The Art of (Trade) War

the Fed will actually cut rates. And don't worry. We'll close out the episode with our tradition, the craziest thing I saw in markets this week. Don't worry, Sarah, I've got a good one. You've got a good one. I I do have a good one. I'm ready, I'm ready. Hopefully our guests have a good one. I think our first guest is a little worried that his his craziest thing isn't that crazy. Joining us this week are pen Pal Here at Bloomberg. We talked to this guy a lot.

Ben Emmons, Managing director for Global macro Strategy at Medley Advisors. UM Now, Ben, you were born in the Netherlands, but then you spent a long time at Pimco in the Bill Gross era. So I kind of think of you as a California dude. Is that fair? Is fair? That's fair. I think of you as the California I got. I got the blond hair, I got the tan, I even got the muscles. So so whatever I see you in New York, I assume the surf is not up in

California right now. I got. I got a message from my son's school like his rainy day today, you gotta come early to pick him up. So I was like, hey, okay, Sunshine, I'm a good place. And our other guests this week is my pal e She. Now she and I have worked together. What's the twelve years? We were actually in the same Bloomberg boot camp training class years ago. Yeah,

definitely a while, Sarah. The reason I love she. I don't think listeners realize this, but one of the big perks here at Bloomberg is they put out free soup at lunch and it's usually pretty good. I'd say they're

batting at least five on the soups. And she, whenever he goes again, when he always picks up a second one team player, which I it's very nice because Michael used to be my boss and and to paint a picture for those of you out there, when you go to get a soup at Bloomberg, it is like battle time. As nice as that is. That is on She's part. That's not why we brought him on as a guest. It's actually he's probably the most knowledgeable about Chinese politics

and markets and economy here. So no pressure, she, but we're hoping you can explain everything to us. I need to practice with my Mandarin at least I want to get right to it. Because you look at the markets reaction this week. Put aside Monday, Monday was rough, but we really saw a rebound in stocks this week, as if they don't really care so much about the goings on between US China trade. Ben, I want to come to you first, how much does this all actually matter

to the stock market. So it's interesting, Sarah, because you would think that we're going exactly through the same episode as last year, right when we had the first time the threat of this two and a billion of terrors, and at the first followed with this episode in October and all this volatility, and we kind of have the same thing, right, we had him coming out suddenly hiking terrors and then more threats coming and you would think

the same voltating. Yes, that was just on Monday, but I have to say that also at that time in septem October, we had bouncers like this, really because the market is trying to, I think, to do two things. One, it's of course trying to understand what's the world of terrors really mean, and so there's a lot of opposing views about this, right who pays for the tears? And then the second thing is it's like, wow, it's just terrors, right, We're not actually dealing with any kind of great hikes.

You know, I've kind of made it that sound like the same. It's not really great hikes, and it's not really right now killing our economy, right, it will be maybe something in the future. So I think that's part of the reason why I see this relief bounds. And yet in the treasury market it seems very much risk off. You know, treasuries are bid this week, fields are coming down. Um, stock market it was risk off, but now it's back

to that rally mode. UM it always begs the question is one of them right, one of them wrong, or does one market just understand President trump sprinkmanship better? Do you think, I mean, what what's your take on all that? So I would actually think, Mike that that the bondmark has been pretty rational about this trade deal. And for a while I wasn't in that game myself, but after sort of the analysis of the latest bet that we

went through. Now, if you take take us back to January, when we came in a new year, that Marcus started rebound, but there was a lot of chatter out there like the trade talks are going well. I mean, things are progressing, and you know, rally continues, but the bond market wasn't really moving along. But it was a little bit moving rates, but not much. Of course data is weak and and and so forth. But since that time, we haven't read moved substantially higher rates at all. If anything, we're now

a lot lower. And I think that the markets in fixed income has continue to look at this saying this deal isn't that really going there? Well, these negotiations are maybe that's constructive, and you know there's a risk that things do fall apart, and that uncertainty is reflected in the U Grove particularly that stayed flat all the way through this whole episode of the stock market rebounds generating. I think that was a kind of signal the bond market had a better sense of where we were in

these straight negotiations than the stock market. So you mentioned that something people are trying to figure out is who actually pays for these tariffs? And Walmart came out this past week they reported earnings and they said that when these higher tariffs do go into play, because a lot of the new list of that three billion, if it does go into play, it's really a lot on some of the goods that Walmart cells clothing as well, and they've said they're going to pass it on to the consumer.

What do these tariffs actually mean for the economy? Then the first inclusion would take is that this this would change the demands and one people would maybe look at those products and by other things when or people would just not buy him at all. Right, I mean that would be the initial idea. Then I think people would start to anticipate like this is gonna stop here or going to see more. Now, here's an important difference between

the episode from last year and this year. This time, the next round of terroffs on three billions so is now officially in the in the federal registered by the U S Trade Representative. That didn't happen the last time, right, we had ten percent on two and a billion and in the thread of but but there was never anything else really formally announced and that that thread was taken back. This time we're dealing with actually something that he threatened

with and actually put it out there for comments. So if anything goes wrong, then people know like, okay, this has got there's more coming. And I think that will really change people's behavior by this kind like Okay, we're gonna deal with substantially more terrors and companies will will are bare for that. So yeah, it's a big, big change now. She obviously China can't match the US tariffs dollar for dollar. They simply don't import is uh much US goods as they export to the US. So the

question on everyone's mind is how will they retaliate? But will they retaliate? And you know people obviously talking about um they own more than a trillion dollars in treasuries. They could start selling them off and spike in interest rates. Others wonder if they'll let the currency just go into free all free fall to make their exports uh more competitive. Um. Now, there's problems with both those scenarios, but I'm just curious, what do you think where would you expect to see

any sort of retaliation? Um? Yeah, definitely, Chinese has some Trump casts in the hands. You mentioned the treasury, you mentioned the You've been waiting to use that one. They have a lot of cause that can plain. They own one trillion dollars of US treasury, they can sell to the market. They have the manage the Chinese you want on to offset some of the costs from the tariffs. But I think these are like last options. So the signals they have been sending is that they're still willing

to engage. They're still willing to talk. Remember last week before the Chinese send the meeting to send the team to DC to continue the latest round of negotiation, Trump who was threatening to raise the tariff, But the Chinese still send that team to the d C, but they cut the trip shot. Basically, He's said, they are sending the signal that they are willing to engage, but they

are they're diggetting. They have to make that demand and their bottom line clear to the people in the US and to the market that they are not going to giving to the maximum pressure that Trump is putting on the China. Right. I'm glad you mentioned the talks in in DC start. Do you realize whenever the Chinese delegation comes to talk in d C, we send she down there to follow them around hoping for a quote. I have to I have to say I I didn't know that, and I saw she's name on a byeline last week

and I realized. I said, oh my gosh, they sent him down to d C to try to get I think it's not a bad gig because they never talked, right, Yeah, exactly, well expectation, except this time. It's very interesting to me because I usually mentioned that the Chinese used to be very silent, especially when it comes to the trade, because they don't want to play the nationalism sentiment at home.

But this time, Um lil Her, the Vice Premier who's leading the Chinese side of the negotiation, he's actually gave like two interviews to state media. In that interview, he made a clear the three major disagreement between the U S side and China side, which is for the first time they relieved the disagreement from the China side, one is that the all the tariffs have to be gone,

have to be removed for any deal to happen. Secondly, the Chinese purchase of the American goods has to be realistic, so you as can't demand a lot of the purchase from the China side. And so part of is the language in the final agreement has to be respectful, has show the dignity um and equality, reflect that dignity and reflect the equality from the Chinese side. I thought this is a very strong signal chineses sending because by making

this very public, it's very easy to check. So it's very unlikely China is going to back down from these three uh criteria sent up. So if we demand they buy Trump steaks and Trump vodka, yeah, yeah, exactly. Yeah. I mean those are some pretty strong demands and now they are made public now. Ben, something I've been thinking a lot about and speaking with investors this week is the idea that the logic behind the deal getting done is just the fact that it has to get done.

It would be bad for both sides if it didn't. So everyone is holding on to this idea that a deal will get done. I mean, if everyone is thinking that way, does it just potentially make it worse if we keep seeing the can kick down the road, if

this goes on until the election potentially beyond. That's exactly right, Sarah, because normally to kick the can down road a supposed to be very positive for markets because of the mental was that a difficult decision was put off, say that ceiling or shutdown or anything related to that or whatever kind of regulation. So markets have to deal with the negative outcome from that and therefore you rally. But this

time this is different. Right, If you kick the cannon a road on the straight deal, we now sort of have a timeline what could happen. We could see by July more tears on a larger number of goods. In addition, in the following four months from there we could see there's on European cars. Right, there's actually a time and laid down there. So yes, this deal is essential to have. Also, I think to the European side that then therefore that

will happen too. So you can't really kick the can down the roads without potentially causing major market volatility if you disappoint on the outcome. So the G twenty summit, it's just like Buenos Aires, like last year, they'll get together and it will be really you know, vell televised summit and we will watch the language and you may may go there. I guess some you know, some sense

of what they're doing. But then we know, like you know, from there, we'll we'll think we'll get pretty contentious if nothing happened. So this is indeed a difficult situation. Kick the can here is negative for markets. Ben, So say we put you back in your old seat as a portfolio manager, and we say, Ben, here's ten billion. You have discretion to buy anything you want, bitcoin, swybean stocks, bonds, anything. What what are you? What are you trading right now?

Are you just staying in cash? I mean it seems almost like a paralyzing decision right now to try to figure out how to play this. Yeah, that's there's one way you could approach you right as an investor, I would not do it that way. You know you're not want to sit all in cash? Uh, you know some of it that's just to be optimistic. Um, you know, I think there's opportunities developing with one good thing about this is for investing at least. Is that. Yes, any

kind of tension creates relative value, creates opportunity. Any tightening of financial conditions creates value. It was better in the seminar it is now. But look at how the market has started to rebound in a would happen on Monday because people looked at that, Hey there's a little bit too much till in frencial cognitions there's value a step in. That's what I would do. Now, now to your question what looks interesting, I still think there's really value local

emerging markets. I think that if the China situation gets real pressure, that's where valuable will appear. I would be willing to put money there Asian extrono Asian extent. Yeah,

I think so. I think that that that would be potentially an opportunity, the risk reward there, and I think you know on the commodity side, you know, yeah, the soybean market, well, actually that looks really under values, right you think about historically, Um, but where I would not put my money And even though I've been in that situation, I would not my money in bounds because I do think that yields are thinking in US are they're kind of overvalue, they're kind of the fair value maybe maybe

too low. The economy is stronger, right if we're not the starting death fast yet, so I would not put my money. So going off of that, we heard the likes of Goldman Sacks Mount this week tell Bloomberg Television that yields should not be where they are in the tenure. It's gone way too far away, too fast. Maybe two point seven percent is more fair value. Does it seem like this has just gotten ahead of itself a bit?

I think the there's there's value in the bonds in the sense that if you are like a invest the boat holding boats of stocks and bonds bounds as a natural hatch for your stock portfolio. If you're bullish on the stock market, why not buying some bonds in case past things happen. So there's natural demand on that. And secondly, in terms of the fast expectations, the risk for the fair that is asymmetric. The bar for the fair to

raise rates is very high. For them to courage if a recession do come, they have to cut all the way down to zero. So we're talking about fifty basis points in terms of distributes. The distribution of the polability. Then you come down to like twenty five basis points pricing into the future fair pone futures market is not that ridiculous. Um uh strange. Now, everybody loves to talk about Donald Trump in the Art of the Deal, Right, we're lucky enough to get Ben's notes, and uh, he

tried to look at it from the other side. The art of war by sun Zoo. It's the art of the deal versus the art of war. And I want to quote a couple uh sun Zoo quotes from from one of your notes. Quote, if your opponent is temperamental, seek to irritate him. Check, pretend to be weak, that they may grow arrogant Jack. And then you're right. That sun Zoos principle is that all warfare is based on deception.

So engage people with what they expect because it settles them into predictable patterns of response, occupying their minds while you wait for the extraordinary moment in the midst of chaos. There's also opportunity has been just pointed out. Now, Yuh, I want to ask you, you know, I feel like everyone in the US tries to get into the head of the Chinese side of these negotiations, and whether you're quoting Sun Zoo or Confucius or Yeoman, I don't know who.

How much validity is is there to this? I I you yourself on the blog of quoted some ancient Chinese proverbs. So it walk us through the mindset on on the other side, Should we be reading Confucius and sun Zoo or is it is that silly? There's another person you should read. Kea Mao. He wrote a famous speech during the World War Two when Chinese finding against the Japanese invaders. It's called paronged prolonged wall, basically saying that the Chinese

need to digging and to fight the fight. The whole anti Chinese, anti Japanese a wall last eight years. UM. So I think the Chinese. The timing is on the China side, because if you're comparing the U s E commy and the Chinese E comedy, Chinese had a bad year last year. Now they seem to hit the bottom in the process of stabilizing and probably in your recovery.

The US, the fiscal stimulus is fading. Um. A lot of people are expecting of slowing down this year or next year, particularly and also the Chinese don't have the election cycles the US does. Yeah, so the chump needs something to show to his voters or to his base too, that he getting a China deal is a lot of people wanted, and this is the one thing he can show to his voters, Right. I wonder what sold more, Sara, the art of the deal or the art of war

that I'd probably in the piece. So what do you think is is President Trump gonna have to blink eventually because of the upcoming election. I mean, it's very difficult to sort of predict what he's gonna do. But where do you see it's sort of happened, what's going to happen. Yeah, So this is interesting might because if you watch Steve Bennon on a competing network, Sorry but it was on a competing network. But that was a really important interview.

I actually recommended to listen to it because he says two things. One, he makes it really clear that Donald Trump, no matter what, he's just not gonna absolutely not going to back down, right, He's actually gonna keep the terrorists on. And I thought that was very convincing because he sat with Trump in the same colnicolled War room, and you called it that way the White House, the war room there. And then the other part is about the long term

picture behind this. In the view of Trump, China's waging an economic war against us and the rest of the world. And it's been going on for not just now, but like twenty twenty years or so longer. So they have built up during the twenty years a significant competitive vantage in technology, believe or not. And so this is a real concern on the part not just here, actually in Europe. So there's this hardlining in within the Trump administration that's

not just driven by just campaign rhetoric. It's driven by a long term view. I think, as much as you may I agree with Bannon's auto ideas from an investing point of view, I took a Siers note of his what he was saying the subject. So he's going to keep it on to to to the elections, and if it does damage the economy, he's not necessarily going to back down. That's I think what we can read from it.

I want to ask, I know, people moaning grown sometimes when people in the finance world starts saying that good news is bad news and bad news is good news, but bear with me for a second, because on Wednesday we got some pretty rough data out of China. Then US well right before US markets open, we got weak

retail sales, we got weak industrial production data. And what I've been hearing is that people are looking at this week data from both sides saying, one, it will force an urgency out of the U S And China to potentially come to a deal if we are actually seeing softer, weak a Reeker economic data, and then also that that could also potentially encourage a FED rate cut, and we did see the Fed funds futures market start to price in further rate cuts. I mean, is this a real possibility?

Is it true that bad news right now is good news? I think if if you look at it that way, then I would analyze it first from what happened in the fourth quarter is lingering through that data, and then what we now went through the last the first day, last ten days since that infamous street from trumpon May five, and a condition financial markets if tightened, that's impacting data right now and we'll see this coming out in June. So the market is definitely again bone market is definitely

rational about that. The underlying data trends is weak and has a risk to become a lot weaker, and that would justify ray cut. Here's a difference over the fet thinking I think is that and this what has to Georgia. Actually they coverage now they may face finance and stability and it could cause a bubble, and the other hands, they faced the potential rishk of the economy sliding down.

So it's a real difficult trade off. I think the Federals stay on the track of saying that leaves us unchanged and the market discounts of ray cut, which maybe becomes eventually stimulative. And the housing data today showed them it was actually some effect on the housing now from lower rates, from lower rance. My favorite part about the tweets that restarted the the trade war sent the whole world scrambling to try to figure out what it meant.

They came right after Trump's complain about the Kentucky Derby winner. Did you notice that it was? It was? It was pretty upsetic. So those stewards down in uh the Kentucky Derby must have been breathing us big side relief that they that took the heat off of them a little bit. But Sarah before we go. You know what we have to do. I know what we have to do. It is time for your favorite segment. The craziest thing I ever saw ad markets this week. We really need a

sound effect. I'm gonna work on that. I'm gonna get us a sound effect for this, Sara, Let's start with you. What do you got? All right? So I was going to go with beyond Meat, just because I mean, the company is up more than two a I p O. And it's up a crazy amount again this week. But beyond meat, they're the veggie burger company, right, yes, vegan burger company, meet lists, meat company, however you think of it. Um, But basically they're off to a great start in the

public markets. However, hint, hint, Mike actually sent me a little bit of a hint I have. I have to give him credit because it's so great. Actually, Bob manution, Yes, that is Stephen Minuan's father one out on a bid over at Christie's for a stainless steel bunny rabbit. And when I when I saw this thing, Okay, he did bid. He says that it was on the behalf of a client. But when you look at this bunny rabbit, it looks like an inflated blue and I have to say, and

it actually is inflatable. Supposedly it's inflatable. Over it sold for nine one million dollars for a silver bunny. Well, what's the spot price of silver? Maybe if you back out the ounces of silver price mathematical, its leased to be a couple hundred dollars right there? Are you? She? What do you got? What's the craziest thing you saw on markets? Could come on minutions, father beating on the thing. It's interesting that there's three passed in the Trump and administration.

Wine is a minution which would plan the Wall Street and you have Laiheiser, which we depend on the Hawks on the trade side. Trump is in the middle, so it's makes more complicated to read the strategy of the U. S time US team. Um. But for my the strangest thing in the markets this week, UM, I got a strategist making a song for the ball market, which I saw was very cool. Is it his own tune or is it to the tune of a song? Listen to

this Ian Lincoln from BMO Capital Markets. Here we go, Hello rarely, my old friend Bounds have come to his again because Trump vision soft creeping left fist sees while she was sleeping, and the vision that was planning in Beijing still remains winding the bomb of trading very well. I can do better in my mandream when I think karaoke after three shots, alright, let's do it next. That's a good, good idea for the next podcast. Say you were in the lead there, but I didn't. I didn't

realize he was going to break in this song. That was pretty good, and that's a hard act to follow. I if you want to pass, that's understandable. But what did you say? Anything crazy in markets this week? Yeah? Maybe the rebounds? Right? The rebounded markets? Is that crazy? We come in and it is like really risk off and people are like getting pretty like concerned and were rebound. How crazy he said? And on what right we is?

Really it's just just a little bit chatter again by idam Mi Nuchin through the World set Journal or indeed unconfirmed by Trump by the way, on the six extension of Auditation Europe, or just if some sort of other chatter. So I think that is a little crazy words crazy times. We're living in crazy times. It's pretty easy to pack the craziest thing yes, all right, I'll give you mine quickly. Now, uh, President Trump's companies famously went bankrupt. His casino companies. They

both had public stocks for a while. And now, Penn, you would assume those stocks are worthless, but you would be wrong. There's a robust market for paper stock certificates from old companies, and I went looking on one of the websites where they saw guess how much a paper stock certificate for Trump Hotels and Casino Resorts is going for? Now, reminder, this company went bankrupt in two thousand four How much would you pay for Trump Hotel Casino resort paper stocks

certificate to dollars two dollars? Sara? Can you outpid that? I don't know if I would personally outbid it, but I would say that it's much higher than that. Forty nine. You can get Trump Entertainment Resources, which was the following company when they merchant bankruptcy. Then that company went bankrupt in two thousand and fourteen, so that's only two nine. You know, this validates my instinct as a quarter never

throw anything out. You know, I can imagine after this bankruptcy you're ripping up your son of those days, Mike, I mean, some random paper in your house is going to be worth absolutely That's all the time we have today though, yes she Ben Emmons, thank you so much for doing What Goes Out. Will be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and

review the show so more listeners can find us. And you can find us on Twitter. Follow me at at Sara pant Sack, Mike is at Reaganonymous. Our guest, Ben Emmons is at Chief Economists six, and ye she is she e Bloomberg. What Goes Up is produced by topur Foreheads. The head of Bloomberg podcast is Francesco Levie. Thanks for listening, See you next time.