Surveillance: Trade War Is Unquantifiable Force, Normand Says

central banks are being preemptive or reactive. And I want to pick up on the New Zealand Central Bank this morning because I was going through the statement after seeing this fifty basis point cut. And you can file this under things you don't expect to read after a central bank just cut rates by fifty basis points, employment is around its maximum sustainable level, Inflation remains within our target range but below the two percent midpoint. Recent data recording

improved employment and wage growth is welcome. You don't expect to read things like that after a central bank just cut rates fifty basis points when they only had a hundred and fifty basis points to play with to begin with, Conrad, what is going on? Well, I mean, I think what that shows is that these strange communications that are going along policy easings. The US doesn't have a monopoly on that,

and we've had Uh. Yesterday we heard from from St. Louis FED President Bullard who said that the FED can't react to every trade dispute or every trade risk UM. But that's exactly what they said that they did last week. So I think markets are are are looking at at all of this and saying what is driving monetary policy not just in the US, but but but everywhere UM and and there's there might be some areas around the world where you could make a case for easier policy.

Europe might be one of those areas. We have inflation that's very low in Europe. UM, we have growth that's lower and weaker than what the what the European Center Bank was projecting just a couple of months ago. UM. But here we have data that strong. You you you've pointed out what's what's going on in New Zealand, where we have UM strong labor markets. We have inflation that's closer to target in these areas than it is in Europe UM, and central banks are cutting rates because they're

trying to offset some some policy risk UM. And then the other point that you made, there's not a lot of a lot of the FED has more room than other central banks. But um, the question is why are they using ammunition now? Is it a waste of ammunition?

And I think what's going on in markets is we talked about the yel curve and the rallies in the long end, is that markets are looking forward to what comes next once these banks, once the central banks use up the ammunition as limited as is that they have, what do they do next? And they what they do next is QUEI and I think that's what's driving down long term yields. Well, let's talk about what's run in front of our face right now. It's what the Federal

Reserve does in the here and now. There was a belief over the last few months that they would move to a more preemptive stance, perhaps move early. We've heard the arguments from several officials do more with less. That was what led to many people thinking perhaps we get a fifty basis point cut. Didn't get one. Then the conversation shifted last week. Here we have a central bank that has no choice but to underwrite the trade war.

And then Jim Bullard happened yesterday the president of the Saint Louis FED and he sounded really reluctant to get drawn into that. What do you think about that, Stantce Conrad, and how risky it could be if the Federal Reserve decides that actually it's not its place to underwrite the trade war. I think that's usually problematic. I mean, particularly if the if the data continue on the path that we've seen. I mean, I think don't think there's anyone

that can deny that. UM, that risks have gone up with the ratcheting up in the trade war. UM, the likelihood that businesses might be more reticent on investing and potentially hiring than they were previously. If this trade war continues to to escalate. UM, those risks have gone up. But what do we know so far? We know that businesses on the hiring fund, we still have have pretty solid levels of business demand. The alter it that came

out yesterday, albeit for June. UM, but the more up to date data that we've had from the n f I B, we have very high levels of job openings. So businesses aren't pulling back on hiring. UM. The consumer seems to be in great shape. Inflation is not that far off. And you remember back at the main meeting when the FED made a big deal Pal in his press conference in the minutes of the meeting about trim meetings exactly he advised it on Friday, it's two percent.

So inflation is close to target. The labor market is doing fine. We do have consumed concerns on the business front with business investment um. But it just seems to me that the argument for preemption is too early. O B overcome by events. I'm looking at the data screen that tells me Chairman Paul is going to be overcome by events. Where where in your mind, just using his one benchmark, the tenure two point ones excuse me, one point six four percent, where does Jerome Powell become overcome

by market events? Well, I hope what the FED does is realize that that their role in driving these moves. I think it's problematic for markets to move based on the expectation for FED action, whether or not that that whether or not that's justified, and then for the FED to look at the markets and say, well, the markets are telling us that the economy is weak. Well to your inflation point, are you saying the service sector inflation will not diminish down to what goods inflation is is

a lot of people are are forecasting. I don't think so, and I will still to think that. I also think that what what if we're talking about the good side. UM. Firstly, on the producer price front, those prices are rising much more rapidly on consumers, so there's the potential for some feed through there. And the tariffs have an impact on

goods prices, not yet, but eventually they will. If if we do get this additional ten percent tariff on two billion dollars of imports from China, that will have an impact, more of an impact than I think the first round of tariffs had um and so goods prices will will be pressured higher. But the point is the inflation environment, even with goods price inflation real aatively subdued um, it

has been driven by the services side. Inflation is running pretty close to two percent on on many measures of of kind of underlying prices. So um, you know, I I think, based on the data, it's really hard to make to make the argument. I think what's happening with the FED is that the markets are anticipating them cutting rates. UM. The markets on on the risk asset side. The risky assets are are are skittish, and the Fed just doesn't feel like it's in a position to disappoint markets in

this kind of environment. A Conrad right to catch you out with your Conrad the quadraus dropping by the studio. To get us up to speed on what's happening worldwide are th Q Economic Senior Economist and founding partner. Let's bring in David Pole. Shall we Epic Investment Partners co Chief investment Officer and portfolio manager. Can we begin in Europe? David?

While we've just heard from a series of banks through the morning, Commas Bank the goal of lifting profit increasingly ambitious UNI Credit slashing its full year revenue target by a billion a b mm row adding to all of this, saying it's margins might be hit. These guys are struggling with low rates. Will any of this get any better anytime soon? Probably not, unfortunately. But the UH What really matters though is economic growth because banks are economically sensitive.

This is this really matters. You have to have growth. Monetary policy for all it was trying to do, has run out of gas, and European companies are just not borrowing there is no economic growth and it's not just a matter of rates. You need to have more loan volume and they're not getting than jenniferro Why did we hear that from the CFO of Commerce Bank this morning that like it's like no big deal. This is the really problem with the business strategy for the European lenders

at the moment. They refocus the business models and guess how they refocused the domestically and what's happening domestically in Europe right now. Nothing. It's really really not good. And what also strikes me and it's absolutely stunning. Matt Miller, our colleague, caught up with the Commerce Banks CFO a little bit earlier today and a complacency coming from German politicians and even corporate leaders is absolutely stunning. The best

case at the moment is the economy is staminating. The worst cases were already in recession in a place like Germany, and yet when you speak to these individuals you hear things like we are in good shape. I mean for Germany, they really have an export economy. They've already been hit by China. Uh. To refocus domestically is kind of pointless

because the domestic economy just isn't growing. Do you suggest that the international banks that you know so well, David Prul in the United States could really take advantage of that? Do the is there a desire there to expand abroad and take market shire? Uh? They they are taking advantage in capital markets, but they're not going to expand through Europe. That's not where the growth is. So JA is really the focus in Latin America. With the limited time we

have with you, banks lagged last year. They're all trading it like a nine multiple book. You know data, how cheap is it? Once in a lifetime on the U S banks. So so banks on average had double digit growth and profits and dividends. If you add them up, you're in double digits plus share buy back. The reason they underperformed last year is their multiples compressed. So we had a market that went from like fifteen times in the Q four last year to eighteen and banks went

from fourteen to ten on a multiple basis. So basically the consensus for you is that banks can't continue to earn money. We're going into recession. Credit quality is going to deteriorate. And by the way, the number one metric for a bank is credit quality. So when we look at banks today, their true bargain credit is fantastic because consumer credit is strong, job growth is good, wages have

been okay, there has been no deterioration. So they are basically having record earnings and returning a hundred percent of profits to shareholders. You can get a double digit return even if the multiple stays at end times earnings in the market at eighteen. But there's a massive spread between what they're delivering and how they're performing in the stock market. So we need to talk about why they're performing this

when the stock market. I caught up with Credit Sweet this week and said, counter intuitively, this is the sector that is at most risks from the trade war. Why because every time it bubbles up, rates drop aggressively, and what gets beaten up on that day it's banks. And as you point out, David, what they've done so well over the last decade has changed the business model, fee

based recurring revenue away from just spread lending. The business model has changed, but the investor bias hasn't shifted, and I'm just trying to work out whether it does and when it will. Right right, I mean, the knee jerk reaction is when the yield curve flattens, you sell the banks. It turns out they're not that sensitive to the yield curve anymore. Most of the loans are variable. The fee based business is becoming a big so for them, the

profits have continued. Um, I hate to say this, but probably the turning point would be a recession where banks do better in a recession than other economically sensitive areas, and they would given what has happened to them. Right, So, David, that makes the argument of buying the financial is really difficult for investors. Why don't want to own a sector

until we come into a recession case? So the reason right now is that bank yields are superior in a market where yields are going down and the alternatives are really expensive. Owning consumer staples, telecoms or utilities, you're paying twenty five times earnings for companies with almost no growth. Uh, And here you are with banks with a three or four percent dividend. So it's very attractive. Please come back, come back when yields go up, you know, really appreciate

and I'll bring in the next guest. We esteemed to give you without question. The historical perspective of China and the United States. You can only do that with Fred Bergston, the founder of the Peterson Institute for International Economics, and he is definitive on diplomacy and expecting the unexpected. As we speak to China, Fred, we are thrilled to have you on today. What does President Trump not know? With all your decades of experience of international economics in China?

What's the unexpected? For President Trump? He overestimates his own ability to get the Chinese to capitulate to his demands. He fails to recognize the need to mobilize America's allies to work with him in the confrontation with China, and therefore he risks triggering a really major and continuing trade and now currency war that could really tank both our own economy and the world economy. We see Fred Burkston this morning, yields ever lower. We see central banks on

an attact basis slashing interest rates as well. City Group Asia published a short note on United States intervention in the currency markets? Are we at the point where we get less coordinated intervention by the Bank of Japan to weaken the end or by US Treasury to adjust the dialogue?

There's a risk of that. UH. When the United States designates China as a currency manipulator, and it did two days ago, when there is no evidence that China is manipulating, it really the whole fabric of monetary cooperation that has been so important for the last thirty or forty years. There are agreements in the G twenty and the G seven and bilaterally between the United States and other key allies the Japanese, the Europeans and others UH to coordinate

and consult closely before operating in the currency markets. When the US designates China manipulator with no evidence, and in fact, when China has been operating on the other side of the market, it just causes our allies and treasuries and central banks around the world to shake their heads ask

what the Americans are doing. Obviously know that it's President Trump forcing his Secretary of the Treasury to make a designation that has no basis in fact, and therefore undermines any prospect for really cooperative and effective behavior in the

currency markets. Who are more broadly so Fred. The big worry, of course, and the ultimate irony of all of this, is that actually the administration would quite like is for the Chinese to manipulate the currency just to continue manipulating the currency stronger, which is what they've been doing for

the last year or so. Fred, I think a question for a lot of our listeners is whether the Chinese, by allowing it to weaken on Monday, sent a signal to the administration that they may well be prepared to use the currency to weaponize the currency. Fred, what are your thoughts on that. I think one has to really nuanced that carefully. Well, please do. Yeah, I think the Chinese have been quite careful not to manipulate in the sense of driving their currency down. They know that would

be objectionable and would justifiably trigger a counter response. However, they have undone their manipulation, which you point out has been in our favor. They have been intervening to keep their currency from weakening. That's been very much to our advantage. They have now undone that, at least to some extent, let the market forces that are driving their currency down

prevail at least to some extent. And yes, we use that to respond to Trump's trade threats and trade actions, but one has to distinguish between that permitting market forces to drive their currency down a bit. That's very different from there taking overt action intervening to drive it down. As you say, they've been manipulating. To use the term in a colloquial says in our direction. Uh, and Trump is actually asking them to manipulate more to keep their

currency from weakening. Rather ironic, you might say. But they can encounter and do so in a justifiable way by simply letting the market forces, which are certainly pushing the RNN be in a weakening direction, to prevail, at least to some extent. So Fred, we have to understand though, whether the end result is the same. So they move away from constraining the currency. They don't move towards actively weakening the currency, but moving from constraining to tolerating a

weaker currency that still sends a signal. And I'm just wondering whether they continue to send that signal in the coming weeks, or whether that strategy is too big a double edged sword for the Chinese to really lean on. Well, I think they may continue that, but only to a limited extent. For the reason you imply, the Chinese are horrified by the thought of a free fall or a sharp plunge in the exchange rate of their currency. They experienced that in it had very negative and worrisome effects

on their own economy. It triggered some capital flight out of China. They want to avoid that at all costs. So to whatever extent they may weaponize, as you say, the exchange rate by letting it weaken the offset Trump's tariffs. I think they would do so only to a very limited extent, and though it would compensate to some extent for Trump's tariffs, I don't think we should fear that it will have a massive effect in improving their competitive position.

Fred Burst in one final question, Madam the guard has had a tenure on the watch at the i m F. She wanders off to Frankfurt for you know, a crisis free era at the ECB. Who's the right person to take over the I m F. Is a time to look someplace other than Europe. I think it is time to look around the world to get the best person to run the I m F. Could be an American, it could be an Asian. Uh. There are several very plausible Asian candidates. UH. I think the time to end.

Time has come to end this monopoly which the US runs the World Bank and the europe has run the i m F. That is an anachronism and it should be should need scarred. It is Adam Posen on your shortlist. Run the i m F. Very good. Fred Burston will leave with thank you so much, Fred Burston. He is a founder of the Institute for International Economics, the Peterson Institute for International Economics. It's math Wednesday. We can do that with John Norman of JP Morgan, who has been

very kind to stay around with us. Given the market sell off, we see price up, yield down in bonds. I don't want to get into the Greek letters John Norman because it's summer, but I would suggest the systemic risk, the epsilon that is out there, is substantial. What do you see at the end of all these equations, What do you see in terms of the built in risks of the system. The risks are pretty substantial because you have what um is transpiring the manufacturing sector, which is

kind of a near recession. And if there's a near recession in one sector, you really have to worry about contamination other sectors that are more resilient, like services and labors. Who This is basically the thin end of the wedge. I guess the risk is it just kind of widens out as terrorists go up and and the months pass, and and if that's the scenario, you have to think

markets need to more cheap and still accommodate that. And that, to me is kind of the biggest connected markets just don't acknowledge that facturing, which is pretty worrisome spreads out. Are we correlated or is the idiosyncratic tone of a

year still in place. Let's let's say the correlations are about as you would expect when recession risks arising, meaning anything that's considered cyclical, whether it's credit, um equities, the emerging market complex is going down, and and bond markets are rallying, and the its of currencies like yen and Swiss and and defensive commodities like older or rallying. I think I think the only correlation that's kind of broken down is what's going on in EM local rates. You know,

EM local rates are behaving like developed market rates. They're rallying and stress increases, and that's something that's you know, kind of unusual to see that part of the e M complex pretty firm, even as global growth is moving down. So John, let's talk about that. What is happening. I understood the argument as people are anticipating a wiki dollar, they're not getting one, so what are they looking for

in local rates? So when the M well, what they're assuming is that because rates going down in the d MS, that the the all the e M s can ease as well. And and that's typically not how it plays out. There's some ems that can ease because they have current accounts surpluss and therefore they're not subject to uh sudden shocks from big capital alflows when when stress is rising. But um, I would say that doesn't characterize all of em, right now, That's that's a way to talk about Asia.

That's why Asia can cut rates. That's the way you can talk about maybe some EMS like Russia that of current conservices. But it's just not the place that countries like Turkey and South Africa can be cutting constantially when they're running deficits. And there are a lot of concerns

around global growth. So I think you know, that's probably a place where you can see a bit more um recorrelation opening up where where maybe the e M bond markets are not going to rally as consistently with d M bond markets, and and maybe those e M bonds start to go up a bit as as global stock markets go down, and John, maybe we start to see some differentiation in global fixed income. Interestingly, in Europe was

seeing a similar phenomenon take place. Italy, which is behaved like a d M e M credit rates hybrid, is actually behaving more like a developed market as well. You'ld tore in seven basis points on a tenure maturity today down ten basis points on a thirty year even against the backdrop that has decided to the risk off. So if your idea and e M right now is local rates need to back up and we need to see some differentiation again between EM and developed markets. Where does

Italy fits into all of that? I think you look at it as uh quasi e M type product in the sense that what it embeds is the racial risk and credit risk. And there is more credit risk in Italian bonds relative to other d M bonds simply because the fiscal position and the research that the country is in. So I agree with you. I think it is we are maybe setting up for a bit of a turney point where where Italian bonds just don't keep pace with

um with with bonds. And maybe there's even directional decorrelation where the bun yoke goes down and the btp yo goes up. How should American listeners, and particularly American Wall Street listeners interpret the decline of an ever greater negative yields in Germany? I think they should see that as a combination of fear and scarcity. The fear is just that Europe is moving from south trend growth into this recession that I won't be able to extract itself from.

And the scarcity argument is that the ECB owns one. They're the German bond market. So with investors who were fear of well just can't find a paper to buy, or rather as they as they buy at the rates just go every more negative. Are you and Lon Lewis still Jean Louise? Are you still in speaking terms? After his shaking, shaking, his earth shaking paper of ten days ago. I know James Diamond called me last night said be

sure to asked John about this. Jamie was concerned. I mean, lowis comes out not with the forecast, folks, but with a model of how we get a vector down to a zero percent tenure. How did you digest that, Mr Norman. So, the idea behind that is with with yields great around the world, there's um a drive for anything with the positive interest rate, and that's one of the mechanisms by which US rates could go down to even lower in

the tenure. I think where the analogy breaks down a little bit is thinking about that rally in US rates as a Japanization effect, because a Japanization effected me is about rates that go down to zero because the country is in deflation and it also fails to generate GDP growth. And I don't think the US is even close to that.

So I would kind of distinguish between, you know, what happens from the market, which can look incredibly Japanese because investors are scared, and and what's happening in the economy, which could actually be better. Brilliant defense. John Norman, thank you so much, greatly appreciate your time this morning. Ahead of all of cross asset analysis at JP, I'm work helping us kind of navigate what we can expect with all things equity. Welcome our good friend Gina Martin Adams.

She is the chief Equity strategist for Bloomberg Intelligence. She joins us here in our Bloomberg Interactive Broker studio. Gina, thanks so much for making the long walk up to our studio exactly, so give us a sense of kind of how you're framing the vault hility we've seen in the equity markets that just this week. Yeah, well, I think it's um, you know, reflective of a market that

certainly is weakening very substantially on a technical basis. And it just to put things in perspective, the three percent to client on Monday, three percent to clients are very very rare in the broader equity market on a on a single day basis, and they usually only occur in the midst of corrections that exceed ten percent. So we put it in an out a note on Tuesday morning saying, look, it's it's highly unlikely that we're going to shake this off.

There have only been two instances, indeed, in which a three percent correction was not in the midst of a ten percent or a greater correction since two thousand nine percent of the time, it means you're in for a wild ride. We think we're still in for a wild ride. What's really interesting today is initially oversees the interpretation of these moves by global central banks, it's pretty positive. And then as soon as the traders came into the US this morning at all, sort of the floor fell out

from from under the market. And I think that's reflective of the current sentiment, which is, no matter what monetary policymakers do, we're more concerned about earnings right now, and until there is some form of cooperative resolution with respect to trade, even if it's in a baby step forward,

the market is going to remain very very volatile. Right So it's trade is trade, it's trade, and it's I think as we get through pretty much this quarters earnings, what did you hear from a lot of the companies as it relates to how are the trade uncertainties impacting their businesses? There any themes you guys have picked up? Yeah,

so there's there are a lot of themes. I mean, I would say that the biggest theme is that it's just more about China growth as opposed to tariffs so far, and I think that that's largely because you know, the the tariffs on the products that are getting imported from China are in companies that are generally pretty flexible. They imported a lot before the tariffs were put in place. Um, there's a lot of supply chain angst in the tech

sector with respect to China. But most of this is really more about slowing global growth, and it is specifically about tariffs. So it's more about the byproduct or the snowball effective tariffs on global growth, which is suppressing economic activity. Ga mar names I know you know you don't speak to Carda, which is probably how do you fold anyone's economic forecast in equity analysis? Now? Do you just take it right to a interpretation of what the revenue lines

are going to be? What do you do with economic forecast right now? Well, as you know, Tom, I was an economist before I became a strategist, and I spent a good five years. Yeah, we were trying to keep

it quiet that we need to review. I will say it's an incredible challenge because I had to spend a good five years trying to figure out, you know, what really is relevant from the economic data of our markets, and it truly is a subset of indicators that actually matter for stocks, and what matters are things like initial claims,

the unemployment rate, interest rates, and absolutely order flow. And this the orders are the weakest component of the economic outlook right now, and that is definitely weighing on earnings expectations for companies. But they're not one and the same. Stocks are not representative of the economy all the time, um, and the economy is not always representative of stocks. And

is it your sense that the Federal Reserve? Uh, does the Federal Reserve have enough arrows in a quiver to kind of help the equity markets in a meanful way going forward? Yeah? I know so, I do think so. I don't think you need to dismiss the FED, say, certainly what happens when liquidity increases. When the FED moves to an easier stances, you naturally have higher valuation multiples that result. The problem is that there is that offset.

The FED can only do so much because, yes, you have to rely on the transmit connects transmission mechanism of monetary policy to actually effectively create some sort of better economic growth outlook. And many have argued that that that policy is broken. But the other side of this is, no matter what you think about the broader economy, when liquid it is ample, it's going to inflate asset price valuations.

So the offset is, yes, valuations may expand, but that valuation expansion can only do so much in the face of deteriorating earnings on the other side of the price equation. So I think the Fed can do some. Can they manufacture economic growth out of nowhere? No, um, but they can help to soothe the pain of what is becoming a pretty negative outlook or at least a stagnant outlook for earnings. Jenna, thank you for the updates. The last

number of days or team has been extraordinary. How many people do you have down in the salt mine on the equity strategy team we have twelve Yeah, no, not all ex economists, thank god, not all, not all carrying my sins. But on the broad bi team these three now yeah, GM Martin Adams, thank you so much. It's been hugely valuable just to call upon Bloomberg Intelligence. Thanks

for listening to the Bloomberg Surveillance podcast. Subscribe right and listen to interviews on Apple Podcasts, 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,