Tariffs Are A Job Killer, PIIE's Lovely Says

and she is more than wired in on trade. Mary, with all of the hysterics right now on trade, what do we need to know about the process forward the next three days? Well, we have a lot to watch for over the next three days. Tom, You're right, it's

very interesting times we're living in right now. I think that um, we will see some probably stability and today because we need to recognize that Leah, who is president, she didn't Ping's main negotiator is on his way to the US UM and or at least that's our our belief, and that means that negotiations continue. So there's still quite a bit of hope that will get a deal here between the United States and China and that we can at least put off for a while the increase in

tariffs at President Trump threatened over the weekend. What is a deal come Saturday morning? I mean, is it a handshake? Is it a photo? Opposite? We're going to talk further, I mean define deal. Well, there will be an agreement by both sides, even though President Trump hates the term. It will be a sense of m o U or memorandum of understanding. But there will be some lock in on on purchases for sure, and some changes to how how China operates, particularly with respect to investment from the

United States. So we will see a deal. Will it solve all the problems? Clearly not. The can is going to be kicked down the road. It has to be. The agenda the US laid out was too ambitious and too in a sense ambiguous to be dealt with within the short period of time that the US and China have been negotiating. The President tweets, we are thrilled and very lovely with us. To translate, she's with the Peterson Institute.

The reason for the China pullback, an attempted renegotiation of the trade deal is the sincere all caps hope that they will be able to quote negotiate unquote with Joe Biden are one of the very weak Democrats and thereby continue to rip off the United States five billion a year for years to come. Guess what that's not going to happen. China has just informed us that they vice premier are now coming to the US to make a deal. We'll see. But I am very happy with over one

billion a year in tariffs filling US coffers. Great for you US, not good for China. Mary. I don't want to go into Elizabethan hysterics here, but the last sentence of that tweet, I am very happy with over one hundred billion a year and tariffs filling US coffers. I get that customs and incoming money goes up. Where does

that money come from? Great question? Uh, you know, there's two very very good academic studies that we've just done looking at the price increases following the tariffs, and the answer is US consumers and businesses are paying these tariffs. That is a tax on US businesses and US consumers. Uh. No matter how many times the President likes it, you know the numbers, the numbers are playing. We're seeing price

increases as a result. Uh. The San Francisco Fat estimates that it's put about zero point one percentage points on the c p I. Now that's not a lot, but if the President goes along with what he's threatened, it will raise the CPI by half a percentage point, which is quite a bit. More importantly, it raises the cost of investment by about one full percentage point. So we look at what businesses need to continue to be productive and grow jobs in the United States, and we see

that this is a job killer. Okay, it's a job killer. I saw somebody tried two marginal tariffs. This is really important, folks, And I'm gonna go Matthew here on you You go from no tariff zero to two, three, five to ten, and the president wants to go ten to twenty five ish or something like that. The effect of that on our listeners is nonlinear, isn't it. The more in bigger the tariffs get, the worser the second derivity we sort

of get, don't we marry? Yes, it is proportional to the square of the tax, which means there we go. The burden on Americans will get larger, and of course, you know, the uncertainty is taking its toll. Pretty soon businesses will rearrange supply chains, which of course I think this adminis straation applause. What they don't tell you is the jobs are not coming back to the United States. They're already starting to move to other parts of East Asia.

And in fact, if the terroristory main we've already seen US businessmen say, hey, I love this country, I've invested in this country, but I can't take taxes on my inputs. It just doesn't make sense to me. I can't sell. One more question before we dash, very lovely, if the President puts in some new level of higher tariffs, where are we bombing ourselves back to? Are we back before the romantic names of the past, Uruguay gat, all the other famous trade meetings. Are we back ten years? Are

we back to World War Two? Are we back to Smith and Ricardo? How far back are we on non free trade? Well, these are the China. We're back way back before the Uruguay round. Because considering all of the things, all of the various types as tarists we have on China, including things that pre date this latest round, over fifty of US imports from China are already subject to special US duties. So these are levels of towers that basically in the modern era we've never seen before. Okay, vera

lovely what a clinic. Thank you so much at Folks. We will have out on podcast Dr Lovely Syracuse in the Peterson Institute. That was exceptionally important and valuable summary there of where we are heading. It talks keeping investors worldwide very much on edge. JP Morgan, chief executive office at Jamie Time and Santega notes of optimism even after the rising specter of tarists has royal global markets. Whatever the odds were before, I think it's still any percent.

They'll get it done. The odds of something bad happening is now doubled whatever you thought there, or if a two percent or five minute temper is probably double and that's why the markets are reacting to it. Here in New York City to discuss someplace to say, it's David Rosenberg Clask and Chef, chief Economists and strategist alongside pre emisra Tle Security's head of Global interest rate Strategy. Guys,

good morning to your both. Great to have you with us. Prayer, What are your hand and clients at the moment about what is about to happen Thursday Friday? Sure so, clearly the market is extremely nervous around this potential of not having a deal. Our view is that, you know, tariffs are likely to go up on Friday, but both sides are going to get a little annoyed, they're gonna step away,

and then they're going to come back and negotiate. I really don't think either side wants the self inflicted trade war here, so our view is that it's going to be this sort of gang kick for another few months, so they're going to continue to talk. I actually think that a lot of this is politically motivated. I think going into the election, we're still going to be negotiating because it's very hard to get this deal. We need

enforcement mechanisms, we need some sort of monitoring mechanisms. You know, they're a risk of China losing its sovereignty. These are all pretty big issues, and I think structuring they're pretty far apart. So we don't really expect to deal um. But but we don't expect this trade war either, and I think the markets at least going to be comfortable at the worst case scenario doesn't happen here. Thought well, I think that we've had a very interesting point here

in this chess match. Uh, the US administration seems to think that because the stock market recently hit a new high. Uh, they're obviously believers in this three point six percent unemployment rate and the non firm paper report that came out that the U s economies in fine shape, the stock market isn't fine shape, and therefore, uh, the US has

the upper hand. Uh. Then you moved to the Chinese part, and UM, I think it was fortuitous on their part to start easing monetary and fiscal policy provide what the markets called data stability so at least that the Chinese economy is stopped deteriorating. So they think they have the upper hand. UM. So look, we'll see how this plays out. I'm not recommending taking any treating positions. There's just too

much uncertainty. Can go either way. UM. But I think really that's where we've come to us that both sides sort of feel a little emboldened right now, uh to push the other side around. UM, just being done how their economies have been doing. On the surface, it looks like the outcomes, the potential outcomes, are incredibly binary. Tom. We had a little bit more color overnight Royce's reporting

the following. I think the story is really interesting. The diplomatic cable from Beijing arrived in Washington late on Friday with systematic edits to a nearly one hundred and fifty page draft agreement that would blow up months of negotiations between the world's two largest economies. This is according to three U s Government sources and three private sector sources briefed on the talks. The document riddled with reversals by China.

The real surprise, as we get more color on all of this, is that it took two days for the president to blow up. That he only blew up on Sunday because we learned of this on Friday. Here's some other distractions, probably knowing what The New York Times is going to do with his fifteen years of taxes decades ago. But what's important here, and Meredith Sumter, thank you if you raise your group for joining us yesterday for what

I thought was great conversation. Is here we are PreO, what where is the yield now two point for two percent? How do you trade negotiation adjust that yield? It's very hard. As you said, you know, there are significant binary risks here. I think the market is saying, well, there's some probability of all of these breaking now and we actually go into a trade war. So I think that's why the market is pricing in these feteases in the near term.

We've got almost an entire Fetes price for this year. Yeah, I should point out, as usual, Rosenberg walks in the studio and the futures go negative twelve down to negative night and yeah, two big figures to twenty one on the vix. Is Well, David, is this like September or December or whatever the swoon was February of eighteen months ago.

There a different character and color to it this time. Well, look, uh, I'm not going to compare it to going into the fourth quarter, where it was also coupled with you know, a lack of liquidity in the marketplace, and of course the Fed was in full blown tightening mode. So it's not I wouldn't draw that comparison. But here's what I'll say, Uh, there is way too much risk in the market right now. From my perspective. Uh, we're in a heightened period of

I would say, not just political uncertainty. I would say there's more economic uncertainty than meets the eye. I think a lot of people are paying too much attention to the headlines. They're not looking under the hood at the economy. Excuse me, you're in a meeting with your clients. Excuse me,

they're saying GDPs three discuss. Yeah, I'm gonna say that basically, if you look at the underlying domestic demand components of the economy, so you strip out I mean, negative imports actually contributes to GDP, we had a huge inventory build, which is not sustainable. In fact, I would say that, Well, what I'm gonna say is, basically, you've got to look

beneath the veneer. Uh you know, you've take a look at inventories and manufacturing, wholesale and retailed inventory to sales ratio in the United States today it's higher than it was in December seven when the recession was starting. We have so yeah, a lot of the production and supported GDP tom went into inventories and that has to be worked off, by the way. That was the message in the isms in April. So so my senses that we look at the band cut to the economy stall speed

barely more than one percent. That's the over here wants to talk as all TV securities. You don't agree respectfully with Mr Rosenberg. I don't because I see a pretty big difference from late last year. I think late last year was all about this FED making a policy mistake. They were letting the banksheet run off. They said essentially

forever they were going to hike above neutral. I think it's it's useful to sort of think of FED policy as being either about the outlook or about the reaction function. There's been a dramatic shift in that reaction from function from late last year up until now. Now the Feds telling us we're close to neutral, we're kind of nervous about inflation, we don't need to hike anymore um and we've they've actually announced the end of bantand sheet enough.

So on the reaction function front, I think they're largely responsible for the easing and financial conditions. Now we sort of get to the growth outlook point, and this is where I would say, based on data that we're looking at leading indicators that growth is okay. You know we're going to be around trend, which actually doesn't meet the fat threshold for a cut. If David's right and growth is going to all collapse from here, then absolutely I

think the FED will need to ease. I just don't see enough data here that growth is about to for what that we're heading into a recession. They just seemed to be increasing confidence that the FED can engineer a soft landing. You're saying they can't. I'm trying hard not to laugh. Um, yeah, the Fed. So tell me exactly how many times the FAT successfully has engineered a soft landing. We've had, We've had, We've had time to put our historian had on. There's been thirteen FED rate hiking cycles

in the post World War two experience. We had ten recessions, which which the FED never seems to see until it actually happens. If you're gonna take a look at the fair at staff forecast from the Green Book on the month of recession happens, there's never a negative for GDP in the next four quarters. We have three soft landings. Okay, we had one in the mid sixties, we had one in the mid eighties, and one in the mid nineties.

When the economy slows but doesn't go in the reverse. Well, in those periods were basically in year three of the cycle, not year ten. The unemploying rate was over six percent in those periods, not south of four percent, and the FED was not just talking the talk. They're walking the walk. The FED on average cut rates in those soft landings two fifty basis points and they moved right away. So I would say, look, history is on our side. We

have thirteen FED rate taking cycles. The only thing separating the inevitable recession and where we are right now are just the lags between Monterrey policy and the real cons Quickly, what's the significance of ten years laced ration? Some important when the recovery has been so shallow? Well, the recovery has been so shallow for variety of reasons. But you have to take a look at where accurate demand is Our demandage GDP. Our demand has been very soft, just

over two percent growth. But tell me what's aggurate supply? Ben Productivity has only started to pick up very recently if you believe the data. But labor force, the labor force is collapsing. You know, how did we get down a three point six percent unemployment is because the labor pool is down to war. It wasn't made two thou and one. So that demand a demand has been aggreate demand has been weak, and aggriate supply has been weak.

You know, So the answer back to you as basically, well, how do you get to three point six percent unemployment rate? By the way, three six an appoyment rate is exactly where we were in December nine and the recession nobody saw this week. That's a great observation by Mr Rosenberg on the labor pool off the chart that up pre a miserable as well. We've we've begged them to stay and where did you see, John? We got through that without being Liverpool twenty minutes. Don't worry, We've got that

old comed thrilled. They'd be smart. This halfar with two people that respectfully disagree. David Rosenberg of Luskin chief from Priam Israel t D securities with us right now, David, I want to go to the equity markets. Pre As got bonds covered. We'll do that in a moment. Here you told us earlier you can't trade here. What do you do if you're a long term investor? I think that if you're a long term investor, you have to pay attention to where the starting point is on the multiple.

That is a huge determinant of future returns. And if you take a look at the at the cape at the Schiller smooth pe UH, you know, which is still well north of thirty UH. You're expected real return in equities for the next decade. The real return and doesn't for inflation, is close to zero. So it tells me that this era of passive investing index investing is over.

I think that it's going to be more of a market in the public equities market anyways of active management is going to be the way that you'll deliver alpha and the portfolios UH and UM. At the same time, I would suggest that that UH, in a declining rate environment, you want to be focused on dividend growth, dividend yield, low payout ratios, call it maybe the classic dividend Aristocrats index.

That would be a good place to be UH in noncyclical parts of the market in this sort of environment, the rates environment that I'm depicting, then pre it within the bond market and bringing you over to equity and I don't want to step on, you know, the equity people of TV securities. But then how do you ravel how do you veil you revenue growth? Given the persistent low yields and the single digit actual assumption that Mr

Merzenberg alludes to. I mean the revenue growth of double digit text stocks or even organic revenue growth of eight percent. That's pretty snappy, isn't it exactly? But I think sort of going back to your question, you know, the the question that that the entire macro community sort of dealing with is did all the devish central banks extend the cycle or did they actually signal the end of the cycle.

If they've signal the end of the cycle, even if the multiples look attractive, well, if the cycle is ending, you don't want to be in any risk assets, I would say, then you want to be in ten your treasuries. If the cycle has been extended, then I completely hear you. I think with low interest rates, risk assets are the way to go. Carry trades are the way to go if you're in that camp, which is actually where we're in,

that there has been an extension of the cycle. Not to say that we'll never get a recession, but if the recession is a year out, it's very expensive to be in U S treasuries rather than any of these risk assets. So you know, what what we're recommending is by rus assets, also own some front end treasuries because if you're getting three monthy bills at two point four percent. It's a positive real rate. We haven't had positive real rates in the treasury market for the last ten years.

It's a good place to be in for when you need liquidity, because we know liquidity is going to be challenged. There's been so much of this passive investing that when everyone's trying to exit, you can have outside market move.

So that's when if you've got liquidity, you don't need to sell at at that worst part you write an important question, praise Praier, it's what what is the incentive to take on juration risk at this point when you can get so much you'll pick up at the three month on the three months relative to the site, ten year, thirty year exactly. Yes, I think term premium, which is sort of this bond market explanation for this compensation for

additional duration risk. It's actually back to levels when the FED has historically done qui, and we've heard from a lot of FED speakers there are nowhere close to either cutting rates to zero or doing quei or for guidance, I think they're telling us that they're at neutral. I don't think they can be preemptive here. I think if growth absolutely collapses here we're heading into a recession, then term premium makes sense if growth remains around trend. I

think term premium can rise a little bit, you know. Secularly, I'm not sure that it can be much higher given where global bond deals are. But in the tenure get to to sixty two seventy, so I actually think the goal of the yielk of can step in a little bit. I'm assuming you tight the other side of that trite in the bond market. You know. Look, uh, the FED is the only central bank that's hyped rades nine times

this cycle. And when you couple the quantitative tightening, the de facto increase in the shadow FED funds rate has been three fifty basis points. I would submit to you that this was a very significant monetary tightening cycle in the United States. I said before, I'll say it again that the only thing separating the current um happy place the US economy seems to be with a recession or just the lags um, you do not come out of

a monetary tidening cycle of this magnitude. And the FED pushed the envelope to see how far they could go without it having an impact on growth. And I think we'll start to see more of these impacts, especially with fiscal stimulus fading. We will see more of this in the second half of the year. I'm not living in the here and now. I'm saying that basically, by the end of the year, Uh, the recession rests are going to turn into reality. David were gonna go, David Rosenberg,

Lasko chef, thank you, Thank you so much. TV securities, that's what we love here at Surveillance Collegial difference of opinion, to say the least. Conversation with Admiral Stravins, the Carlisle Group, and we did speak of the Abraham Lincoln and flotilla. Moving over to the Arabian See why don't you bring in our good guest in Tehran. I want to bring in blimbers, Gona Montevelli. She joins us from Tehran. Gon. Not great to have you with us on the program.

Talk to me about this sixty day deadline that has just been sent by Rahani. What is the latest on the ground. Yeah, so, um, this morning Rohani made a statement and it was dead live on State TV. And this is obviously in response to the latest escalations coming from Washington. The latest kind of pressure that's come on common Irna that was, you know, kind of started really last year with Trump and withdrawing from the from the

nuclear deal. And today Rohanney said that from today, Iran is going to cease complying to two aspects of the nuclear deal, and that includes exporting excess levels of enriched

uranium overseas and exporting excess levels of of heavy water. Now, but key thing is that last week the State's Department actually announced new sanctions on Iran's nuclear program, which included sanctioning any country which would take those imports of enriched uranium and that and that statement from the States Department last week also said that it would stop Iran from being able to access any of that heavy water or

export any of that excess heavy water. So in many ways, Iran is is actually saying that it's not going to comply to two provisions that were affected by Washington deciding last week to revoke waivers that are directly that directly apply to those two terms within the deal. So I think what's really key right now is to see how

the Europeans and the remaining parties in the agreements. Those are the remaining four members of the UN Security Council all of the EU countries, and that obviously includes China and Russia and Germany and France from the UK. What we you know, what we're looking for now is how they're reacting. Germany has so far said that not complying to one part of the deal is not acceptable for them. We have to see whether they're going to react in

chorus on that and what that actually means. Um. And obviously it's going to be interesting to see how Washington chooses to interpret this this move by by Iran's talk about Europe first, and then we can talk about how Washington chooses to interpret the latest move from Iran. For the Europeans. From the Iranian side, their message is quite clear. We've stood by the j C p O Y, We've continued to abide by everything we agreed to directly in the agreement. We want to trade with you. But can

the Europeans actually directly respond to this? Are their hands tied? Um? You know, I think, as you said, that the Iranians are deeply, deeply frustrated and um, you know, from what I've heard from European officials and different matters, what I've spoken to over the past months. They'll actually see they take you know, they have a huge amount of sympathy with Iran's position, and they're mostly obviously and we we

we know this. They're not on the same side as the United States on this, and they want to be able to trade with Iran as much as Iran wants to trade with Europe. But to an extent, I think, yes, their hands, their hands are tied because they're dealing with you know, this is the United States, the world's biggest economy. This is a you know, so much of this trade of dollars denominated, and Iran cannot officially trade in dollars anymore,

it's sanctions from doing that. Um So, it's it's an extremely challenging task, and I think, you know what officials keep pressing to the Iranians is that this is taking a long time because we've never ever done this before. This is the first time anyone's ever tried to do

something like this. We've never tried to establish a special purpose vehicle on this level, and we've never tried to do it with this kind of level of hostility from the United States and this level of opposition from the United States, which is of course, you know, still an ally to the European Union. So no, it's it's a

huge challenge. And I think what the Iranians have done today this is more a message to the Europeans to just kind of do everything you can to try and save this this deal now, because after that sixty day window that Rohaney announced today, there's said that they will consider enriching um uranium beyond levels that they are currently allowed to. But at the moment they're actually not hitting both maximum levels anyway. They're actually kind of you know,

they're they've they've got rooms themselves. Well, let's talk about the Washington response to all of this. In fact, not the response the Washington approach to all of this. John Bolton, the National security advisor to the President, has said quite recently there's a clear and unmistakable warning that he wants to send to the Iranian regime. How are they runnings

taking that right now? The words of John Bolton, Yeah, I think they you know, I think, um, I think obviously there's a there's a huge level of kind of disappointment, and I just say, kind of like sadness at the way the state of the nuclear deal. You know how it's kind of you know, the way that things have deteriorated, not just since last year, but actually since President Trump

was was elected. And I think Iranians, from the ones that I speak to anywhere, and these are largely working with people, middle class people, it's kind of this feeling of like, you know, where does you know? I mean, I don't want to sounds out of out of turn, but this kind of sense that there are crazy people running things in the White House that are kind of quite dec me to to start a conflict with with

with Iran. And that's not to say that they don't often feel that there are crazy people running their own country, but I think the senses that they voted for the you know, Honey was elected by by quite you know, a high, you know, a wide margin twice and based on this promise of the nuclear deal to help the economy, and now they're kind of baffled by the level and

the the ambition and that appetite. The sabotage in Washington, I think, you know, and it plays into this history of kind of feeling that you know, conspiracy theoric theories that the United States just wants to kind of uphend um, you know, Iranian popular politics and democratic process. If it plays into those to those um, to those fears and feelings as well, you've gotta leave it there. A report from Tarra and Colner Montalfalli with us of Bloomberg News

and her wonderful coverage that we've seen from Persia. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio