Bloomberg Audio Studios, podcasts, radio news.
We begin this sour with stock steady as investors prepare for a week full of event risk. Muhammad al Aaron of Queen's College, Cambridge writing a heavy data week on tap for the US with the monthly jobs report, lots of speaking engagements for policymakers, including Treasury Secretary Beston and Fedcha Japewell, and the latest on tariffs and Doach. Mohammed joins us now for more. Mohammed, Welcome to the program, Sir.
Where to begin? I think we start on Friday and the rupture in Transatlantic relations and the breakdown in the Oval Office. When you saw that and when you think about the consequences it could have for the economic picture in Europe, for military spending, and for what it could mean for financial markets. To Muhammad, what are your thoughts at the moment?
Thanks for having me, John. My thoughts is that Dad feeds into some existing themes, both top down and bottom up, and intensifies them. So top down, we've had issues of fiscal realignment, and that's going to feed into fiscal realignment, including putting pressure on the dead break in Germany, including the question of how does it interact with what Dodge is doing in the US. Secondly, it feeds into the energy market and how you think about the energy market.
And third it feeds into the realignment of the global order that also has a trade element to it and a currency element to it. So we have all these top down factors that are being amplified, and then the bottom up factor that's being amplified is defense. And we are seeing significant sector differences occurring as you would expect.
So I think every John not as unprecedented, which is the words that the political science and the international relations people are using, but in the field of economics and finance, it is amplifying things that were there already.
So Mohammed, a number of weeks ago we said on this program that the President of the United States may well push the Europeans into doing things that might be good for them. You wrote in the Financial Times about a month ago the mounting risk to US exceptionalism. How does some of these things across these dimensions play into what you wrote about a month ago.
So, John, both the good news and the bad news is we have a very action oriented administration has come in. It has hit the ground running. If not sprinting, and if you are a business, it feels like you're trying
to drink from a fire hose. There's energy issues, there's immigration issues, there are trade issues that are public sector issues, including public sector contract there are regulation issues, so you're trying to absorb all this, and what we've seen is sentiment has come down and there's been a weight and see attitude because most of these things impact both your income and your expenditure, so it's really hard to figure out how all these things are going to play out.
Then there is the international relations side of it, your trading side of it. So the worry that I have is that the lack of ability by the public sector to absorb all this results in a wait and see attitude. That weight and sy attitude comes at a time when we already have a bit of a whiff of stackflation going on. And next thing, you know, people start questioning US economic exceptionalism, and if they do, two things happen.
You start questioning the only reliable engine of growth for the global economy, and you start questioning the shield that markets have had against all sorts of geopolitical and political aspects.
That's a lot of hair on the American exceptionalism story. And we've been talking to people about it for the past couple of weeks about the concerns, the lack of certainty, the on hold kind of nature of a lot of CEOs, And yet when you ask them, they still say they prefer to invest in the US over the rest of the world. If Europe went through with a nine hundred billion euro spending package defense and infrastructure, would that shift for you? Would you see brighter shoots in Europe?
No, it wouldn't shift for me. I would still prefer to US over Europe for the simple reason that Europe doesn't have a genuine and durable growth engine. So maybe defense contributes in the short term to growth, but they need to get a handle on some really fundamental things.
I encourage everybody to read the Drug Report. The Drug Report is a really good assessment of what has gone wrong in terms of investment, in terms of competitiveness and productivity, and what needs to go right, and that should be your benchmark when you assess future growth prospects in Europe.
So what happens, Mohammed, if this American exceptionalism story is challenged to the degree that you're laying out and a lot of people are worried about. But there isn't a brighter alternative in Europe.
That's the concern because remember I've always said the good and the bad and the ugly of the global economy. The good is the US, the baddest China, and the ugly is Europe. And if you don't see China and Europe converge up to the US, there's a risk that the US will converge down to the other two. It is a risk scenario. It is not the baseline I
want to stress. But in mid January, no one was questioning US economic exceptionalism, and now, as you point out, a lot more people are starting to worry about it.
Mohammad, what do you make of the tariffs? Do you think they're actually going to come on tomorrow or do you think the market consensus of that. Maybe China, of course goes on, but there will be a pause, another pause or a pass when it comes to Canada and Mexico. Is the accurate way to view this?
I don't know, and Marie, I really don't know. I don't think anybody knows about the president. But what has become clear is that there are three sets of terriffs, and that explain why the President was pursuing so many objectives with tarifs. You know when he came out in October and he said it's my favorite word. He said, it can weige revenue, it can result in fairer trade, it can put pressure on both adversaries and allies, and
in addition, it can protect US industry. And the initial reaction of the economists was too many objectives for a single tool, but we're seeing now what is happening. You have a set of general tariffs that do the revenue side and the reciprocity side, the fair trade side. You have a set of sector specific tariff aluminium steel that protect industry, and then you have a third set of
tariff's aim that particular countries to get particular outcomes. And I think that that's the thing we're going to live with for the next few months, is not the next few years, which is a multifaceted trade policy.
Muhammad. For the first time in a long time, there was a FED official in the last week that considered stagflation. I'm sure you notice the same comments downside risk to growth and upside risk to inflation. If we were to have a FEDS Joe mantit the one into conflict. How do you suppose would be the best way to approach that situation.
It's tough. It's really tough. Stagflation is the nightmare of policymakers, and it is the nightmare of FED with the dual mandate, as you point out, So it's really tough. I worry, like you had an introduction that we've had a reaction we fed. So the FED is not going to be getting ahead of this anytime soon. I hope it understands it, but it's not going to be getting ahead of it anytime soon. So the risk is John, that monetary policy continues to amplify volatility rather than acting as an anchor
of stability. That's the risk we face right now.
Mommy, can you just give us a sense of the trajectory of your belief that the economy can withstand all of this in the United States? As the year has progressed, I realized that it's the beginning of March. But how much which more worried are you now than say two weeks ago about a real calling into question of American exceptionalism and a real rolling over of the US economy.
You know it's my nature. I've been worried for a while. I put out an ft UP AD on February fourteenth saying be careful that slowly we may see the erosion of US economic exceptionalism, and that's bad news for everybody, not just the US, for everybody. So I've been worried for a while, and I've seen sort of three elements that have made me worry. One is the way business is reacting to all these policy changes, which increasingly is wait and see. We think it's going to be fine,
but let's wait and see. Second, we know that the lowest segments of the household income distribution is under enormous pressure, and that has been a concern for a while. And then the third issue is the risk of a FED policy mistake. These things have been there and now they're they've amplified because of what's been going on.
Muhammed, always appreciate your time. You're a good friend of this program, a good friend of ours. We appreciate it. Thank you, Sir Mohammed Aaron of Queen's College, Cambridge. There on some of the challenges for officials worldwide and for global markets as well,