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Joining us at the desk Jim Milstein, Goggenheim Securities co chairman, A legend on Wall Street and in Washington. Jim was the Treasury Department's Chief of Structuring Officer under President Obama and a very good person to talk to when people are very worried about the economy, frankly, and so, you know, one thing is that you see investors pricing in now two rate cuts this year, they're worth three priced in. So the outlook is still a little bit sour, but
maybe not as dire as before. You see so much under the surface because you're also a structuring advisor. Do you think that the fear is warranted?
Well, I think the you know, the chaff said at the last interview, he did the really he's looking to the Treasury Department into the White House at this point to see the direction of their policy. You know, tariffs are a big change in the potential economy of the United States and the world economy, and so that will influence both short term price pressures as well as economic activity.
So I think he's kind of frozen for a while until he sees really where we're going with tariffs and how the rest of the world reacts to those tariffs, and whether we get a growth slow down as a result of retaliatory tarwer you know, high tariffs being imposed here and retaliatory tariffs being imposed outside.
Can we already tell I mean, Jim Farley, the CEO Ford said, these tariffs or the threats thereof, are causing chaos and costs, and it seems to me that in the next round of CPI, PPI and PCE, we're going to start seeing that shine through.
Yeah, I think you're I mean, just anecdotally. I think some of us are already seeing prices go up on the things we buy as a result of suppliers and sellers getting ahead of it. So yeah, I think you know, in the short run, tariffs are an increase in the price level, but thereafter, you know, it may just stay at that level. So the rate of change may not be great in twenty twenty six as it will be in twenty twenty five when the tariffs are imposed.
Well, but Jim, all this, you know, all this uncertainty in not only tariff policy, but we don't know what's going to happen with regulation and tax cuts. Are in question right mass deportations that seems to be affecting everything from small businesses when you look at the nfib NO expansion to you know, Morgan Stanley and City saying, like the M and A bankers and the IPO guys that we have not really necessary right now.
Yeah, I mean, listen, I think one of the two big pieces of legislation that President Trump got through in his first term was his US NCA the tariff deal, the trade deal between Mexico and Canada.
Trade deal anyone's ever seen, according to the White House.
Yes, and.
As a result, I mean that's been in place now for seven eight years. And US manufacturers, which is the
sector that the Trump administration now wants to promote. US manufacturers laid out their supply chains in Canada and Mexico based on the rules of the road established by the usmca So you know that no one should be surprised that they were surprised by the threat of imposing twenty five percent tariffs on Mexico and Canada are two largest trading partners, and why are they our two largest trading partners Because the USMCAA created a roadmap for how to
take advantage of relatively lower wages in Mexico and take advantage of relatively lower commodity prices in Canada to set up your supply chains for domestic manufacturing, you.
Know, aside from tariffs obviously creating a lot of havoc in the market. That's fair to say. On tax cuts, one question I have this was supposed to be one of the biggest parts of the pro growth agenda, that and lighter regulation. But how likely is it that we see a lot of those promises come to fruition And if we don't, does it stifle that pro growth story.
Well, let's first be clear and level set right.
So, the extension of the twenty.
Seventeen tax cut, Tax Cut and Jobs Act is basically the status quo ante. If it isn't extended, you would have a tax height hike on households. The corporate tax cuts were made permanent, but the household cuts were not. So they if they don't extend them, you're going to get a tax hike. But if they do extend them, it's just the same tax regime we're in today.
Now.
President Trump has a campaign talked about further tax cuts, no tax on tips, no tax on social security, no tax on overtime. You know that would uh. The the estimates are all over the places to what that cost to revenue would be. But it let's assume it's somewhere between two hundred and three hundred billion dollars a year, so over the ten year period, another two to three trillion dollars worth of UH incremental debt for those tax cunts at a time we're already running a deficit, uh
equal to seven percent of GDP. So let me just stop there a little bit, cause this is really to me. You know, I guess f If you're a hammer, everything looks like a nail. If you're a debt restructuring guy, uh, everything looks like a need for a debt restructuring. Today, our debt our federal debt to GDP ratio is basically one to one. We're running a seven percent of GDP deficit this year, okay, which means that debt is increasing by seven percent a year, whereas the economy has only
been growing a two to three percent a year. So we're basically becoming more indebted over time because the growth of the economy is not outpacing the growth of the debt. So there's a massive need for what we call in the trade fiscal consolidation. We need to get our house in order and create revenues closer to spending.
Well, and they're hoping to get those revenues with tariffs. I guess in terms of the cuts, I mean, Scott Beston has this three to three to three plan, but it seems so unrealistic to get the deficit from seven percent down to three percent if you're only able to find like fifty eight dollars and twenty six cents in waste and fraud, right, because they're not attacking Medicare and Medicaid and military spending, they're trying to fire people at us AID.
Which guys especially as growth is expected to slow. I think that that's the part no one's talking about here, that how do you grow into that? At the GDP forecastulting revised.
So that's to be fair to mister Besson, he's talking about a four year trajectory to get the deficits down from seven percent of GDP to three percent of GDP. He's talking about goosing the growth rate of the economy to three percent, not in the of low twos, high ones that we've been in and trying to moderate inflation by having more energy production.
You know, with oil in the sixties.
You're not going to get more energy production here in the United States.
It's just it's just not return on capital. Isn't there for that.
So let's put aside whether or not that's the best way to deal with inflation.
How do you goose the growth rate? Well, the theory of.
The administration is that deregulation is going to free animal spirits in the business community, that the tariff walls are going to create a surge and domestic investment to produce because behind those tariff walls you can be more competitive against foreign competition. The problem with all of that is it takes a lot of time. Deregulation is going to
take a lot of time. The rules that are currently on the books that they want to get rid of the agencies actually just can't say done by executive order. They have to go through a rule making process. They had notice and hearing, and they have to unwind the regulatory state. Is going to take even if they move with lightning speed, is going to take a year or two to fully unleash the animal spirits.
And with regard to setting up new.
Production facilities in the United States and reorganizing our supply chains.
That's a multi year effort.
So and you're doing it against the backdrop of high tariffs, potentially retaliatory tariffs, which could be a growth slowdown, as you say, Sali, which means that tax revenues might shrink in the in the short term, and god forbid, we have a recession and then not only do tax revenue shrink, but expenses go up because of all the countercyclical programs we have to ease the pain of a recession.
Even if you see the FED cut twice this year, does that relieve these companies of the pain they're struggling through refinancing at these higher rates.
No, the answer is no.
The so you know, you look at the credit markets and the corporate credit markets. There was a huge surge of refinancing activity that went on when rates were low in the early post COVID period, when the FED had driven rates back again down to virtually zero before the bout of inflation. Most corporate debt has a maturity of five to seven years, so we're now at the end of the maturity of that wall of refinancing that went on there now, So now we've got a new wall
of refinancing that's required at much higher interest rates. So even if the Fed knocks fifty basis points off the low end of the curve, the early the short end of the curve, the uh far end that n you know, the belly of the curve out uh in the five to seven years, zip code companies are that did their financing back in two thousand, two thousand, uh, two thousand, twenty, two thousand, twenty one are now gonna be refinancing in a much higher interest rate environment.
Uh. And you know it's the As the.
Uncertainty, the general macro uncertainty creeps into the credit markets, you're seeing as slow, not not dramatic, but a slow uptick in spreads uh in the non investment grade market. And so both h uh, higher base rate and higher spreads are gonna create higher interest burdens.
Why are spreads so tight right now? I mean, especially if you see an increase in bankruptcy or a concerning absolute number of bankruptcies, why do you have spreads, even junk spreads so tight.
There's a there's just a tsunami of credit availability.
Right now.
There has been uh, you know, the growth of the private credit businesses, which is unrelenting and can tenuous, you know, which in some way is really taking recycling money out of the insurance industry, which used to be big bond investors and continue to be bond investors into a series of specialist funds to do their underwriting. And you know, there's plenty of bank liquidity available.
And private credit. Yeah that was I say private credit.
Well to that end, is this masking some of the pain that's really under the surface.
What are you seeing.
Because when you think about a bank, say, well, consumers are fine. Consumers are fine, but Bank of America and average FICO scores well over seven fifty is almost eight hundred for many of its credit lines, and so you're not really seeing the American consumer there. You're not seeing the painful companies that are maybe being turned away from a JP Morgan type firm today.
Yeah.
There, I mean, so you take the you know, four years of pretty high inflation, and while there has been wage growth to compensate that, wage growth is moderating, So you're really seeing the consumer starting to be pinched. And that's why you're seeing the first set of distress show
up in consumer oriented companies. You know again, it's this is with sign upol credit availability and a change in the capital structures, particularly in the middle market arena where you have not so much bank finance but private credit and private credit is usually one or two lenders. So when a company gets into trouble, even a private equity sponsored company, you can have a conversation like this about what are we doing?
Nobody else knows about what are we gonna do about it?
And so there's an awful lot of what we call liability management exercises going on in private conversations between a private credit fund and a private equity fund, or a private credit fund and a family owned business.
So I'm bringing up these stats a lot lately. That bank balances have declined over the past twelve months back to pre pandemic levels, this across all income groups. Wage growth has slowed over the past twelve months across all income groups, and that Americans inflation adjusted debt is rising past you know, twenty nineteen levels across all income groups. And yet everyone says, never count the American consumer out.
I've been doing this for.
Twenty five years.
It's a good thing to say.
Yeah, right, why is the American consumer so resilient and does that continue?
It's about credit availability, you know. And just look at the federal government, right, as long as people are prepared to fund you know, one point seven trillion dollar deficit, we can the Congress can continue to spend with abandon. As I said earlier, you know, I think we're coming to the end of that cycle because we're at the
point where the debt's growing faster than the economy. But as long as there's the last lender there willing to lend you that time to finance your spending, you're going to take it. When the alternative is you know, a restructuring.
Yeah, or no iPhone right, Yeah, they're giving them away. You just have to sign a contract. Yeah.
Obviously a lot of things to watch around the corner. Jim, we thank you so much for your time. Of course, that is Jim Milstein of Guggenheim Securities