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Welcome to Meren Talks Money.
The podcast imish people who know the markets explain the markets. I'm marrensumset where, but this week I'm speaking with Peter Barrison, Chief Global Investment Strategist at BCA Research. That means he heads up the team at BCA that provides global economic and financial market analysis to its clients and helps them shape their investment decisions. Peter has been economists for more than three decades. Previously worked at the IMF, the International
Monetary Fund, and at Goldman Sachs. So we wanted to get Peter on partly because we read all his work religiously. Peter, by the way, religiously. We wanted to get him on to talk about the global economic outlook. Back in March, he was very clear that he felt the recession holds for the US were still high. His year end SMP target is four four hundred and fifty. That is quite a drop from the current level, which is still knocking around six twenty five percent drop. Actually, is he still
bearished on the US? What impact does he think Trump's trade policies will have. Is there a bigger risk than trade? And what does the endgame for markets in the US and elsewhere look like right now, Peter, that's going to take an offul lot longer than thirty five minutes that we've got, So as you could talk really fast, I'd appreciate it.
I'll do my best.
Welcome to Marrion, Dogs Money, Thank you very much for coming on. Why don't we start then with the US economy and this recession rescue. Latest peace puts the recession risk for the US at about sixty percent, right, But we have been waiting for this recession for a long time.
Yeah, that's right. So back in twenty twenty two and twenty twenty three was one of the few optimistic strategists making the case that the US was not at any great danger of recession. And then late last year and certainly into this year, I moved into the recession camp. And the reason I did so was because I argued that a lot of the installation that had protected the US economy had worn thin. So back in twenty twenty two,
there were millions of excess job openings. Anyone who lost a job back then could walk across a street and find new work and not prevented unemployment from going up. There were over two trillion in excess pandemic savings, and so when the FED began to raise rates, inflation rows households just kept on spending. Now things aren't so simple anymore.
Those job openings have receded, the pandemic savings are gone, consumer delinquency rates are rising, and on top of that, we've got all these threats from the trade war, from the bond market, and so I do think that the risks of a recession this year are higher than they would normally be.
Yeah, although we do still keep seeing a numbers that suggest things are just fine, and we know that consumer confidence levels below but consumers are still really spending in the US and the recent job numbers were fairly encouraging, right, So we do keep seeing better than expected data just keeps going, we do.
Although there has been a slowing in consumer spending this year, there's also been a slowing in the labor market. I know we got pretty good numbers on payrolls for May, but those numbers are like to be revised down. What we've seen since the start of twenty twenty four is that on average, past payrolls have been revised down by about fifty thousand. That doesn't even include the benchmark revisions.
We know from the CENSUSUS quarterly data that was just released last week that payrolls were overstated by round seventy five thousand per month in the final three quarters of last year. So fifty thousand plus seventy five thousand in future revisions basically gets you down to close to zero potentially on the May payrolls when all the data has been cleaned up, so I think we are still seeing It's not a dramatic slowdown, but the crew certainly is a slowdown that's taking place as we speak.
This idea that fast falling immigration in the US may turn into something of a supply shocking, that you end up with a fairly dramatic reduction in the growth rate of potential workers, which could lead to rising wages, a tighter job market, etc. Ivan a supply shock really in the same way as we've seen over the last four or five years, but in a different category.
A that depends on how quickly the slow down and immigration unfolds. Of course, we have like millions of people being deported, that would be a supply shock. If it happens more gradually, then it's not entirely clear whether demand or supply will dominate it. And the reason I say that is because if you reduce immigration, then of course, arithmetically you're reducing labor supply. But those immigrants spend They spend money on food, they spend money on clothing, they
spend money on shelter, so they contribute to demand. In other words, and in the nearer tum it's not really clear how you balance out those.
Right, Well, let's look at the threats then, and one of the things that everyone maris about, of course, is the effective tariff rate we're going to end up with and exactly how that will impact the US economy. How are you feeling about that at the moment as a recessionary risk.
Well, right now, the effective terror frate in the US stands at about fifteen percent, which is quite high. I mean, we went into this year with an effective terror freight of like three percent or so, So fifteen percent is kind of in the same ballpark as to where tariffs were in the nineteen thirties.
So at a much lower level of impulses percent of GDP in the nineteen thirty So the impact lower.
Well, well imports as a share of GDPR about three times as high now as they were in the nineteen thirties. So the fact that we have the same terorforrate actually does more damage to the economy today because trade is a share of GDP is larger today than it was back then.
So that that is going to impact on growth.
Well, if you look at the estimates that the Yale Budget Lab and others have done. If current teriforrates remain in play, this will reduce household income by about two percent for the median US household, which is not a trivial shock. Two percent is a meaningful decline in income. And of course, the Trump administration is hoping that China ends up eating the tariffs rather than US importers or US consumers. We don't really see any evidence for that hope in the data. We now have a few months
of data on Chinese import prices. This is data calculated by the US, not by China, by the way, and what we've seen is that basically Chinese import prices are down about one percent prior to the imposition of tariffs. So it's really US importers that have been shouldering the burden of the tariffs. Consumers not so much so far.
But as we've heard from Walmart and others, if these tariffs remain in place, then they're going to have to pass on the cart of the tariffs to the ultimate buyer, the consumer.
Okay, so they will end up being a feed into inflation.
Yes, yes, In fact, the CPI swop market is saying that inflation's going to a rise by around a percentage point over the next twelve months. That's a meaningful increase in inflation.
But you also think there's an even bigger risk, as you put it in a headline recently, lurking around the corner, something much worse than trade war. And I think everyone knows what that is. It's the dynamics of US government debt, which are increasingly out of control, and with a big beautiful Bill on the way, that may get worse. And that that's your big worry at the moment.
Yeah, I think the market has taken comfort in this kind of notion that Trump is pivoting away from tariffs and focusing on tax cuts. Now, of course, that would be good if the bond market did not react negatively to the prospect of more unfunded budget deficits. But what we've seen both in the bond market and from the US dollar is that investors are getting a little bit
skittish about the current level of deficits. We estimate that if the Big Beautiful Bill passes, the budget deficit will rise to close to eight percent of GDP over the next few years.
From around six and a half percent at the moment.
From around six and a half percent yes, that's right. Now it's supposed to come back down after a couple of years because of various cuts to social programs. But the reason those cuts were inserted later on into the ten year budgetary horizon is because they're politically unpopular, so they might never actually end up taking place, which is
often the way things go in Washington. So the problem is that you've got a budget deficit, let's say seven and a half to eight percent of GDP, and you need something closer to three and a half percent just to stabilize the debt to GDP ratio. And so you've got this completely unsustainable trajectory in debt to GDP and on top of that fairly high interest rates. And I think that's the big difference from where we were a
few years ago. A few years ago, we also had high debt to GDP, but interest rates were very very low up until twenty twenty two. Now we've got this toxic combination of high debt and high interest rates, and as a consequence, the amount of interest that the federal government is currently paying stands at about three percent of GDP, up from around one and a half percent of GDP
during Trump's first term. And if you look at where interest expense is going, if bond yields evolve with market expectations and the big beautiful bill passes, we're talking about six percent of GDP in interest expense over the next ten years. That would be completely unprecedented in US history. Not that point, about one third of government revenue would be going just to pay the interest on the debts. So something needs to break. This can't continue in its
current form. And yes, it sounds a lot like that story about the boy who cried wolf. People have been talking about a debt crisis for many years. It hasn't happened, But of course with the story, the boy does get eaten at the end, and so I think that, unfortunately, is where we're heading. I don't know if it's this year, next year, but it's getting increasingly close.
We talk a lot about how the fiscal situation of the US is unsustainable, same with the UK, with other European markets, etc. But let's focus on the US when we say it is unsustainable, completely unsustainable, and something what must change? What do we mean what must change? How can it change?
Well, the deficit needs to come down. It's as simple as that, and that can happen either because spending is cut or because revenue goes up. Now, in practice, I think it's very difficult to cut spending because most of what the government spends on is government programs such as medicare and social security defense. Not a lot of political support in cutting that, certainly not social programs for Democrats, and not social programs or defense for the Republicans. Raising
taxes is a non starter for many Republicans. Democrats probably a little bit more amenable to that. And so if you can't spending and raise taxes, all you can then really do is hope for growth, and unfortunately that's sort of the direction in which the current administration is going. They're saying, we're not really going to cut the deficit in dollar terms, but we're going to grow the economy massively,
and that's going to fix all our problems. So you know, of course, if growth does go up to three percent four percent, that would fix a lot of problems. But it's not clear where that growth is going to come from. As the administration itself has admitted, much of what is in the tax bill just goes towards extending the expiring tax cuts. So existing policy doesn't change. And the other tax cuts, you know, no taxes on tips, no taxes on on over time, the self deduction, you know, that's
generally focused on households. It's not so much focused on businesses. I mean, there are a few things for businesses in the bill, but it's mainly focused on households. So it's not really obvious why trend GDP growth would go up a lot as a result of the big beautiful bill. In fact, it could be quite the opposite, to the extent that these big budget deficits raise interest rates and that crowds out private investments that could reduce trend growth in the United States.
When we say on the sustain what is the endgame question? Because you know perfectly true that there is no appetite to cut spending, there is no appetite to put up taxes, and it is not a given that growth will come through. So what is it? What level of yield? For example, what is it that might persuade an administration or force an administration to actually do something about the situation as it currently stands, rather than the wibble away about future growth.
There has to be a crisis of some kind, right, what counts as a crisis.
I don't know if you need a full blow crisis. You could have something similar to what happened in both the US and Canada in the early nineteen nineties, where yields were very, very high. The budget deficits was lower than it is today, but nevertheless, because yields were seven eight percent, that was pushing up the interest expense on
the debt quite a bit. And you had the tax cuts that George Bush famously forced to introduce breaking is no new taxes pledge, and in Canada, will also had the GST, the Government sales tax General Sales Tax, and so revenue was found in the deficit declined and the bond vigilianties right away. That didn't really require a crisis,
but it did require market pressure. You could, of course, have a more adverse scenario where there really is a crisis where bond yields start rising, investors panic, that dumped the bonds, and that causes the yields to continue rising. That could happen as well, but either outcome would probably lead to the final result, which is that the budget deficit goes down in one form or another.
I then spending house all the tax cuts are things that people have no appetite for until they're forced to have an appetite for it.
That's right, that's right.
Yes, I'm guessing Peter that you are a little more pessimistic about the US secuity market and perhaps some of those more bullets commentators.
Yeah.
I mean, if you look at valuations right now, the S and P five hundred is trading at about twenty one and a half times forward twelve month earnings, and those overd earnings assume record high profit margins. So it's a pretty optimistic set of assumptions that are driving equity prices today. And of course, if earnings do rise from current levels, that would be fine, but that hasn't really happened this year. Earnings estimates have sort of been flat.
They went down in April, they recovered in May, but we're close to where we were in say January. I think it's unlikely that we would get meaningful increase in earnings estimates unless growth really ends up being quite strong, and that is unlikely given the slowing in the labor market, given the hangover from the trade war, and the fact the bond yields remain quite elevated. So I think probably in the best case scenario, if we avoid recession, then
the SMP goes up maybe five percent or so. But if we don't avoid recession, then you have to ask how low could the stock market go.
Well, let's talk then about where other people's optimism lies. And still even now, a lot of it lies in AI on the huge potential for this sector to pull not at the stock market but the economy, along the idea that we really will have the great productivity revolution we've been waiting for for so long, that will drive growth, that will drive company earnings, that will make the evaluations that we're paying today in the US licklick, nothing and
everything will be absolutely fine. Where do you come down on the AI story.
Well, right now we don't see the gains from AI in the productivity statistics at all, actually been really really weak. Now, maybe AI does boost productive I think that's entirely possible, But even if it does, that's no guarantee that it will boost profits, which is what matters for a stock
market and the internet period. It's a good example. US productivity did increase in the mid nineteen nineties and stayed fairly high for about a decade until about two thousand and five, but it was only around two thousand and five that the profits began to finally materialize, So there was a long lag between productivity and profits. That could happen with AI as well.
Okay, so not madly optimistic there in this shorter term. The other thing I supposed to talk about is that there's an awful lot of reasons why foreign investors might want to start applying a slightly higher risk premium to the US than they have previously, or risk premium at all, given they haven't really considered there to be must risk.
You have the things that we've already talked about, the uncertainty around tariffs, we have the uncertainty around the debt and the fiscal position, and of course the general uncertainty around the current administration. And then you know, we all woke up this week and around the world to the
pictures of la burning. Whether which parts of burning or not burning, or exactly how bad it is, it's hard to tell from far away, but nonetheless you see the pictures and you look at that, and you can see people who have an awful lot of money invested in
the US market. We were looking at these statistics the other day, by the way, and really interesting because it is only the last four or five years that foreign investors have really poured money into the US and as the risks begin to accumulate, or a pitch to accumulate, it might be quite a fast move out.
Yeah.
I think that's definitely the risk for the US dollar, and a dollar, despite the fact that it's weakened over the last few months, still remains a fairly expensive currency. And so if this notion of US exceptionalism fades, it
does have to go completely go away. But if investors decide that US economy is going to be less exceptional than it was in the past, that will justify a smaller growth premium to US assets, which means capital is going to flow out and the dollar could we confer so structurally, I am fairly bearish on the outlook for the US dollar.
Okay, So if money flows out of the dollar, which currency and which market does it flow into?
Well, I mean, of course, if the dollar weekends, it has to weaken against something, so most likely it'll be the euro, maybe even the Japanese yen. Here in the Bank of Japan seems to be finally able to raise rates now that inflation increased and these deflationary pressures have abated, might flow into other developed economies such as Canada, Australia.
Now it's true that all of these countries have their own problems to contend with, and so that doesn't mean that their currencies are going to skyrocket, but the margin they could strengthen visa VI the US if the underlying drivers that have compelled foreigners to buy US assets become less appealing.
And if money flows out of US equities, and when you say your mildly underweight equities, I think what you mean is that outside of holding fewer US equities and would suggest holding fewer US equities and cash and bonds, you're not talking about diversifying into other equity markets. But if you were, which equity markets would you consider to be attractive at the moment or interesting.
In terms of where would that money go? You know, in a global recession, it's hard to see other stock markets doing well. If anything, most non US markets tend to be higher beta. When US earnings estimates fall, they tend to fall even more in places like Europe and Japan. So you're not going to find a safe haven in
most other major stock markets in a recessionary scenario. Now, once we get out of the recession and the dollar bear market resumes and valuations become more relevant for investors, then I think at that point you're going to see Europe and other non US markets outperform. But I think we have to get through the recession first, Okay.
I mean our general feeling I think is that if US markets full by twenty five percent, twenty percent something like that, all of the markets will fall too, of course, possibly even more, but the cheaper markets are likely to wreak up faster.
Yeah, so the Europe is cheaper, Japan is cheaper, China is cheaper. They also tend to be a little bit more stycklical, They tend to have more exposure to financials, materials industrials. So sometimes it's a bit of a wash.
Okay, what about China.
I think China is an interesting stock markets. I mean, clearly China has done a fantastic job in terms of tech progress. Where I think the uncertainty still lies for investors is around corporate governance politics, Like our Chinese company is actually going to be able to make money for their shareholders or will all of this just be about maintaining economic stability and political stability. That's where the uncertainty lies.
And I think that question mark over whether shareholders will capture the innovation coming out of China is a big question mark and does justify a discount for Chinese stocks.
Okay, so would you say that for you, maybe the Chinese market is always a trade, never a long term hold.
Right now, I would say it's more of a trade than anything else. If we have shifts in kind of corporate governance, that I think it'll go from being a trade to an investment. We have to see those shifts.
For when you think about markets, do you still think of them in terms of EM and DM or yeah, a different kind of category in your head.
Yeah, I think that's becoming a bit of an antiquated label. I sometimes choke with our em strategistic BCA Arthur Burdakian that maybe the US is going to become an emerging market simply if you look at how the dollar has traded, and we've seen US interest rates rise relative to those abroad.
Usually that would signify a stronger dollar, but the dollar is weak, and because the US itself is having some of the same EM related issues around debt and political stability that emerging markets have historically faced, whereas actual emerging markets today are much better shape than they were a couple of decades ago when I was first working at the IMF and dealing with some of these issues. So yeah, I think you have to kind of go on a country by country basis now.
Yeah, And as you say, the so called developed markets have no moral high ground the political stability business at the moment. That's right, Yes, across Europe, the UK, the US, exact right, none of us, none of us are standing on particularly thick ice at the moment. Yes, gold, silver, platinum, oil. We're great gold bugs on this podcast, and we're excited by the silver price now, and we're excited by platinum.
We're wondering what's going to happen in this market and if there is a safe haven out therebuts it's a yellow one.
Yeah. I've generally been bullish on gold, and I'm structurally still bullish that the price of gold is high, even in inflation adjust the terms, it's close to its all time peak. But I think when you're trying to value gold, and of course it's difficult to value something like gold because it doesn't pay any income to its holders. I think what you have to do in that case is sort of look at gold holdings in relation to something
like global wealth. If you do that, what you see is that gold kind of look cheap because global wealth has grown so much over the last fifty years that gold has not caught up. So it's a share of global wealth. Gold is much much smaller today than it was in the early nineteen eighties.
Okay, interesting, I like that way of looking at a share of global wealth. I'm not sure we've done those numbers before. We're going to do them. What about bitcoin? We're talking the week beginning June the night and there's been positive bitcoin years out of the US administration, and the day we're talking bitcoins up two percent today. Are you positive long term or Bitcoin or indeed on any other cryptocurrencies?
Well, I mean Bitcoin is interesting because we just talked about global wealth and there's a large fraction of global wealth that people don't necessarily want to disclose. They want to maintain their wealth in as private as setting as possible, and bitcoin does fulfill that demands. I wouldn't necessarily advise investors to own a lot of bitcoin, but I can
see the use case for push comes to shove. I would choose gold over bitcoin in the current environment, but certainly bitcoin, I think at this point does deserve to have at least a very small part investors' portfolios. Have you got any I don't hold any. No, I've been sticking to gold.
Yeah, well I've got both. I've never been a big fan of bitcoin, but I'm often wrong, so I like to hedge myself. So as we keep telling people, I get end litt hate mail about being mean about bitcoin, but I've actually got some and half the people I talk to who aren't mean about bitcoin at all just don't. Peter, is there anything we haven't talked about that you think we should talk about.
I think one question mark is around oil prices and where they go from here. I think if there's sort of a bullish case to be made for the US consumer, that bullish case could at least in part, hinge on the possibility that gasoline prices fall, and it certainly does seem as though OPEC is no longer able to maintain discipline. The Saudis, of course understandably upset that countries that Kazakhstan
have been exceeding their quotas. US shale production still remains quite strong now, of course, the prices fall For most shale players, you need oil of around sixty to seventy dollars a barrel to make money by drilling. If oil prices would have fallen into the fifty range, that would shut down quite a lot of US production. But nevertheless, I think it's worth stressing that gasoline prices have declined relative to where they were a year ago, and the
margin that is helping the US consumer. If that continues, that tailwind could increase. That just worth monitoring.
And how much would that take down your recession risk?
Probably not a lot, because I think ultimately tariffs and bond yields matter more for the economy. But it would help certainly help offset some of these headwinds.
What could happen, Peter to make you change your mind about coming recession? What could happen to make you positive on the US economy, positive on growth, and crucially positive on the US equity market.
We need to see a few things on the economic front. One we would need to see Trump further dial back the tariffs, especially against China, which you know they've come down from one hundred and forty five percent, but they're still close to forty percent. TERRAF rates on China's quite high. If the Big Beautiful Bill passes without the bond market reacting negatively. So, in other words, if we get the fiscal stimulus without the adverse bond market reaction, that would
make me more positive. If we start to see AI boost corporate profits in a more broad based way, would make me more optimistic as well. So I'm open minded. And my recesion probability is sixty percent. It's not one hundred percent. There's still forty percent chance where things can go right. And that's why I've been cautioning investors to wait until they see the whites of those recession's eyes before turning fully pessimistic.
Okay, and let's hope that we see the whites when they're coming. We're going to miss them. Indeed, Pete, what are you reading at the moment?
Oh gosh, I've been mainly listening to podcasts and things like, things like that, and so a lot of great content on Bloomberg. I would certainly start there obviously.
Obviously, thank you so much. You for joining us today.
My pleasure.
Thank you so much, Thanks for listening to this week's Marin Talks Money. If you like us, your rate, review and subscribe wherever you listen to podcasts, I keep sending questions or comments and Merrin Money at Bloomberg. You can also follow me in John on Twitter or x I'm at Marinus W and John is John Underscore Stepeic. This episode was hosted by me maren' umset Web. It was produced by Sumersadi and Moses and sound designed by Blake Maples and special thanks of course to Peter Barrison