Surveillance: U.S.-China, A New Cold War, Buiter Says

happy talk around the potential for a trade deal. We now understand from the President that the March first deadline is something that he would be inclined to let slide if they are close to a deal. Do you assume we have made some progress on the trade front over the last month. Undoubtedly, yes. I think the more positive noises have some foundation. In reality. Trump wouldn't be saying what you're saying if he didn't believe that he he could indeed push out the March one deadline, and that

is has to be good news. The problem isn't solved yet, right. There are really quite intractable issues having to do with STECH, having to do with the Chinese changing the economic model right, which is something that is really not going to clients at the moment. Villam Do you just tell them to assume that this is going to continue for decades, that

this isn't going to stop. Yes, this is my view, um that the relationship, the trade relationship between the US and China is part of a wider strategic global new Cold War. Yes, well, you were brilliant enough to bringing Catherine Mann, who owns the concept of dysfunction and the code dependency of these two trading giants. She has the high ground and that concept that what you see or do you agree with your colleague Catherine Man is a

co dependency of international trade very much. So, Yes, the two elephants in two and a half elephants if you count the your area as to half in international trade, and they are China and the US do have opposite ambitions for a regional and so then don't the Chinese outweigh this president that's there? Isn't that there their greatest probabilistic outcome and simply to outweigh outweigh Donald Trump. Yes, but that may be another six years, right, So I

wouldn't think that this is really their strategy. They want this issue to be settled. They don't want another two years even of open trade warfare, which has really been damaging the Chinese business confidence. Matty. As you know, in leadership, one of the toughest decisions you have is not who

to please, but who to disappoint. And I just wonder at the end of this week, it was really interesting listening to the President at one of the recent rallies this week when he mentioned a deal with China, the crowd went silent. There was no cheering about cutting a deal with China. I imagine Ambassador Leightheiser, if he doesn't get the kind of deal that he really wants, he's

going to be disappointed. If you listen to some of the hosts of some particular news shows who in the United States, they don't seem impressed at the prospect of a deal on board of security either at least not the board the deal on the table, Marty, how many people are going to be upset in the next couple of weeks and who is going to be upset? Well? I actually I think the commentary around trump'space on the

conservative media side is mixed. Russia Limball last night gave a kind of uh tacit approval for this strategy of declaring an emergency action and signing this bill. So I actually think that Donald Trump can do no wrong to his right, Marty, I'm glad you bring this up. So the basic theme right now for the Conservatives is there gonna get one to two billion dollars of funding. He's going to do a national emergency and overlay on top of that. Does your team in Washington have a working

number of what that overlay is? No, And in fact we're trying to figure it out in terms of what exactly what kind of money he's moving around. Their members of Congress has have warned him against using military funds. Uh, that we're you're marked for other things. But they're they're various ideas dick more about where they can get those funds and would not represent some sort of dangerous president. Did you see the Senate a cruze proposal? Oh I miss,

this is fantastic. Um when you see the fourteen billion dollars from Al Chapo Um, it's convicted. It was also you can then use the money for boarding security. It was an interesting idea of being floated around that critics with still owads of fine. Uh. And so it would be the switch the French who would be building the

wall right, we'll just keep this up. Okay, Well, look forward to having your back, Philim about her with us, and we got lots to talk about, and certainly this new theme in America of some form of socialism coming into the debate as well, at least according to the critics of the liberals. George Ken Gollus with you. What you need to know is Mr gun Colvas writes it up at Nomura had a full faith in credit us

strategy for Numura. And what's really important about gun Colvas is his research synthesizes in all of Numura fixed income research worldwide. George, I'm gonna give you an open question before John jumps on. You give us your observation on the new disinflation would you write about this morning? Look, we we've been struggling with it for for many years.

A good morning, guys, and uh, I think there was a period of time where you know, there's hope, you know, sprung internal all throughout the last really colst fifteen months post the the tax deal and all throughout eighteen and

they're really hopes of inflation coming and it wags. Inflations have slightly improved, but you know, really having a hard time working its way to the broader economy, and we're I think markets are really struggling with We're gonna go back to the secular stagnation world that we were desperately trying to break free from in the last year year

and a half. And we look, that's really the multi trillion dollar question considering the sort of deficits that we're running, because it needs given you know, given a sort of you know, uh number of numbers being printed out of the DC, at some point you would think inflation would would actually kick in. But you know, we're also running a huge detload as well, and I think that eventually

becomes counterproductive growth. So, George, what I'm interested in right now is the divergence potentially the could evolve and materialize in the coming months between Europe and the United States very slowly, that spread between the German and US ten years starting to grind out wider two and fifty six

basis points the US over ten year buns. Are you anticipating that to drift tigre in the coming months as we start to appreciate a little bit more that Europe really isn't looking good and the policy response is incredible. Look I think there's scope for us to kind of go do wider, maybe even break what we saw, But to make something sustainable really requires the US too to

find a new area of growth. And considering that we we we two are also slightly decelerating the feed is also trying to desperately achieve a soft landing with the US economy at a time where the rest of the world's slowly I really think that you know, the highs and rates probably took place last year, George. Something that keeps coming up again and again on the soft landing question is this period of time in the mid nineties.

How useful is it to take a framework, a period of time for history gone by and apply it to where we're at right now. It's convenient, and we all do it, and let's be honest, and I think what we would we'd like to draw parallels to the past because it gives us comfort into into what may lie in the future. But the future is uncertain, and I think it is dangerous to kind of make parallels, especially

to the got a huge productivity boom. Distinislation are from the good side, but it lets a super you know, super strong growth And I'm just not sure we're gonna get the same thing. You know. Obviously there's the I was taking taking a bigger piece of it and they don't have a space force. But other than that, I really have a hard time scene where it's coming from.

George Cofas we've walked away from the spread market, two is ten spread as a vanilla spread difference in Yale between the ten yere and the two year because it's been boring, but it's never boring. What part of the spread market do you get the most information from right now? I think the bigger get to really spread your horizons. How about that that voice for radio too. We gotta

go for two thirties. You get to go as far as you can to get the full kind of perspective of what's happening with long term rates, because although we haven't seen the the natural form of term premium coming

in the current has stayed deep throughout this period. Meanwhile, the dollar is strengthened it and and it's giving you somewhat comflicting messages that the bond market is nervous about a downturn, but the thirty year bond market, the thirty year rate is not participating but the dollar is and we have short term rates higher, and it's creating this weird you know, skis them down the middle of what

really is there? How does that on wine? This is really important, folks, is non correlation of longer term ten years, thirty year yields into dollar dynamics. What happens? Does the bond market catch up with the ascendant dollar? Does it go the other way? Well, I mean, look, we're in

a holding pattern with the set. I mean, the set obviously now has opened the door to potentially cutting rates as well, if you know, to go back to the n Again, we're not supposed to do those sort of parallel analysis, but the set has finished the hiking and hiking cycle ninety four five and then and the easy

and then staying at a higher plateau. And so it could very well be that you get a few cuts which you get in the market is actually actually now pricing too and at the short rate actually moves more

than the thirty year rate. So you're looking for bull statement inc Is that essentially what you're saying, George, I mean, there's there's going to be potential for ball steepening, uh and it and it could be something engineered to kind of elong and get this business cycle what the done is by time, and if we were to CDUs still down more than what's projected and kind of linked up with what Europe is going through, I think they would

have to do that. So, George a question that some people might ask, and I'll ask it on their behalf. To really get some kind of aggressive bull statement, it will be difficult because of the issue once that is sitting on the front end of the curve, just in terms of supply and it comes from the treasury, how important is the supply dynamic to get that statements that

you think we might be able to have. I think it's it's it's it's it's easily attainable if the set changes its portfolio composition, and this is really the key thing they brought up. The portfolios now in play the balance sheet, and if they were to redirect their proceeds for let's say mortgages at the short term treasuries, they can help you really finance a lot of that short term paper. So all these things have solutions that they

really changed their their direction. But isn't the ultimate solution what Secretary Geitner mentioned long ago and far away, which is just let time march on. Doesn't time heal all of this balance sheet dynamic, I mean, and it has in the US is in much better shape if you if you're if you're referring to the commercial banking system.

But it's more that there's always so much balance sheet to take down, as much paper as being produced in the government, bond marketing, meltism, the credit market and deltics, mortgages. There's only so much space in the system. And when it happens quick, you have dislocations. Are you able to make a tenure call right now, I mean, not twelve months? Or is it just so noisy out there you can't do it? I can? I can? I think we all do. And that's part of our job, especial and I think, yeah,

what the key is what's our confidence level? And um, we obviously have a precast. Do you think we're gonna be you know, hugging current levels into we have a potential scope to grind higher into the summer, because it's a lot of this negativity should kind of go away in a short run markets markets up right to the short run, but in the long run, without inflation, with the rest of the world slowing, We're gonna be, you know, stuck in the range and heading back down. Fascinating, George,

thanks for the briefing. George Kann called us at number I just greatly appreciate that special topic. In his latest note, QT caps Tapers, scenarios, a smart note on a balance sheet as well, expert on the most important thing to our listeners in the world, not the shutdown, not Brexit. Laura, State and local text deduction. This is a huge deal, isn't it. This is incredibly huge and pepe As they are filling out their tax returns and sending them out c I R s this week, this month, are realizing

just how bad it is. You know, he was hearing from real let there, but seeing they're getting a much smaller refund or they're they're minding that they're paying a lot more in taxes. No, no, no, no, no no, no, it's not you're not I'm not getting a refund at all and paying for the first time of years. Yes, that's what it's because the Biscuits deduction, Laura continue on the the upward over this. Are they going to change

the rule, That's what everybody wants to know. Well, so last week President Trump said he was open to changing it. And this was really a shock to to most people because it was sort of settled back when they did the tax overhaul a couple of years ago. Um and and and be clear that that right after Trump said that, Senate Republicans sent out a statement saying, nope, we're not reopening this issue. We're not relitigating it. So the chance of there being some congressional change real soon is is

not not looking likely. However, Uh, New York Governor Andrew Cuomo went down met with the President yesterday. He made his case. Afterwards, Trump said, you know, I listened to him. Look, how you know, this is a nice told of my partnersanship. But thanks for coming. Translate this from the Senate majority leaders Kentucky over to those evil leftist commies up in New York. I mean, that's really all this is about

his politics and geography, isn't it. It's it's true because but whether you're Republican or Democrat, if you are in New York, New Jersey, Uh, there's no Republicans in Connecticut at least at the national level, or you know, in California, you really care about this issue? But you see a lot of the Republicans who cared about this lost their seats last November, so they're no longer in Congress. So there's not as many Republicans whispering in the Trump's you're saying, hey,

we need to fix this. It's really just Democrats in the northeast. You want to jump in on this, I would love to please jump in and ask a question. Please, thank you. I remember when I moved over here and I called the accountant and I thought, well, it's America, so this is going to be a low tax situation. I'm looking forward to leaving Europe. And then I got told, well, I gave you yours a city tax tax. Then there's another tax, so you don't pay property taxes. Thank goodness,

Thank goodness. Combine that with the state income No idea, how many tax you didn't? Why did you ask miss Davison question, Laura? I want to ask about buy backs actually, because there are some senators that are talking about how they can curb buy backs low to them on the Democrats side. Then we heard from Senator Rubio, who essentially is looking to end the tax incentives with buy backs. What's on the table here, and what's likely to happen.

So what Rubio has laid out is a very very loose proposal that would basically equalize the treatment for companies whether they you know, issue dividends or buy back stock. We saw after the tax rate drops the precipitously that corporations very much preferred buying back their shares versus m issuing dividends or um. In particular, what what Rubio was

hoping to see more of capital investment that has really faltered. Um. You know, we have about a year of data since since the law passed, and that has not been the driver of economic growth that Republicans we're hoping. So Rubyo saying, look, let's uh, you know, make it less advantageous for companies to to buy back their stock instead put that money into growing their business, whether that be research, research, research costs, or um some sort of equipment, machinery, buildings that would

be uh that that driver for for economic growth. And they're not that it's likely to come. Is this is really a just sort of one idea out there and rull be a sort of a loan on his party on this. Floord Davidson, thank you for the update. I'm sure we'll inflict more pain as we go to April. If you have an investment account and with the repair that you've had, and you can benchmark it back to two thousand nine or August of two thousand seven, or

maybe you can go back farther than that. This is not only the interview of the day, but it's the interview of the week, month and forever, Lizzie, and Saunders joins us, she needs no introduction with Schwab Lisianne, what were you doing December twenty four, twelve noon? What were you writing? What were you thinking? For Swab? Well, we we did do a daily report during that era. At any time that we see the market down uh more than about two percent, we we put out a report

uh that day. There were a lot of aspects to it, uh technically, sentiment wise, it suggested we were in some sort of panic selling mode, kind of a crescendo um, and that we were likely to see at least a technical lift. Let think the jury still out as to whether that was truly the bottom, And I think the answer to that question will be the length of runway between now and the next recession. I think of our session is pushed out that low probably holds for a while.

If not, if it's sooner than than I think what consensus believes, then it's more likely we read test those But in the modern day, can you speak to schwab people the same way you did five, eight, ten, or x number of years ago in the hyperkinetic media of today, how do you handle that versus what you used to do.

I think it's a tougher environment right now. You know, Tom, you and I have known each other for a long time, and I think we we generally were on the right side of the story in later oh seven, and same

thing in early two thousand and nine. And I'm not and not that either of those environments were easy, but I think at those times, certainly with the benefit of hindsight, but fortunately for us, at that time, I think the so called call, which I don't tend to use that word very much, was a little easier than it is right now. I think the waters are a little bit murkier. Uh. We we sort of at least temporarily solved one of the problems that plague markets last year with tighter monetary

policy and tighter financial conditions. But I even there, I think the jury is still out as to whether the FED truly is done. I think there's some chance we could, at least in the short term, get a little bit of an inflation pick up, given things like n f I D selling prices, that may put the FED back in a position to have to throw another hike at us. UH. Conversely, UH FED is sort of a little bit in a box.

We may look back and say, boy, the December hike might have been seen as a mistake, because indeed we were slowing sufficiently enough to move into a recession. I think the big wrinkled, probably the big needle mover to define the length of around way between now and extra session will be trade. I don't have any greater ability to sort of define what's going to happen there than anybody else does. Well. Well, listen, and you said, with the FED on this sidelines, investors are focusing more on

fundamentals and what you know, perhaps the next recession. What are you seeing in the earnings here at this quarter? And more importantly, you know nineteen we've seen we've heard some CEOs fairly conservative in their outlook across the various sectors. What's your thoughts about earnings and how earnings can support this market in so the fourth quarter, obviously it has been a decent earning season. The beat rate is only about seventy, which is below what it has been recently,

but decent numbers about six growth or so. That's obviously down from the peak growth to prior quarter. But we we never expected to maintain anything resembling that heading into ten simply because of the math of comps on a on a tax cut basis. Right now, you've got refinitive consensus estimates down into slight negative territory for the first quarter,

and every day they continue to be ratcheted down. So I'm not sure the rerating down of twenty nineteen estimates encompassing not only trade related risks, but uh the lagged effect of tighter monetary policy, the lagged effect of the strong dollar last year, and of course the collapse in all prices, So I'm not sure we've rerated it. The question, and the important one, is do analysts ultimately set the bar low enough that when we get into reporting season

they're sufficiently low to allow companies to hurdle it. I do think that there's a even if it's not a high risk of an earnings recession. There's a greater risk of an earnings recession in the first half of the year than there is an economic recession starting well. It's weird about this year is unlike last year when the E was accelerating dramatically and the PE was coming down because we were under multiple compression, the opposite has been

happening this year. So the E is under pressure, but we've seen a lift in multiples because some of those easing UH issues from from last year and at least being financial conditions. So Lisianna, again, investors are focusing more on the fundamentals here. Do you think analysts estimates for SMP earnings accurately reflect a lot of the geopolitical issues out there, whether it's you know, the China slowing trade talks, European Union slowing Brexit, those types of things. Are you

think they're adequately captured? Probably not yet. And it was interesting about the rerating that happened to twenty nineteen estimates. So if you go back to April, which is when you first started seeing consensus estimates for Q one, and then July was when Q two was brought into the mix. September was one, Q three and then January Q four, so the start point is different, but you've seen a dramatic rerating across the board. It kind of happened in

in a cycle. You you first had the rerating associated with China and the trade war companies exposed there. Then it was the collapse in oil prices and the rerating that was necessary with energy, and then on some of the exporters tied to the dollar. Only more recently I think has it happened in conjunction with the weakness in in Europe. So it was like analysts were almost had blinders on and and sort of bringing estimates down in chunks based on some of those UH pressures that you

you mentioned. Again, I think in the near tune we probably still have a bit more room to go on the downside. Um. But to your point about some of these risks, this really has impacted soft data more than it has hard data for broad economic standpoint, which means it may not quite be the same impact near term on earning well. Briefing Lizen Sanders, thank you so much, greatly appreciated. She is with Charles Schaub, Thanks for listening

to the Bloomberg's vanlast podcast. Subscribe 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