Surveillance: Trade Talks Are Unpredictable, Hewson Says

Good daily, David, Good to see you. So let's start with the federal reserves quote, shall we We'll take it from there. We are closely monitoring the implications of these developments for the US econom account look and as always, we will act as appropriate to sustain the expansion with a strong labor market and inflation near US symmetric two percent objective markets off to the races. My first thought

is anything new here? David? Yeah, No, I think it's interesting markets have reacted to that one paragraph in in empower speech. But if and you know that paragraph that that talk of expand or continuing the expansion is exactly

how he started the May press conference. So to some extent, there's nothing new and what he said, perhaps there's something new and what he didn't saying that we've heard previously talk about there being no convincing signs for a need for a short term movement one way or the other, and he didn't say that. And then I think if you layer on top of that the wealth of FED speakers that are coming out as we approached the Purdah period for the fom C, the message seems to be,

we are concerned about trade. There are uncertainties brewing and that might impact the economy further along, and if it does, we will react, but for the short term. And bear in mind this is a message that has to govern for the Fed's meeting into nearly two weeks time. Now that I think the message there is for now no change. Well, the risk is David, two weeks out from a Federal Reserve meeting, the market standing to hear what it wants to hear. The problem is, are we assuming a rate

cut in two weeks? No? No, no, no, no, no, We're not assuming a rate cut in two weeks. I think the risk is here that the market starts to believe the bulk of market participants begin to believe that the Federal Reserve is coming their way. The risk is we go into the June meeting in two weeks and the summary of economic projections comes out and it hasn't come in enough down to market positioning. David, do you

anticipate that spread coming in and to what degree? I think the lesser that that's going to be the lesser shock over the next month. I think that the two shocks that we're going to be watching at is firstly, what happens with Mexico. Do we get these tariffs coming through and bear in mind yesterday we were also hearing a lot of news about the resistance to these tariffs and from the Republicans. And secondly, what happens to that

G twenty meeting. So in that context, I would imagine the SEP is going to that summary economic projections are going to suggest that the Fed is considering lower rates by the end of the year. But that's not something that's going to be hard coded, and certainly, of trade moves in a different direction, the Fed will be flexible. First of all, I want to suggest, folks, for those of you in America, the major risk, which is how many days does it take to have your body changed? Sean,

if you have a full English breakfast every day? Are you having a stupid piece of sausage I won't eat and that when you live here, tom you do that on a Sunday once a week after a big night out. Okay, it's not something you should try and do everything tomorrow, David Page. The risk here, seriously of all this is we have central bankers adapting to political philosophy and political policy as well. Where in the history books do we show that that can be successful. I'm not sure they

are reacting to any political philosophy. I think they're really reacting to economic risks. And I think what the FED assumes, and what we certainly assume, is that if you see terasterizing against Mexico, arristterizing against China, and you get an escalation of the trade war, you're going to have a negative shock to the economy. What what kind of US number do you get? Your own pilot interstrates maybe cuts interest speeds in two weeks. I mean, is it a

one handle? You know? I think there is a risk, there is a small risk that if you see the Mexican tarists going ahead now and you see markets react negatively to that, that the FED could be moving in a two weeks tign but we think that's very unlikely. So you think June could well be a live meeting. I've heard this a couple of times over the last week. It's not an original thought. I just think it's still slightly contrarian. Do you think June could be alive meeting?

You like to practice original thoughts, but no, I think if you see developments moving, if you see Mexico seeing Harrison posed on it, and you see a negative reaction with markets, yes, I think the FED would consider cutting at that point. So do you think it happens. No. We have two interviews in the next ninety minutes or so right here on Bloomberg Radio. One will be with the Dallas FED president Robert Kaplan. Michael McKie will be catching up with him. Also catching up with the Chicago

FED President Charles Evans as well. What do you want to hear from the remaining FED speakers through the next twenty four hours, because so far, the only one in the last week that has actually tied up the prospect of a rate cut and directly referenced it is Jim Blood. Yeah, and we've seen Evans and Caplan previously talking about need more time, so we would expect that's the message that the Fed is delivering, and that's what we go into this meeting expecting. What I'm saying is two weeks is

a while. Markets are moving quite quickly. We could see, we could see events change, but that's not our expectation. I think the FED wants to see what happens with trade and it will react accordingly, and we expect a relatively benign outlook from trade. We don't necessarily expected Mexican tariffs to come through as they as they look at the moment, we think there's a good chance you see some resolution with China. In that case, the Feds in

an awkward situation. You could see financial conditions ease, but the Fed still considering insurance cuts. What is extraordinary to me the John's mention of two good central bank interviews is are different. Those central bankers are. Evans is a frontline monetary theorists as his vice German clarator, and uh Dr Caplan is an interesting guy out of education, his his important books and leadership and his work at Harvard

as well. Is Powell beginning to learn how the Evans and the Clarators of the world think and operate very much. So I think Clarata has had quite a marked impact. And I think when we look at the pivot that the Fed put through at the back end of last year, other than being governed by significant tightly in financial conditions, they looked like there was some evidence of a Clard

review m starting to come through the see. I think PAL very much reflects the underlying statement rather than perhaps driving policy individually in quite the same way as Yellen potentially didn't, ban Anke did and Greenspan. We see a further asset inflation with lower interest rates if they actually do rate cut, whether it's what is the two weeks show in June nine, or it's after that it is September.

Do you just assume you follow on with the worry of Steve Roach, which is asset inflation Now, I think we're starting to worry a little bit more the other way. I think the Fed is going to struggle to get ahead of the market. The market is already pricing in three cuts for the Fed by early next year, possibly

three by the end of this year. I think the Fed has got to see some significant bad news to get that um And if it doesn't cut by as much as that the market is going to start to worry that it's still behind the curve, and I think that that becomes more initial David thinking so much, David Page of ACTE. Here was some very thoughtful discussion. Stephanie Baker joins us right now and without question stuff And the site GUIST in Washington is not in Portsmouth, It's

in Mexico City. And the likelihood of terroriffs. Republicans are saying to the President. No, are people in the White House saying to the President no, Well, it doesn't the message from the Hill doesn't seem to be getting through to Trump. Um. You know, he's tweeted out that he's got this morning, Yeah, the support of Republicans, but you know, we're not seeing that on the Hill. I think Lindsay Graham UM. Senator Lindsay Graham has been the most vocal

supporter of him. But it does look like the issue where the Republicans might finally bring ache with Trump and oppose Um either through an over you know, they you know, they could override Um his veto on this. They may have the numbers for it. It does look like they could. Um. What's so important, and John, I think this really bears repeating, because I think a lot of Americans, including Tom King, don't get it. Our trade with Mexico compared to China, China, China,

China is ginormous. There's no other way to put it. The scale of this relationship is something I think so many of us don't understand exactly. Um, you know, this could have a huge impact because I think people don't really appreciate how much trade goes across the border, you know, and how complex the supply chain is. This is not just things that are made in Mexico and being shipped to the USC, their parts going back and forth, being reassembled,

um you know. And and I think that the fallout from it will you know, in packed American consumers in a huge way. This can work both ways. Of course, it's important for Mexico too. And actually, think what's really interesting in the last twenty four hours, the Mexicans believe they can satisfy satisfy the President's demands in the next

week or so. Stephanie, do you think they can Well, I'm not clear what would satisfy Trump's demand, and that's important, and I don't think he's actually spelled out exactly what Mexico needs to do to head off these tariffs. Um. You know, is it a complete shutdown of immigration on the border? Well, exactly, it's three bullet points when this brooke John, and one of them was to, as you say, Steph, and you shut down the southern border of Mexico with

the three Central American states. I don't know how they affect that, but that was the granularity where the president was at one point. But how does he assess that? Exactly? Yeah, exactly. I mean, you know, I do think that there are a lot of question marks over if he really wants to press ahead with us, shouldn't he be clearer what exactly they need to do? Um? Which makes the question why the Mexicans seem to be so confident on the

surface of things. Of course, we've got no ideas what's happening behind closed closed doors, but certainly in the statements they've made in the last couple of days, Tom may sound very optimistic about getting something done and things being chanistic or collegial. I'm not you know, I agree with you. The tone has been very positive from Mexico, but to me, it's more collegial waiting for the president to get back from the uh, the pomp and circumstance of your Great Britain.

So the other thing we have to consider, we've hurt the Republican push back. We have to consider how realistic it is that they formalize that push back, stephanitiely simply saying it is one thing. Doing something about it is quite different. Do you see them actually following through and formalizing that effort. Well, they could just pass a bill, um, you know, a fairly narrowly worded and defined bill trying to stop him from using tariffs like this, um. And

that might be the simplest way forward. Um. And I would expect, given the fallout that that you know, everyone is looking at from this, that they would press ahead with something like this. We have to help, Stephanie. You have to help us with our surveillance. Question of the day. How many times a week should you have a full English breakfast? I've said once, John said once mix on the weekend after a big nine ten, after three days in a row. I'm being chastised by any and all.

I am the wrong person to ask this. I don't ever eat a full English I'm I'm I'm too healthy conscious because I keep. What's the thing do you have everything fried? Don't? Do you have a Friday as well? I have them over medium? But what's the thing that looks unedible? You think you're talking about the black pudding? Have you had the black pudding, Stephanie? I have. It's not my favorite, but yes, yes, you know I'm well versed in the black You haven't. You haven't tried? No, God, no,

it's actually not bad. You might like it, suggest folks, tomorrow morning, I'm having a full English, and I mean full Stephanie Baker, have you had a phil Scottish? She could have some haggis with that, with iceer without ice. Stephanie Baker, thank you so much. Let's see is in here an important conversation. The problem with Victoria Houston is every time she's on, we want to go longer, longer, longer, because she actually knows John what she's talking about about trade,

like kel A Dover, will I get my Stilton? She's unlike now is the stuff that you're interested in? Unlike the politicians, she's actually experienced in trade. Wants to bring in politicians that didn't know how important Calais Dover was at one point. But that's a very different story. Victoria. Great to see you into the TUDE of Economic Affairs Senior Accounts or International Trade and Competition Unit, Victoria. I want to reflect on what we've heard so far this morning.

There are various FEDE officials that are worried about the trade story. They're worried about the heightened risk that emanate from US trade policy. The difficulty around this is the tensions persist, but it's unclear whether the risks materialize. How

do you frame that at the moment. Well, it's really tough because as a supporter of free trade, there are lots of dangers and risks lurking in US current trade policy, and in particular, as you've alluded to, it's the things are pretty arbitrary and unpredictable, and um President Trump is using powers that really weren't supposed to be related to day to day trade policy, emergency powers for example, as as we've been hearing about in connection with the Mexican

buddher So it's it's deeply unpredictable and that's really where the risk is. In conjunction, of course, it's what the UK is doing where we can't say from essentially from one day to the next, what UK any policy here is going to be. And I guess that's another problem in and of itself. Victoria For the United States, there is an expectation almost at the moment that maybe we get some formalized resistance to the president's executive power around trade.

Do you expect that to happen? That's a tough one because frankly, these executive powers are actually really deeply entrenched, and although the way they're being used at present by President Trump is being strongly criticized, actually these powers have been in place for decades and have equally been used by former presidents. Again, as a supporter of free trade and the rule of law, I would be delighted if Congress was to take this in hand more. But I

can't particularly see that happening imminently. We have too short time with you today, and I just have one question, And when I knew you were coming in, I've only have one question. How do you respond to Brexity types who say no deal will not be a big deal? Does life go on three months after no deal where trade is normal between in goods and services between the

United Kingdom and everybody else. That's a That's a really tough question because part of the reason why Brexit supporters are taking the deeply entrenched position that they are and trying to say, oh, no deal, no problem, is that, UM, they're having to feel very defensive because on the other hand, we have the remains support as the Ramona's as as we colloquially call them, who are taking the opposite of view, which is that no deal would be going to and

at a catastropy. So people have really retreated to very entrenched, diametric positions UM in order to essentially defend themselves. Now, I think the reality he clearly lies somewhere in between those two positions, and actually no deal would be a problem. It would cause um serious problems for businesses in the short term. The issue that I have is that the current government and the government we've had for the past two years, hasn't done enough to use sensible strategies of

communication and policy that could have mitigated those effects. Okay, I have to leave it there, just because of the news, Lord Victoria Houston, thank you, thank you so much. Senior Council to Trading Competition Unit in i e. A. Jim Carroll and Morgan Stanley is a genius that Morgan Stanley call has been extraordinary. Mike Wilson pushing against the equity ball market, saying there will be some volatility, things will be a bit difficult. Ellen's out there with an arch

slow down in economics call. And then there's Jim Kraren and others driving for their fixed income. Call right now, Jim, what do you do if you've enjoyed capital gain in bonds? If I'm price up, yield down, and I'm a winner, what do you do right now? Um? Very interesting question, Tom, and thank you for the introduction. Um. The you know, the way I look at it is that tenure treasure yields are probably likely to hit that two percent level.

That's not too far away from where we are right now, or at two point o nine in the tenure treasury. But here's the way that we need to think about it that there are four key components that drive tenure yields. One is your changing growth expectations, two as your change in inflation expectations, Three is your central bank outlook, and then the fourth is the risk premia or term premia

as we call it in the bond market. All four of those components are weakening, meaning that growth expectations are falling, even inflation next station expectations despite some tariff maybe there might be a one off popping inflation, but that's it. Um in the central bank outlook has turned more DUBBSH, which means that the demand so I'm now I'm talking about the risk premieer, but the demand to own high quality fixed income treasuries is actually higher, So the risk

is actually falling. So it's hard to it's hard to point where yields actually turn around, but I will say that you have to be very highly convicted that we are going to get a recession at some point in early two thousand and twenty if you want to own ten your treasuries below what does credit and high yield signal? If I'm a full faith in credit conservative investor, So when we look at investment grade right now, and when we look at high yield, high yield, default risk is

really low at this point. So we're not seeing a very um concentrated area within the high yield markets or even in the credit markets that are having uh, you know, big problems at all. So what it is saying is that what you want to do is you want to move up in quality. You want to earn some carry, you want to have some yield, but very very important,

you also want to have duration. And that's the gains from own owning longer term maturity bonds or the potential gains that you can get as as rates fall from owning longer maturity bonds. So extending some duration, picking up some yield, and moving up in quality is going to be important. The high yield market and the investment grade

market are not signaling anything distressful at this point. Spreads are tighter on the year performance so far, how yield is up almost day percent on a year to date basis, So we're not seeing signs of distress in those markets. So, Jim, just to follow up on that, I'm given that you suggest that a recession is possible in the high yeld market. Um, how do you feel about the credit quality that you're

seeing in the high yield market right now? Well, I mean, it really kind of depends because the high yield market very very interesting. We've seen more credit improvement within the high yield market. Don't forget, it's so much smaller market than we actually have seen in the investment grade market. In other words, investment grade markets have been have gravitated lower in quality towards more of the triple B level, So they've been going down in quality a little bit.

But the high yield market, oddly enough, has had more upgrades than actually downgrades. So the high yield market, from a technical standpoint, and given that, I believe the fundamentals are still okay right now, fundamentally looks still strong. The question that a lot of people have is that the investment grade market now has a very high concentration of triple b's and they don't have much room before they

could possibly get downgraded into the high yield space. That's not our base case, but that's certainly a risk that's out there in the market. So, Jim, if I wanted more yield here aside from the high yield market, do I even think about emerging markets? I think, yes, you do. Um, you know, there are certain emerging markets. I would be very specific about some. Um, there are some markets that we like. I mean, i'd like to say I like Mexico,

but there's too much political risk there. But fundamentally I'm okay with Mexico if I just exclude all of the tariff you know, things that are going on right now. So let's exclude that one. Well, you know, let's talk about another one. Let's talk about Brazil. Brazil is a

very interesting market. Bond yields have been going down in Brazil, and the central Bank I think there has full full ability to cut interest rates at you know, at a reasonably aggressive pace if they need to stimulate their economy. And I believe that much of the dislocations with the U S, China and trade have have have effectively played through. And it's very strong demand from the pension fund community in Brazil for their local bonds. So there are emerging

markets that look good. Eastern Europe, Poland Hungry, Czechoslovakia single A rated bonds. These are all like high beta Euros if you want to your euro bonds, if you want to think of it in that sense, meaning that they're exposed to Europe but don't have as much exposure to so different parts of emerging markets. Being very selective can actually you can actually have some very attractive opportunities too.

Short of conversation, Jim Karen, don't be a strange We need to get you in the crack of dawn and when we're surveillance and now joining us to begin another season of peer to peer. David Rubinstein joins us important interviews. As I've said many times on this air, his interview with Jeff Bezos a years ago, I'll say a year ago, was absolutely extraordinary. David Rubinstein joins us this morning, David, Melinda Gates. And what I think is so outstanding about

Melinda Gates as it's never been about Melinda Gates. Her work is, you know, in support of her husband and the two of them at Microsoft and meeting at micro Soft, but their approach to philanthropy literally has taught rich people how to give away money. What did she say about the first moment where she and Bill said this is the way we're going to give away the pot. Well, when they first got married, they were still focused on Microsoft.

She actually worked at Microsoft for about I think five years after they were married, and then after their first child, I believe she decided to retire from Microsoft, and they were not that involved in philanthropy relatively speaking compared to what they are today in the early year years. But when Bill retired from Microsoft as the CEO, he became

in effect the CEO of his foundation. Which was called the Bill and Melinda Gates Foundation, and they became partners, and she describes in her new book how they worked together, and it's obviously a little complicated. She points out that sometimes there was some tension over what she was going

to do and what he was gonna do. But a large part of the book, which is an excellent book I highly recommended, is about how she's focused on women's issues UM contraception, UH and among other things, helping women learn how to be better farmers because women are often the farmers in many parts of the world for their families, learning women how to be avoid abusive relationships and things like that, and so she her main point is that

if women are empowered, better educated, treated better, the world will be better off because there'll be more productive citizens and and so forth. So it's a really terrific book,

and the interview is very, very revealing. She reveals how they met, which is interesting, how they get along, how they've had some of their uh marital problems like anybody else whant to say, mariw problems and I mean things where she would say let's do this, and Bill would say, I'm not sure I really want to do that, and then ultimately they work it out. So it's an now she says, do this, Bill says no, and so then

they do what she says. Right, Well, she's managed to work it out so that I think it's my view and extremely happy close relationship and look for being married to the wealthiest person in the world is never probably going to be easy, but she's managed to pull that off as well. And they are partners in the way that very few married couples truly are are equal partners. So, David, the the Gates Foundation is not just the Gates money, it's also Warm Buffets. How did that all come about?

It was a surprise to them. Warren Buffet had had originally planned to give his money to a foundation that his wife would oversee. She predeceased him, and so he wasn't quite sure what to do, and ultimately, in a typical Warm Buffet fashion, he came up with a very creative idea he would give the money to the Gates Foundation because he was they were doing things that he thought were good, and they were going to be around a lot longer than than he was to oversee the

dispensing of the money, and they were surprised. In fact, they walked around after their words in their neighborhood and and really cried about the fact that that he had so much confidence in them that he was going to give them the bulk of his fortune to give away. Um, he didn't want his name on the foundation. He is on the board, but he basically lets them, uh dispense

the money in the ways they think are appropriate. So, David, what did Melinda say as to I guess the one or two key areas that the foundation is going to focus on going forward, given the tremendous resources that they do have. The Foundation has focused on two main issues over the years. One is um helping poor people, people in the poorest parts of the world with health and improving their health because that will enable them obviously live longer.

So vaccines, some malaria prevention, other kinds of things that help poor people, often in Africa, sometimes in Latin America, other parts of Southeast Asia. How these people are able to get better health treatment and therefore enable them to live longer and better lives. And the second major issue has been cater twelve education. In the United States, I think they would say they've probably made more progress on health in the poorest areas the world, and Cata's well

in the United States. Now, Melinda has basically developed a separate part of what they do, which is to help um empower women, and her book is largely about that. I think that they are trying to solve the problems of the world. No two people can solve the problems of the world, and they don't have enough money to solve every problem, but they made a big impact, and they and with Warren Buppet, came up with the idea

for the Giving Pledge. Were now more than people from around the world have agreed to give away at least half of their net worth to philanthropic purposes. And I think that set a pattern for people who are not as wealthy as the people who signed that pledge. But many other people aren't doing work and more and philanthropy. You know, I opened with that, David, and it's extraordinary to me how they have changed the dialogue of philanthropy.

Have they gotten that message out? I mean, a lot of people go after the rich people, but I would suggest in America there's a sense of philanthropy like we never seen. Yes, I like your mind people that philanthropy is an ancient Greek word that means loving humanity, doesn't mean rich people writing checks. So you can love humanity by giving your time, your energy, your ideas, and your money if you have it. The most valuable thing you can give is your time. You can never get your

time back. You can always make more money, presumably, but you can't get your time back. And many people who have done great philanthropic things are not considered philanthropists. So Wendy Copp, who created Teach for America, in my view, is a great philanthropist, but she didn't give him a lot of money. Was her idea and her time and

her energy. And I think their view at Bill and the Lindigates is everybody isn't gonna be as fortunate as they are in terms of having financial resources, but you can do a lot more than just get away money, and I think they encourage people to do that. This is wonderful David Rubinstein peer to peer on the Lindie Gates and again I can't say enough, folks is uh. Mr Rubenstein mentions their courage and help philanthropy in particularly

in Polio. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews Apple podcast, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio