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Towson Slock of Apollo joins the surround the table. Sawson, good morning, sir, It's good to see you morning. Can I ignore all that?
Well, this is.
A golden lug starting point for the FED, at least, I mean the dual mandate it says inflation should be too. We moved a little bit more in that direction, better than expected, and on jobless claims. We also had a label market that still is reasonably strong. So from that perspective, this is absolutely good news for the FED that we did not get yet any inflation surprise to the upside.
But obviously we still have terriffs in the pipeline and what's left on the tariff front could still add as much as one percentage point to tariffs over the next I'm sorry to inflation over the next twelve months. So in that sense, this is backward looking. As Mike is saying, the risks are of course that there's now more upside coming to inflation.
So this is the issue, and it's a sequencing Giessue, and I'd love to get your thoughts on it. So sentiments collapsed basically created over the past few months. What we've started to see with CPI is just a bit of softness that's encouraging. How long before we see the weakness in the output dates before we then say the higher prices in months to come?
What comes before the other Well, let's think about how companies might respond to this.
So now you know tariffs are coming.
For example, if you think about Amazon, of the sellers on Amazon, seventy one percent they source their goods in China. So one very important aspect is that it will be visible for everyone the prices are going up on things that are imported, of course from China. So the conclusion to your question is how do you respond to that? Do you take your existing inventory and sell that at the old prices? Do you take your existing inventory and
raise the price immediately? That profile will probably be individual for different companies, depending on the competitive situation, which sets are there in how sensitive they are to tariffs.
So we just don't know.
Yet what the impact will be and how quickly this will feed through. But we do know that higher prices are coming as a result of goods coming from China becoming significantly more expensive. So even if companies decide to sell the existing inventory at the old price, we will over time see some outware pressure on goods infasion coming from this source.
Is there that.
We ignore this data at our own peril the idea that actually lower energy prices are giving more disposable income to consumers to potentially go out there and buy, and that, oh yeah, it's also an offset for a lot of potential producers in the US.
Absolutely, low energy prices is very, very helpful for the consumer. But the other thing, of course, is that the whole surrounding sentiment around what's being going on is that we literally went from the last few days from nuclear winter, so now back to talking about stackflation and staflation.
Has these risks of course, that you.
Have hit winds from consumer sentiment being weak, corporate centimingly weak. If you look at the fit survey for Capex planning, they are really beginning to turn south. So companies are beginning to put back more likely because of the uncertainty. And let's not forget we still have a five trillion dollar net wealth effect on consumers from the stock market
going down. So if I add this whole list together of week A corporate sentiment, week A consumer sentiment, tariff is coming and a negative wealth effect, and on top of that also retaliation from foreigners who might be doing things to us simply because of the trade wall that brings you a fairly long list of downside risks to the outlooker world.
Which raises this issue of how we even game out the idea of inflation.
Why potentially are we.
Not talking about deflation or disinflation? And I say this given the fact that we see Walmart, for example, saying that they are going to invest in price competitiveness, basically they're going to absorb all of the costs from tariffs.
At what point could potentially the lack of demand be the main story more than inflation.
And that's why the key issue here is who is going to absorb the increase in tariffs?
Who's going to absorb.
The price increase in goods that are coming here, in particular from China.
Is it going to be.
Consumers that will face higher prices or is it going to be taking out of margins?
Will the E in the pe ratio go down as a result of this?
As companies such as Walmart, Costco, and of course Amazon begins to say, well, maybe we are going to absorb some of this and that remains to be seen exactly.
Maybe it's going to be.
Split across corporates and across consumers, but the bottom line still is that someone has to.
Foot the bill when tariffs are going up.
Wall Street Journal has this morning that the President privately acknowledged that his trained policies could potentially lead to a trigger a recession, but he said he wanted to make sure it didn't cause a depression. Where are you now in terms of potentially having a recession this year?
So, of course the last few days, it was pretty clear that there would be a certain stop in the economy where prices would go up significantly, literally on all trading partners and everything coming in. So that was a scenario where a recession was very likely, almost at one
hundred percent where we came from. Today, the recessiont probability is probably fifty to fifty percent, meaning we think that there is still a likelihood we will have a slow down, but the risk is we just don't know what the response is going to be from consumers, corporates, how much will markets go down further? In particular, this wealth effect on his own think about how we normally talk about
when the stock market's going down. We go back to the spreadsheets and say, what's the marginal propensieses to consume? How does consumers react when the stock market goes down? Here on his own, the stock market down now five trillion so far, and of course now it's rebounding and then coming a little bit back again. That's, on its own, a fairly significant hit to consumers and the wealth effect for the Kajuma outlook,