in a transactional world, we need to be a bit more more mindful of So when you we're from your emerging markets, everybody is signing more free trade deals. Everyone is trying to diversify their export base in terms of partners as products. I think that's a welcome development, right go.
Out with us.
Thrilled to have them with us with Breakout Partners on our Bloomberg podcast, what a successful experiment it's been.
Thank you for listening on YouTube.
Subscribe to Bloomberg podcasts out at YouTube and we say good morning and Rowhat's India where we've had just huge, huge success. Rowen, I want to do an audible here, stay to me the new Modi capitalism of India. Explain to me twenty twenty six for the animal spirit of India.
No, I think it's going to be the same old that. Look, we have fixed a lot of the historical issues now we have a big bad wolf in terms of President Trump, and Moodie is the one who's trying to safeguard the interest of Indian farmers and Indian sort of domestic houses. And we've got to stay the course. If you want to make integrate again, let's.
Stick with the region. What about China?
You mentioned that China was surprisingly absent from discussions given its central role in global trade.
What do you make of the silence?
No, I think that was for me the biggest shock. That one would imagine that the US China issues and China in particular would be a very big focus, but honestly, not really. And I think there are a couple of reasons, one being most of the investors have priced in that the US China's serve issues will continue for the time. They will be escalation, most of it is posturing, will
revert back some of it. So from that perspective, is going to be a slow and steady negotiation between US and China, and we have we're in that segment of the nash EQUIYBM that we don't want to be in
the goog Do situation. I think both US and China realizing that a bigger focus for me was how the emerging markets are talking about the China manufacturing blood and how the oversupply sort of killing their own domestic manufacturing industries, and there is a big focus to make sure that that doesn't really groups.
All right, Ronie, thank you so much. Rohikoel with us.
Please please would love to see you in a studio at some point. Rohikoel is with Breakout Capital Partners.
Stay with us.
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Andrew Ceciliana joins his partner Trading Customs Practice a KPMG. This could be a three hour interview this morning. You are a licensed US customs broker. All of a sudden, everything seems arbitrary. When Isabelle Lee gets something from d Or in Paris, she has no idea if there's going to.
Be a customer terrorfunt. Have you ever seen it?
This nuts.
No, it's been extremely volatile. Are uncertain really complicated to the rules of consistently changing toime. So if you think about it today, there are country specific tarifs, industry specific tariffs, there's trade deals taking place, and there's a bunch of investigations that are still under way that we don't even know what the impact is going to be.
Okay, but so the air JFK Okay, they come at a cargo plane. Are there people like you, licensed customs brokers figuring out what's in each bundle?
Well, what a broker does.
A broker will help clear the shipments, right, so they will file the customs entry with US Customs. On that entry is where you declare all these tariffs. So that is the point of contact with Customs to disclose all the towers to customs.
So the USS racked up some eighty billion dollars in tariff revenue this year to more than double the last year. And it looks good on the revenue side, but how are businesses and consumers actually absorbing this the cost on the ground and based on your perch, are they worried or what's happening?
You know, it's a great question.
It really varies.
There's no single answer. There are situations where prices going up, people see it right there. There are those scenarios, but there's also marking conditions that are driving prices not to go up. And there's also supplier and import absorption where there's negotiations happening where they're absorbing the tariffs, and also companies are looking for ways to mitigate and move their supply chains to avoid the tariffs.
Tell me about the Dominimous rule. I mean it's striving everybody. Everybody.
Yeah, So the Dominicus rule many many years ago was like two hundred dollars, and the whole point of it was, when you have these small parcel shipments, why do we want customs entries for every single small shipment? And then when the amount raised to eight hundred dollars, you had companies taking advantage of it, you know, putting warehouses in Mexico and Encounter and shipping into the US. So a lot of US companies right a disadvantage and lobbied against it.
So right now it's closing a lot of turmoil because companies that were relying on that e commerce benefit just lowered from eight hundred to pick a number, it's yeah, there's it's zero. Now it cost some entries required for those shipments. I mean there's different types of entries. But the deminimus rule no longer exists.
So we're clearly at an inflection point in the global trade. You call this a turning point and noted that companies who treat the disruption disruption as strategy could come out ahead.
What does that look like in practice though, because okay, maybe what if.
I'm a small business and I got myself used to the eight hundred dollars yeah minimum?
Right, So then so when the tarots, when the new towers were initially announced, it was everyone's in mitigation mode reacting to the taros.
There was also uncertainty.
We don't know if they were going to lie, so they were just looking for the low hanging fruit opportunities. But now we're beyond mitigation. Companies are rewiring their supply chains. They're looking at a tax and trade planning opportunities. They are looking at technology and data and AI to do scenario planning modeling. We have a tool of KPMG that does that for our clients. They're also looking at operating models, the customs function for years was operational. It was a
border tax, clear the goods. Now they're looking at the overall structure and.
This Siciliana that is going to get one more in here. I'm very remiss on to say a nasty letter from the government in Mexico. Thank you for listening every morning in Mexico City. Really honored. And we don't do enough on agriculture. How do we do one on terriffs of tomatoes, of avocados, of bananas that I think we can't grow in America?
Am I right?
In?
That?
Isabelle that I don't know?
I have to ask chat Okay, how are we doing.
On agriculture terrorists? Is it like coming? Well? There was?
There are terrors for Mexico encounter punitive tariffs under the IEPER, which as you know, the Supreme Court case is going to rule on soon.
But there are also exceptions.
If a good qualifiers under the USMCI, they avoid that tariff. So right now, if you meet USMCI, you could avoid the taro.
Well, it's a single summation of your KPMG study and this headache of tariffs.
It's volatile, there's lots of disruption and companies need to be agile and flexible and manage through it. You can avoid the pain.
You have to manage it. I got eight more questions, come back. Thank you so much.
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