Economic Playbook For Trump 2.0 | Eric Wallerstein on Tariffs, DOGE, Jobs Numbers, and Global Trade War Tail Risk
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

I am joined by Eric Wallerstein. He worked at the New York Federal Reserve with Joseph Wang. He was a reporter for the Wall Street Journal. His work has been featured on the front page. He currently is the Chief Market Strategist at Yardenny Research. Eric, welcome to Monetary Matters. Thanks, Shaq. Thanks for having me on. I've been meaning to get you on for a while, Eric.

How are you thinking about the macro right now? Things are pretty uncertain. We're a little over a month into Trump's second administration. How are you seeing the data? How are you seeing the potential policy about Doge, tax policy and tariffs? I think we're kind of in a soft patch right now. And

a lot of the loudest voices last summer when we had unemployment starting to rise, the SOM rule about triggered, um, the downward revisions to payroll employment were 818,000. That was a big, um, you know, kind of suggestion, right. That the economy was in fact slowing and the quote unquote long and variable lags were taking effect. Those people are kind of back, right. This is a growth scare now. Um,

There's kind of a soft patch with the consumer. There really no large data misses happened, but I think we just had a bunch of second and third tier data misses. We had the weak retail sales in January, which could have been seasonal adjustments. But then we had Walmart missed earnings. We had a bad S&P PMI. It was just kind of like one thing after another.

And then with all the policy uncertainty, naturally bonds get a bid and markets are a little more tepid. It's kind of funny, I think it's really just a Momo sell-off, like momentum stocks and big tech stocks have been doing so bad, but you're actually not doing so bad in the S&P 493. The rest of the market is doing pretty good. That's why we're kind of hovering around $6,000 for the S&P 500.

By and large, we're pretty optimistic. We think this is like we would fade this kind of consumer soft patch. We think in the February data and the March data, things will rebound. We don't think unemployment is going to rise dramatically. We don't think tariffs and the new kind of policy regime are going to unduly weigh on the economy. We think

you know, basically investment in high tech sectors. So R&D software, info processing equipment, and then even just like the nuts and bolts manufacturing sector are all headed higher this year. You know, something that Scott Bessette mentioned in

in recent days and even prior to his nomination was that the private sector was really weak. If you look at the manufacturing sector, it was in a rolling recession for nearly three years and we're finally getting that recovery. So no, I think things look pretty good and I understand that people are uncertain and there's a broad based fear about what could happen.

But I think it's a little misplaced and more so just kind of recency bias and anchoring to the past few years where GDP was really good. Earnings are really good. We just got used to the gravy train of fiscal spend. But I think there's just different drivers for the rest of the year and through the end of the decade. So we're optimistic. We see 7,000 on the S&P 500 by year end. And yeah, I think things are OK. And you see S&P. What are your targets for the S&P 500?

for year end 2026 and then 2030. 2030, we have 10K. And listen, I understand the valuation story. I know, you know, like Goldman did their big, oh, high valuations lead to lower returns. But like, you know, the history of the S&P 500 is not that long. So you basically have like the tech bubble, pre-financial crisis,

And basically, valuations are very high. And then we had a recession. And so those metrics all look a certain way. But I don't think the S&P is super overvalued. We just think that earnings are going to drive it higher from here on out. If you have 8% earnings growth, which we're expecting higher than that, and so are consensus estimates, and you add in dividends, as long as valuations don't move, you're fine. You're getting historically normal returns. So...

Yeah, I just don't think it's an overvalued market. I think it's probably fairly valued. Like, NVIDIA is a huge company. Their profit margin is 55%. Like, that is literally insane. And so, yeah, growth is slowing a little bit. It was exponential, but their multiple has compressed, right? It was...

In June 2023, I want to say they were trading more than 40 times forward earnings. They're trading 29 times forward earnings now. That makes sense for a company that's growing at that rate. And I think even if the tech stocks compress a little bit because they start to slow or they're spending a lot, they're obviously investing in the kind of AI and AI adjacent sectors. I think you'll get a kind of re-rating in the S&P 493.

the rest of the market really hasn't benefited from ai yet you know it's mostly been a tech story um even within tech companies right you can reduce coding hours and reduce manpower like you can use ai to augment your work i think this year is when we're going to finally start to see kind of regular or non-tech companies starting to use ai in a meaningful way so yeah i mean i think

earnings continue to go higher. In the last earnings season, analysts were expecting 8% year-over-year earnings growth in Q4. It's like literally 13%. That's a huge change. Analysts often like undershoot, but that's a huge change. It's led to a re-rating of people pulling down Q4 of this year. Like, okay, year-over-year, it won't be as strong.

But I think you're going to get double digit percentage earnings growth each quarter this year. And ultimately, that's what drives the economy, right? Or like, that's what matters. That's what drives employment gains. Companies that expect more earnings are going to hire more workers. Those workers are going to spend more. It's a virtuous cycle. So I don't know. I understand that tariffs could lead to this huge trade war, but I think we're already starting to see

kind of the race to the bottom. The whole point isn't to just tariff the world and to some degree, we're going to bring in revenue from tariffs and we're going to rebalance trade, but also we're going to kind of bring down barriers in other aspects. If you saw some of the recent executive orders, we're going to make sure that the EU doesn't unfairly tax our tech companies. We innovate, they regulate. It's also a lot of punishment towards China and making sure that our allies and other countries aren't trading with China to avoid the US.

You know, I think it's actually going to be beneficial, right? Like we all complained during the Biden administration that the fiscal deficit picture was unsustainable, that it couldn't keep going. We all complained that China's surplus was growing exponentially and that they're exporting deflation to the rest of the world. It's absolutely crushed Europe. And yet now we're actually trying to do something about it. And I get we're moving fast, like moving fast and breaking things, right? So maybe that's a little disconcerting and raises uncertainty.

But you can't have your cake and eat it too. You can't just be upset about the fiscal picture and global trade imbalances and then just not want anything to be done. So I think something's being done. And overall, it's going to be a plus and a positive for US companies. So Eric, just background for the audience is you, your boss at Yardenny and the team at Yardenny Research have

over the past three years, not been worried about a recession, has been bullish on the economy and bullish on the U.S. stock market. And that has been the right view to have. In 2022, it was high interest rates, 2023, commercial real estate, 2024, SOMRU, all these recession fears like flies and you just swatted them down. Nope, not worried. Nope, not worried. That has been the view. It does seem like the

What's coming now is a little bit different. It's coming from the President of the United States and the government. So tariffs and Doge are cutting the economy. Let's start with tariffs. I really don't understand tariffs that well, but they either will cause inflation or they will cause growth to go down. So tariffs kind of have to be bad for real growth, right, in a way.

Do you disagree? And also your boss, your daddy, he has had the view that the Great Depression was caused by the Smoot-Hawley tariff of 1930. And so why does your daddy not think that it would cause a slowdown this time? Yeah, so like the biggest left tail risk is a

the biggest foreseen left tail risk is a global trade war right that absolutely crushes global trade imports and exports fall real growth falls um it's bad for everyone i think the encouraging signs that that's not happening is the fact that and president trump has said it himself right like

tit for tat lowering trade barriers. You know, like you've seen, yes, we're going to raise tariffs, but also like, okay, if you keep your barriers to U.S. exports lower, then we're going to have more favorable terms for you. So it's a little more out of the deal than just raise it to 25% across the board and raise revenue like that. So that's one thing that's been encouraging for us. But, you know, in terms of inflation,

So, I mean, we've actually had goods deflation for like a year and a half, right? Like, and it's part of the reason why I think the Fed made a mistake getting so bulled up on disinflation because it was all on the good side. And whether due to base effects or...

new policies or whatever, or goods demand were returning, which it is. Consumers are buying goods again because they pulled forward the 2023 and 2024 demand into '21 and 2022. But now it comes back. It's a very cyclical sector. Eventually, it's going to end. Goods prices aren't going to deflate. One of the reason real retail sales was so bad in January is because CPI goods inflated 0.7% month over month for the first time in a long time.

China is so reliant on the US trade deficit. And if you look at if you compound like US or the China's exports to Vietnam, the US and like a couple other like Mexico and a couple other of those like Southeast Asian countries, it hasn't gone down at all. There's no China going away from the US global trade is like the US, Canada and the UK run a massive deficit. And China runs a huge surplus. Like

like we don't need Chinese imports as much as China needs to export to us and their prices have been falling. Like look at Chinese export prices and look at their PPI. They're just falling. They're in deflation, right? So yes, tariffs like on the surface are taxed. Someone has to pay a higher price, but like

what did cpi and ppi do during trump's first term when we had tariffs and by the biden administration obviously increased tariffs as well on china it didn't have a significant impact ppi felt saw some little impact but it did not pass through to cpi it's a different environment right now where people are much more sensitive to inflation but if you think longer term so i don't think there's a huge there will be a huge impact on goods prices but if you do think longer term

In order to have the deflationary kind of impacts on the economy from tech and stuff like that, you actually need to have capacity in the US. You need to have industrial capacity and build and invest here. We've been lagging on that for 50 years or 50 plus years. If and what I expect to happen is that these tariffs and the policy to

eliminate barriers to investments that any PA, the like environmental review that all projects have to go to go through is probably going away. You're basically going to encourage investment in the US, right? Rebuilding capacity over the long run. That's just inflationary.

So like, you can't just, I understand that looking, we're used to looking at CPI and PPI and the PCE every month and on a three month lagging basis and a four month lagging basis or like whatever Waller and Powell are, you know, which months they want to choose this time. But I think like,

we saw the dramatic impact on supply chains during COVID. And since I think supply chains are much healthier, you can see it in some of the commentary within the PMIs, like on the regional basis, you can see them saying, I think supply chains might be okay to handle, you know, tariffs on various countries. But unless we rebuild domestic manufacturing in the US, you're never going to get long term disinflation. And we're just going to rely on other countries. And

if a pandemic or a war breaks out, you're then kind of in the same spot Europe was in 2022. And your inflationary backdrop is now kind of up to other countries, which is not something you want. So I don't think there's going to be a huge increase in prices from tariffs. Sure, it'll probably happen to some degree. That's just naturally what a tariff does. I'm optimistic it won't weigh on growth.

that's obviously a tail risk. And then over the long run, I think it's important that US infrastructure actually catches up and is rebuilt. And we have the manufacturing base that going forward is disinflationary. And that's the same thing with the fiscal deficit. It's inflationary to have a nearly 7% of GDP fiscal deficit during a non-wartime, non-recession. You have to bring it down to some degree.

And sure, it may be like maybe stocks would be at 6300 right now instead of 6000 if that wasn't happening. But there also could be a fiscal crisis if we do nothing about it. So long term, I'm optimistic. And in the short term, I'm like less concerned than I think consensus is.

I totally understand your long-term view that we need to incentivize building things in the United States, but that is going to be a long-term story. That takes time. Whereas these tariffs, 25% tariff on Canada and Mexico set in place to go in, it'd be effective on March 4th. And then the reciprocal tariff is set to go in place on April 2nd. I do understand your point about reciprocal tariffs that...

If other countries have tariffs on us, by instituting a reciprocal tariff, we incentivize them to lower our tariffs. And that actually could cause a decrease in tariffs. But it does seem like President Trump just likes tariffs, period, regardless of, you know, he kind of just, he just likes tariffs. Not in order to achieve an end goal, as it means, but just as he likes tariffs as an end in and of itself.

Yeah, no, I mean, and there's a number of things tariffs can do, right? Like they can raise revenues. I know there's a lot of arguments, especially from the left that sure, they'll raise revenues, but they're going to decrease imports. So like, you're not going to get as much bang for your buck. And then also for national security reasons and to rebalance trade. So like there are going to be tariffs of some sort. Our average tariff rate was quite low, even after, you know, Trump's first term and Biden's. I think like,

There are a lot of trade barriers in the rest of the world that aren't picked up and just face line like in our headline tariffs, right? Like the EU has a ton of trade barriers just within their own block. And that was something Mario Draghi has been talking about. He's been really like free market-y for the past like three months, but...

I mean, if anyone's going to do it, I guess it'll be him. He can probably corral something to happen. Canada has interprovincial tariffs and trade barriers. They're taxing cross-border flow within Canada.

These things exist, and I think actually one result of Trump's tariffs is that the international trade barriers across the globe are going to go down and fall, and maybe some of the barriers to U.S. investment globally are going to fall as well. So, like, yeah, some costs are going to go up, but I think the plan is, and we're optimistic about it, is that if you deregulate, so you lower regulatory and compliance costs, you...

lower energy prices, and you lower the corporate tax rate, you're going to offset some of those costs to some degree. So like, yes, some prices are going to go up. It's going to happen. How inflationary it is or how baked into inflation expectations it'll be to be seen. But there are some counteracting measures being taken. And I think overall, if you're a business and I told you,

There's going to be a 20% tariff on these goods. Namely, we're a services economy, right? We import like not a lot of things. We're fairly self-sufficient. I said, there's going to be a 20% tax on these goods, but also I'm going to lower your tax rate. I'm going to lower the tax rate for all your workers. And I'm going to remove all of like the regulations and barriers to invest. So I'm going to encourage you and like promote you to invest in the U.S. And it's not through like subsidies to the sectors that I care about specifically, like

the ira um the chips act was a little different because it was smaller and i think we all agree that that's an important national security sector but the ira was so targeted on like specific green energy things and evs and like arguably unproductive investments that the private sector wouldn't have done so i think a business would take a 20 tax on certain goods which maybe encourages more investment in production here in the us as well as you know deregulation and things to help them on the business side so

Yeah, it's a give and a take. I think it's a better policy and promotes domestic industry and investment here. And if you looked at the latest executive order from last week, basically, we're going to encourage foreign countries who are allies to invest in the US and build here. So yeah, we're going to tariff goods that we import, but we're also going to provide a streamlined way of you actually producing here. So that could bring more production here.

and remove the need to import as much. And we already don't import a ton. Intermediate goods coming into the US are not huge. So I don't know, I'm optimistic. The base case is that this goes wrong in some way, right? And I think, I'm not saying it's all roses and stuff and there's going to be no bumps along the way. I'm just saying there's a lot more paths to...

a good economic outcome than people are seeing. I think people are just seeing these things that are changes. Anytime there's changes, people have recency bias, they're anchored to their own experiences, they're worried. But changes happen. Economies change. We had the Plaza and Louvre Accords 40 years ago. The gold standard ended 50 something years ago. Economies change. And I don't think

I think the way it's being changed right now is more thoughtful than people are giving it credit for. And I'm optimistic that it won't be bad, as bad as people think it is. So I don't know. Like, we'll see. There's like, just like you said, the 25% tariffs in Canada and Mexico, I'd probably prefer those to be lower. But, you know, we'll see how they progress. Like, there's, I think one thing that tackles that is,

Trump is pretty anti-Maduro and anti-Venezuela generally. That's how his tone was in 1.0. And Marco Rubio, the Secretary of State, is definitely anti-Venezuela because they support Cuba's communist dictatorship. At first, Trump had a big opening with Maduro and was like, hey, we're going to be good.

take back migrants, like we're going to sell a bunch of oil, everything's going to be good, our relationship will be all good. And then like yesterday, basically said you're not taking in any migrants, deal's off the table. I just, it's so hard to take like the 25% tariffs at face value and not expect them to go away in a month because Canada and Mexico do legitimate things to help US industry or something. It's fluid and it's hard to make long-term calls on any of those things. I just think that trade barriers are

in key industries and sectors,

will be low enough that US corporations will be happy. Let's talk about Doge, Department of Government Efficiency. When it first was created, Elon Musk and I think President Trump said it could save a trillion dollars, two trillion dollars. Where are we right now in the savings? Because some of that is up online. Doge has tried to be transparent in terms of how much money has it actually saved and how

big of a deal do you think this is in terms of cutting down the US deficit, which is currently at $1.8 trillion? I don't know if Doge is going to do much. I think overall, though, there is an ethos of cost cutting in this administration. And so each cabinet member in their own agency is going to want to slim down on employing like their own employee employees.

leases on buildings, which doesn't really help the in-office order. But regardless, it's just trimmed down, right? Like no more excess, like going contract by contract.

is not really the best way to go about it. You actually need to reshape the economy to actually change the fiscal deficit picture and get closer to a balanced budget. I don't think anyone actually expects or wants a balanced budget. Clinton's balanced budget is part of the reason mortgage-backed securities got so inflated and the housing bubble took off. But

I think 3%, a 3% of GDP fiscal deficit is in the cards. I actually don't think Doge is going to play any meaningful part of that. But the ethos of a smaller government and, you know, less frivolous spending within government is, I think, something everyone could get on board with. Like, it's something everyone complains about. We have like a bureaucratic bloated government. But yeah, like using AI to go line by line on contracts, like,

$7 billion in savings, $50 billion in savings. We're not really putting a dent in the deficit at all. But it is what it is. It's not making the deficit worse, at least on face value. But yeah, no, I think...

The other thing I think like, I really think people are missing the fact that the EU is actually going to spend on defense and what that means for us. Because if you break out like mandatory and discretionary spending, you're like, oh, discretionary spending is only a trillion dollars. What are we going to cut all discretionary spending? Like there's defense in there. You know what I mean? It looks like untouchable.

but defense is such a defense is like 1.1 trillion dollars and if we just spend less on that and the other worlds the rest of the world spends more on that like europe and our allies

Like we're going to get a huge fiscal impulse from Europe. We're not going to actually have to spend so much and give out so many DOD contracts. And the beneficiaries are still Lockheed Martin, Raytheon. Like, yes, there are defense contractors in other countries and their stocks have been doing quite well. But like we are the center of defense. Like our companies are the best and it's going to help. I think it's really going to help. We don't have to spend as much on,

kind of the security blanket and also like less, there's a lot of issues with USAID or concerns, I suppose. But I think like, something we do spend money on is like foreign aid and like giving money to other countries and stuff like that. So this ethos of cutting back on that, it helps over the long run. Yeah, like one of the contracts Doge canceled and I wrote about was like to modernize social security's tech.

Which like probably actually saves us money in the long run if we do modernize their tech. So I don't know, they're kind of going quickly. And I think Musk has addressed that. He's like, yeah, like I'm going to make mistakes. We're going to cancel things that shouldn't be canceled. Then we'll fix that. So, you know, hopefully it, it, it, everything's fine. Right. Like in those things are remedied pretty quickly. But yeah, I don't know. Like,

I think Doge is more about showing people that we are doing something because rebalancing economic trade and cutting the fiscal deficit over two years by a percentage point or two, it doesn't appear to be anything. It's pretty intangible. You don't feel it until you look at the data and no one looks at the data. I understand the desire to get Americans invested in this wholesale change.

- In terms of the narrative, absolutely. And so the real changes are in that point of the data, but no one looks at the data. People look at the narrative. Whereas I see Doge is,

All narrative and very little into the data. Your former employer, The Wall Street Journal, pointed out, and again, Trump talking about a trillion dollars in savings. Oh, OK, maybe it's 500 billion. Maybe it's 100 billion. Wall Street Journal found that total canceled contracts were 16.5 billion. Then they rounded it down to 7 billion. And now the analysis that the true savings are more like 2.6 billion dollars.

$2.6 billion out of $1.8 trillion of a deficit. It is quite literally a drop in the bucket. And I understand that these things could scale over time. So maybe the true savings could be $50 or $100 billion. But end of the day, Eric, the real budget deficit is so much of the spending is

interest expense, social security, Medicare, Medicaid. And so those three entitlements and then defense. I actually, you know, I've had the view that if Doge is really going to make a meaningful change in our budget deficit, it would have to go after the

Department of Defense and what I perceive to be the wasteful spending of, you know, there's a door that it costs $500 to make, but it's sold to the government at $10,000. There, I actually think you really could get some good numbers. And, you know, I hope President Trump and Elon Musk are able to take on the military industrial complex. We'll see. You know, I have my doubts, but I'm rooting for them. But in other...

Up until they do that, I think it's just going to be these large sounding numbers like $40 billion, but that really don't make it a dent in the budget deficit. And to give real, maybe more tangible examples, who are some of the biggest players in new tech defense? Anduril, which is a US private company, Palantir, which is a newly public company and does more of the software-esque things.

There's no reason the DoD and the US federal government has to be the big federal contracts, the big contracts that are handed to these companies. They can be part of it, but very easily the UK could spend money and give it to Anduril because they are the frontier of new defense tech. It could easily be Germany doing that too, or there could be German investments in the US. It doesn't have to be federal defense spending. So when we say...

defense spending can't be cut and we just raised defense spending too. And like, oh, it'll never be cut. Like we can't do that. Like, I think we're missing the point because the U.S. defense sector is much more than just federal contracts being handed to specific companies. And I think Silicon Valley has a huge part in this administration and the government now. And Silicon Valley is pretty interested in industrial tech and defense forward tech. And so I think

I think the EU has missed the NATO guidelines for so long. They don't even spend 2% of their GDP. The UK is also part of that story, and they're going to be raising defense spending, they just announced as well, to 2.5%, and then I think 3% after that, 3% of GDP.

You're getting like, okay, it's a global economy. It's global markets. You're getting more fiscal spending from the rest of the world. You're literally getting the country. I was so bearish on Europe four months ago because it's,

The brakes were hitting from Brussels. So France is like the best performer in Northern Europe since the pandemic, the only one with really strong GDP growth. And they were running a 5.5% of GDP budget deficit. Brussels was like, all right, stop, you're done. Like, that's it. Get down to 3%. Germany has been pretty much austere. And Italy's economy boomed because of a massive populist policy, the super bonus, which was a tax write off for every household.

Now, they're not going to do that. Germany is going to allow for fiscal spending. France is probably going to be okay. They're going to all spend on defense. That's going to lessen our need to go spend on defense. And it's going to be a huge fiscal impulse. And the ECB is easing. Where is the negative for markets in that respect? I'm struggling to see it. I was really worried about Europe and therefore global growth because China was absolutely hammering them.

Europe can actually do they have defense contractors there like they can do a lot to spend and like build like an industrial base or rebuild an industrial base that isn't like Volkswagen factories you know like yeah they can actually be a part of this so yeah I don't know like I think there is a lot of reasons to actually be positive and um in terms of the budget like it's not

If 6.7% of GDP getting down to three sounds crazy, you're really just getting outlays down from 25% of GDP back down to like 22, 21% of GDP, which is like historically where they were before COVID and before the great financial crisis, they were about 20% of GDP. And

tax like the tax cuts in Trump 1.0 didn't reduce receipts and revenues as a percent of GDP. They just kind of bob around the high teens like they always do. They're always around like 17, 18% of GDP, whether it's because stronger growth or repatriating, you know, taxes that are booked, you know, profits that are booked overseas, which I think pharma will be a big part of rebalancing trade now and getting more profits booked here.

If you get it down, it's not crazy. It looks way more normal. And I think we can actually do that. So yeah, I don't know.

Will Doge balance the budget deficit? No. Will the budget deficit get closer to 3% over the next couple of years? Yeah. I think there's a very legitimate chance that it does. And so where's the real meat in the cut? Is it coming? Okay. Europe is spending on defense. So US defense spending can go down as a percentage of GP. Where else is it? I mean, I saw some. I mean, I think it's mostly growth. Like we grow out of it. And I think that's the plan. Yeah.

Um, so I think they'll probably cut at some point you're going to like go into the entitlements. Um, and there was a spending cut in the, in the latest budget budget passed. It was just that tax cuts were like four and a half trillion dollars and the spending cut was like 2 trillion. But like those work in different ways and tax cuts, I think are actually growth stimulative. Um, so I think they're, you're going to get more bang for your buck. Like you're actually going to bring in more revenues.

because you're expanding the economy. So it's not a four and a half trillion dollar cut. It's probably closer to what the spending cut was. But yeah, no, I think you grow out of it. So you get, you know, our labor force is no longer going to grow at the same rate it did over the past four years because immigration is going to go way down and participation in the labor market is pretty much topped out for prime age employees. It's pretty low for like baby boomers, but, you know, prime age labor force participation and employment are pretty high.

So it's all going to be productivity and productivity growth was about 2% year over year. Last year, historically, it's around 2.1%. In our outlook, which is we give like a slightly more than 50% probability to this scenario, we think it goes to 3% in the next year or two. So you get 3% productivity growth, you're at 3% real GDP. You don't need the labor force to grow very much more. And I think it's very realistic.

I think it's happened a lot before. It happened in the 1995 to 2000 period, which is pretty enaglisted today. And yeah, I don't know. Like we're not balancing the budget here. We're probably going to cut it back a little bit. I don't think we're going to be at 6.7%. We'll probably be more like five over the next like year or so. And we're going to grow more and it's going to be more productive as opposed to just like, you know,

bringing 8 million people into the country, our GDP goes up. It's going to be like actual worker productivity, which is way better for real wage gains. It's very closely correlated productivity and real wages. And then you have more consumer spending. You have the whole virtuous cycle. And so the corporate tax rate is 21%. And then there's a Trump tax cut, the Trump TCJA.

So those expire in 2026. So Trump wants to extend those cuts, but does he want to make additional cuts to the cuts? And also, can you be clear your view? So you think that actually cutting taxes lowers the deficit because the economy grows more than the revenues decline? It just like, if you say like the deficit over the next 10 years will be $4.5 trillion wider because of tax cuts, it's probably a lower number than that. Okay, okay.

Got it. It's not positive. I don't think you're necessarily going to lose that much revenue because of it. And that's what happened in Trump 1.0 when the corporate tax rate was cut. Receipts as a percent of GDP stayed relatively the same because you had that boost.

I know Brad Sester does a lot of work on this, not to plug someone else, but the amount of pharmaceutical companies that book profits and therefore get taxed overseas is a legitimate amount, like hundreds of billions of dollars. So I think if you rebalance trade,

and do get more investment in manufacturing here stateside and encourage US companies and just global multinationals to book profits here, you're going to offset some of those losses. So, I mean, tax cuts are generally like if you're a business, they're good, right? Like you're pro tax cut and it will help the economy to some degree. I just think like getting $2 trillion of spending cuts and then $4.5 trillion of lower receipts is actually more

like more austere than it looks. You're getting more of a fiscal contraction than you probably, or fiscal deficit contraction than it appears like on face value. And again, like we'll see, but I think we saw this in the first term and the economy wasn't all that different. And yeah, I don't know, like we'll see, but whatever we were doing four months ago under the Biden administration was just growing the deficit significantly.

each year and each quarter. So something needed to be changed. You talked about the labor market. How distorted have the labor market figures in terms of non-farm payroll as well as employment been by the large amount of immigration over the past five years? I really don't understand it. I'd love for you to shine some insights on it. Yeah, this was a huge thing when we had that benchmark payroll revision.

last summer, they were like, oh, payrolls are actually 818,000 less than we expected for a year period. Payrolls do a better job of capturing immigration than the household survey because like you're asking businesses like, oh, who works here instead of like calling a home? Like what non-legal immigrant is going to answer the phone and be like, yeah, man, I'm here. I have a job. But if you, I mean, there was probably, I think,

six or eight million immigrants who came across the border from 2021 to 2024, which is staggeringly higher than usual. And they just don't all get counted. So if you use some previous research from the CBO and others on how many immigrants are counted in the payroll survey, when this first came out, I figured that it was about two thirds get captured. So you're missing a third of the immigrants.

And so I figured that, you know, payrolls are actually probably more like 400 to 500,000 lower, not 818,000. It turned out that was the case, right? We revised the payroll revision to just under 600,000. But the household survey missed all of these people. And the Census Bureau, like, finally just started looking at the border statistics from, you know, the border and customs, whatever. They have a running tally of all these encounters and apprehensions, right?

They found, you know, like 6 million more immigrants, two and a half, maybe a million each year for 2022 and 2023. They threw them back into the numbers and oh, like household employments, millions of people higher than we expected. So you're just like the Census Bureau lags, right? Like you're not going to know how to count 2 million additional immigrants each year. And to think that because

the labor force survey methods weren't capturing these immigrants, they weren't there, I think it's a little asinine, to be honest. GDP was what GDP was, and productivity growth wasn't all that high for 2021, 2022, 2023.

So where is it coming from? It's coming from labor force growth. Like, it was obvious. I don't know. I thought it was pretty obvious. And granted, like, we were right. So it's way easier in hindsight to say that. But yeah, like, part of the part of the impact on the actual labor force metrics was that the unemployment rate rose.

But it was all people entering the labor force. It was all new entrants. So whether those are immigrants or not, it's people encouraged by the labor force and encouraged by real wage gains to go jump in and be like, I wasn't here before. I'm going to go find a job. A lot of it was women, prime age women, the highest labor force participation on record. That's kind of remote work has some degree to do with it, but they were encouraged enough to join the labor force. So you had the SOM rule triggered, but people actually laid off from their jobs.

wasn't rising at all. It was all re-entrance and new entrance to the labor force. And that definitely has to do with immigration. So

I wasn't worried about the SOM rule. I thought it was pretty stupid. It's a stupid rule anyway. And Claudia Somm is a good economist, and she just found the statistical regularity. So it makes sense that people tweaked out a little bit. The long and variable lags are here. Long and variable lags aren't a thing. They're not real. It's just a fake made up explanation for what monetary tightening did in the past. What it really did in the past is the Fed raised rates, a financial crisis happened,

And then the economy slowed and then you had a credit crunch, right? Like we had a financial crisis, SVB and a number of regional banks failed. That's it. Yeah, that's literally it. And that's how you get a credit crunch. It's literally the freaking banking sector. Like that's the most that's the closest thing you can get to leading to a credit crunch.

The Fed stepped in, the Treasury stepped in, the FDIC stepped in, they literally eased it, boom. They nipped it in the bud, they completely eased. That's fiscal and monetary easing, boom, in force. And so, they prevented a credit crunch. And now we have the Senior Loan Officer Survey is improving. Like, they're actually easing lending standards and easing the cost of funding for businesses.

There is no credit crunch. There's no long and variable lags. It's just that monetary tightening and higher interest rates, they punish some sector of the economy that's sensitive to those rates or who borrowed too much at low rates. It did. We decided not to let it be a crisis and not to let that crisis unravel. And therefore the gravy train keeps going. What's going to slow the labor market right now? Yes, there are physical layoffs happening. But what is happening in the private sector? Is anyone investing less?

Are forward earnings expectations going down? There's no slowdown. Sure, federal spending is decreasing a little bit, but a little bit. We're still spending a lot. And sure, federal contractors, that's going to go down, but they're probably going to go to the private sector. Hiring intentions will go up. There's a lot of uncertainty right now. Businesses will expand their workforce and they're going to hire those workers. No one's that productive in the federal government. No shot. You're going to be more productive and earn higher wages in the private sector.

So yeah, like you'll see some labor market churn for the next six months, but that means more hiring and more quits.

Like people have been concerned because there's less hiring, less quits, right? Like, oh, we're at 2014 levels. Yeah, but we had the highest hiring rate and highest quits rate of like multiple decades, like two years ago. So you had all that labor market churn. Eventually people settle into their jobs. And now we're actually seeing the real wage gains for lower wage workers. So like how hot do you want the labor market to be while also getting disinflation?

It's just like they're incompatible. You need the labor market to slow down a little bit. And frankly, if employed people are not losing their jobs and real wages are going up, the fact that you're still concerned is crazy to me. So it sounds like you're more sanguine on the labor market than Jay Powell.

i'm more saying on the labor market than like nearly everyone like and i haven't been um and it's worked so like maybe i'm a little like i'm sticking to my guns a little more and i should be sensitive to that but i think and this is interesting because i think part of my job and part of your job um but part of my job at the journal was to like evaluate like how good like the person i was speaking to like did they know their stuff and how much did i

agree with what they were saying or did it have like metal, right? Like, did it hold its weight in water, whether I agreed with it or not. And something I've seen from like strategists and investors who are around their 40s is they really anchor on the housing market. And that's probably a legacy of the great financial crisis. But I see so many people talking about housing starts, talking about housing completions and construction employment. And construction employment is at an all time high.

And these people are saying, oh, we're completing all these homes, starts and permits are very low. Something's going to come undone and construction employment is going to fall. I think that's not going to happen. This housing market is so weird, just like the labor market has been pretty weird in the post pandemic era. It's not the same cycle. You're not going to get the fall off in construction employment and starts and permits can easily rebound. I think part of this administration wants to do is deregulate.

you're going to get starts and permits up. It's going to happen. And also construction employment for single family homes, nearly half of it is remodelers. These people have skills, right? They don't have to build a home. They can just go remodel. That's half of it right there. And you're also getting a supply. If the demand for construction employment is going lower and I take that at face value, well, the supply for construction employment just absolutely plummeted.

The flows are gone. There's no more like don't expect immigration for construction employment anymore. Like, sure, it'll happen a little, but not really. And the stock might have got down a little bit, too, because people are going to be scared to go to work if they're not, you know, if they're an illegal immigrant or they're going to leave or they're going to be deported, you know, like something like it's going to come off a little bit. So I think demand for construction, which is remodelers to its people building data centers. It's like a lot of things is going to go down. And I think

I think it's okay. I just think the housing market is so screwed up right now in this post-pandemic era that anchoring on it too hard is a mistake. And it's the same thing with the labor market. Seeing these traditional metrics fall, hires and quits, is not the right way to think about it. It's not preceding a recession. It's after...

It's following the biggest amount of churn and like housing's all screwed up from super high mortgage rates, super high home prices, the kind of huge, huge surge in building that's still kind of happening and all that backlog finally being worked through. But like, let's say this administration lowers barrier. They like they exit Fannie and Fetty from conservatorship and they like

promote, you know, HUD to have way lower regulations and just go build a bunch of multifamily construction. Like who's going to build it? People who are already builders. So yeah, I think people keep missing or mistaking things in this cycle for things that happened in previous cycles, but it's so asynchronous. It's just completely different. So yeah, I'm not worried about construction employment. I'm not worried about housing that much. I'm not

I'm not really worried about anything in the goods and construction sector. I think it's all accelerating.

And so residential building construction is just below its highs, but in terms of total construction, data centers, warehouses, that's at an all-time high. And yeah, a lot of that is not at nearly as interest rate sensitive as the mortgage. Two points I grant you, number one, I bet totally, yeah, the 40, 45-year-old analysts, they're over-focusing on housing because that's what ruined the economy in 2008. But I'm just looking at, just housing's not as big. Like in 2006,

residential building construction as a percentage of total employees was at like 7%. And then it collapsed from 7% to 4%. But now it's at 4.5%. So what, is it going to collapse from 4.5% to 1.5%? It's going to be some floor. So I totally get that point. And then also, the one thing I will say is that

Mortgage rates go from what? 2.53% to 7%. That absolutely crushed the existing home market. So you have a house, I buy it from you. I have a house, you buy it from me, blah, blah, blah. And that employs brokers, real estate brokers, but it does not employ construction workers. And that is where a lot of the employment is. So

What was killed in 2022 and 2023 by the interest rate shock was the sector real estate brokerage that does not employ as many people. And what has been strong is construction because all those houses have to be bought from the new home market and real estate prices have gone up. And so that employment is strong. But if the new home market actually starts to become weak, that will become a drag. I understand your point that it's not a significant drag as big as 2008, but it will be some sort of drag, right? Yeah.

No, that's a great point. And yes, there would be, I think if you just look at it, right, like completions are at an all time high or close to for I think multifamily and starts and permits have been quite low. Some of that might just be uncertainty though. And I think like as you get interest rate volatility down, and let's say the Fed is on pause, probably for the rest of the year, you know what I mean? Like they're not going to hike again, unless something crazy happens. But and they're probably not going to cut if inflation is still sticky, or maybe a little higher from tariffs. So I

I just, yeah, I mean, you get more certainty, you maybe get deregulation, you keep building. And I think actually the existing sales market will come back a little bit because like,

It's a life thing, right? Like the American dream is built on housing and eventually people have to move. Like going back to the office, I got to move. I got to sell my home. I got to buy a new home. You had a second home. Like maybe you get rid of it because you got to go back to the office and you can't live there anymore. So like that, that churn starts to happen. People will refinance or pay down their mortgage. I think it'll start to happen. My last story at the journal, my like swan song was about how,

how millennials and younger people were so screwed by this housing market and older generations have benefited. Like renters income or like proprietors income, sorry, is a huge part of non-labor income and non-labor income has soared. It's like 17%. Proprietors income means someone owns a spare unit and they get rent on that? No, like a landlord basically. Most landlords are mom and pop. It's not Blackstone or BlackRock according to Twitter.

The current housing policy of very expensive real estate, it has benefited the old at the expense of the young. I'll say also, it's so much worse in other countries, in Canada, New Zealand, China. Oh my God. Those countries have huge real estate problems. It's so much worse. And I think it's actually a very interesting point because consumer sentiment has been, it's now a hot topic because we had two bad consumer sentiment prints.

seemingly no one cared for three years when they were pretty bad, but now they're super focused on it just as they move to online surveys and get really partisan. But I think why sentiment in the US has been so depressed is because you can't afford a home. Like whether you can't afford a home, like

I personally couldn't afford a home in Santa Monica, California where I live because the median price is $2 million. And where I live specifically, which is right on the beach, it's probably like $5 million. So I'm not buying that right now. Mortgage rates are super high.

Who's taking out 7% mortgages to go buy historically high home prices? And home insurance is going up. Every possible part of owning a home is super high. So it's really bad for me. My parents have a home, my grandparents have a home, but they'll see younger people and millennials, 35-year-old, 40-years-old, good careers and can't afford a home in New York City because a studio is $1.2 million.

So you see that it makes you depressed. It's like the American dream and you can't do it. You can't move on with your life. And I think it's a huge reason why consumer sentiment has been so high because home inflation, while sheltered inflation is going down, home prices are still going up and it doesn't even tell you the whole story. Like it is impossible to get a home or move to a bigger home and like start your family. And I think it's a huge reason why consumer sentiment has been more depressed than it otherwise would be in a very strong labor market.

And like something has to give. I think part of the reason it happened like this is because of the Fed. I think it's a huge reason why actually they were buying literally trillions of dollars of MBS while home prices were rising like double digit percentage points. It's literally crazy.

And then you had Zerp and just like all the support and regulation in the housing market has also contributed. So maybe we're seeing that come off a little bit. But yeah, it's a funky housing market. Eventually people will at least incomes are going up. There is hopefully going to be transacting with return to office and just like people getting exhausted and normalized to 7% or 6% mortgage rates. Yeah, it's a funky housing market cycle.

I think it weighs in duly on consumer sentiment. And like you said, yeah, it's way worse in Canada. Like people can't afford any home, right? And they have nowhere to go too. There's like three or four cities you can really live. And, you know, it's not like here where I can move to the burbs or like, you know, there's a little more fungibility in your home, I guess here.

Eric, let's just go back to the labor market and the birth death ratio. Because on this program, I featured a lot of analysis about the birth death ratio and how non-farm payrolls has been, was, you know, the strong non-farm payrolls were overstated because the birth death ratio was assuming business creation that didn't happen. Tie that into immigration. And then also in the non-farm payroll that came out February 7th for the data of January, let's see, there was 580

$599,000, let's call it $600,000 revisions, negative revisions for 2024. Why is that not a bad thing? Why are the birth-death truthers, why are they wrong? Yeah, it's funny, like, the birth-death model has been such a huge focus of the past year. And like, if you're an economist or strategist, it makes sense to find the most obscure shit that no one looks at and then use it to support your argument because no one will know.

any better. So yeah, the birth death model is basically, you know, pay the payroll survey asks employers how many people work for you. But like, there's a lot of turnover in the number of firms in the US. So like new businesses are created every day.

businesses are shut down every day and it's way they're going to capture all the businesses shutting down way quicker than the BLS is going to find a new business. So they try and like they look at new business applications and they try and adjust and they'll add payrolls for however many new businesses they think are being created. And so this birth death adjustment, the birth of firms, the death of firms has added to payroll employment a significant chunk for the past couple of years.

The reason calling it out as like baloney or saying the BLS doesn't know what they're doing is stupid. It's because business applications have risen a significant amount post pandemic, a huge jump. Also the birth death adjustment, I just pulled it up, went from like adding that is what a million payrolls over a 12 month period before their pandemic to adding like a million and 250 payrolls.

So like 1.25 million after. So not a substantial jump. Like it wasn't like it went from zero to a million payrolls are being added each year. It was like a million to like a million and change. But new business creation soared.

Some people will say new business creation soared because people wanted PPP loans, you know, like you had sole proprietorships for tax reasons. An Uber driver who's they started business. It's not like an entrepreneur starting something that will hire hundreds of people. Complete bullshit. Like it's a stupid argument and it's used anecdotally because the Census Bureau will break out or whoever does it, business applications,

by, I think it is the Census Bureau. They'll say, "Okay, did you apply for business?" And they'll also say, "Does this business have a high propensity to hire people with wages? Is this business going to hire employees?" And they break it down another layer too, like do they already have people on payroll kind of thing. Those have risen too. So you're seeing most of these new businesses are actually ones that the Census Bureau is like, "They're going to hire employees." It's not a sole proprietorship basically.

So these are legitimate businesses and the Fed or I think it was St. Louis did a study and they found a lot of it was like new tech companies coming up or like, you know, startups in the burbs of places because of remote work, but like companies with employees, not just sole proprietorship. So

The birth death adjustment has added slightly more employees to payroll employment over the past two years than it did before the pandemic. But it's because it's a more dynamic economy, it's more innovative. The barriers to starting a business in the US are like nothing. It's like you start a tech company, all of software is a service.

but we use you know the cloud we rent the cloud there's no needed um like investment from us or capital outlay it's just a monthly subscription it's part of the reason why the economy is so much less rate sensitive right like most businesses don't require hard industrial investment like it's mostly soft things it's services they're monthly subscriptions and you can like my company has like 15 people we're completely remote like i live in la

We just use all cloud providers, CMS platforms, everything like that. I think this is legitimate and it's part of the reason why the US did so well coming out of the pandemic, way better than Europe and comparable advanced foreign economies because the labor markets there, first of all, are so tight. You can't get fired. You can't leave. So you have productivity absolutely plummet in the EU during a recession because it's just a ton of employees doing nothing.

Here we had labor market churn. People went to different jobs. They got paid higher wages. They like moved all around to where they were more productive.

And also you can start companies. There's no incentive to start a company in Norway because they tax the shit out of you. Being a founder there is so hard. And also a lot of the US stimulus was giving people money as well as giving businesses tax credits or bailing out Delta Airlines. But in Europe, a lot of it, I am speaking anecdotally, was basically giving companies money to not lay off people.

Which short term was more of a, you know, forestalled the crisis, but longer term, it didn't cause a boost in demand. It takes people cemented in their roles rather than encouraging them to go where it's needed, which is leave like in-person jobs or go to like services jobs. Or like, you know what I mean? There was so much, the economy transformed so much during the pandemic that if you just made everyone stay still,

you wouldn't have had all that labor market churn and new businesses created and all that. It's also actually part of the reason why I think the whole

inflation was a global phenomenon argument is BS. It's completely BS because Europe had such a different labor market, a completely different economic growth picture, and they were sensitive to Russian gas. Energy is maybe a small part of CPI or it's a part of CPI, but it also influences core CPI. Every price is sensitive to energy prices.

We didn't need that huge increase in prices. We just stimulated the hell out of the economy after it didn't need it anymore. Like we were still stimulating on the fiscal side and the monetary side in 2022 when CPI was over 7%.

It's absolutely insane. And we didn't need to. I think you get all that churn and increased productivity, you can actually get real wage gains without all the inflation. And that's why real wages were going down for like three years. People like workers, production and non-supervisory workers had negative real wages like through 2023.

It was only 2024 where they started to beat inflation. And yet you'll have like the kind of economists within the last administration or sympathetic to it, arguing that this is the best economy ever. It wasn't honestly till last year. It wasn't great for low age workers. And you saw the cost of things go up so dramatically. I don't think we needed it. I don't think it's a good explanation for what happened in the U.S. I think it's kind of a cop out.

I honestly would, I would take the cop out too, if that was my position, right? Like if inflation was everywhere, I totally would say like, oh, well, you know, couldn't do anything about it. But I think the U.S. was so exceptional post-pandemic, we didn't need the inflation too. Like our economy was different and we have a much looser labor market. I don't think we needed all that stimulus and that inflation. So I think that was a policy choice. And sure, it simulated growth. Like we had higher growth because of it.

but yeah i don't buy that story and

And we say you don't buy or it's BS the global inflation story. European inflation went up. Japanese inflation went up. US North American inflation went up in many parts of the world. Inflation went up. You're not disagreeing with that. What you're disagreeing with that is that they had they all had the same cause. You're saying they have different causes. Yeah. And I think the US could have had lower inflation like where the US have had inflation 100%. Did it need to be 8%? And does it need does the super core need to be like three and a half or 4% right now? No.

We could have had lower inflation, it could have been more transitory, and it didn't need to have the same effect. It's literally still here. And I think it also led a lot of people have tried to explain away this election and global elections as a reaction to inflation. But that explains away the fact that the previous administration and the Fed and kind of everyone involved had an impact on inflation, right? Like, okay, they voted out the people who did it to some extent. So...

Yeah, I just think it's...

It explains away policy choices to leave it up to that the global economy had to succumb to this no matter what. And we're just a small part of it because our growth story is so different than the rest of the world that clearly we have our own. The US has its own drivers and a differently shaped and wired economy that we're not subject to global price pressures in the same way. So yeah, no inflation would have happened. It just didn't need to be the wrecking ball that it was.

And what do you think about inflation right now? 2.7%, 3%? Are we headed to 2%? Everyone knows you're not a recessionista, you're an anti-recessionista. You are very, very confident in no recession, strong nominal growth. Is it going to be a soft landing or a no-landing scenario? What's your view on inflation? Yeah, no. I mean, like 2% is probably not going to happen.

I don't think stagflation is here. I think that's a stupid take. That was kind of what I was saying all like the second half of last year. Like inflation is not going to go down. You know, services are very sticky and goods prices have been deflating. Don't count on them for too long. I've been saying it for, you know, like nine months. Everyone seemed to miss that and think that like 2% was right on the horizon and we'd have like 10 rate cuts.

or whatever. But now I think it's too much on the other side. Like, oh my God, tariffs are here. We're gonna have 4% CPI. No. And the economy is not going to slow so dramatically that it's into stagflation. The worst case scenario, barring a black swan or whatever, is that real growth slows to 1.5% because the labor force growth is slowing and we're taking away fiscal spend. That's the worst case scenario. But

We're not going to go negative on growth. And I think we're still getting disinflation on the services side to some degree. I don't think goods prices will rise that much. So no, I mean, we're probably stuck in this three handle world in terms of CPI and the PCE isn't going to fall to 2% anytime soon unless economic growth is hit with like a recession or something.

But yeah, I mean, like from the from an investor's perspective, you probably should have been hedging for inflationary outcomes for a while. Like, I don't think it changes that much. I don't think other than slightly higher goods prices, there's nothing that's like raising wages substantially, right? Like nominal wage growth is slowing. It's falling. A lot of input costs aren't rising. So no, the inflationary picture looks fine.

I think it's going to prevent the Fed from cutting, though. You can't cut if the PCE is edging up towards 3%. That's a horrible look. And the inertial bias there is going to prevent any hikes. So we'll probably chill at 4.5% or whatever Fed funds rate.

This administration will try and get the long end down. We'll see what happens. But I don't know. I think it's really nice that we don't have to focus on the Fed so much anymore. It's kind of tiring reading all their speeches. So I think they're a little bit of, for the curious who care about balance sheet policy and QT, I think it's a really interesting time. The framework review will be really interesting. But I think from the overall investor perspective, I think the Fed has like a fourth or like

Yeah, it just doesn't matter that much this year. Yeah, I agree with you. I think the Federal Reserve matters less than it has over the past five years. I'm not as happy about it as you are. You know, a lot of the books behind me are about central banking, not a lot about tariffs. So I got to change that. I got to change the time. But I think you're right. What do you think about China?

Yeah. And hey, like, I'm not like, one of my things is that I worked at the Fed. So like, the Fed being out of the picture isn't exactly pro me. So I feel you. China, you know, maybe they're

Stimulus is starting to take hold. I was kind of long and still am of the opinion that they don't have the will or the way to stimulate consumer demand enough to actually rebalance their domestic imbalances. You know, they're too mercantilist. They're relying on exports and they're not willing to basically like allow for consumer wealth to grow. It's like an autocratic regime. It's inherently anti-consumer.

cares about wealth inequality like it promotes the the upper the upper regime versus the lower regime and the reason that productivity and the lower middle class in China has benefited so much for the past since dingjao ping was because there was no growth there at all so like even as inequality widened the overall pie was growing so astronomically that everyone was benefiting but now like

If I'm a Chinese consumer, I have no property market, so I probably have to deleverage. Each local government financing vehicle has like 300% debt to GDP. A lot of them are going bust and the model isn't changing enough. We're getting incremental stimulus. I think some of it has the right idea. They're trying to do things. But I think, I mean, frankly, I think the central bank and the federal government

should issue debt. They only have 80% debt to GDP if you just think about the whole Chinese government. It's all on local vehicles. They could probably issue debt and find buyers. I think that's the best-- Oh, yeah. And the yields are insanely low. They're trying to tell banks to stop buying the bonds. And it makes sense to buy bonds in China because there's no property market, right? Where do you store the wealth?

and they have a very high savings rate, frankly, it's part of the issue. They're not consuming or investing. They should just issue debt at the federal level. I don't think they should worry. They should go to 100% like now debt to GDP, and they should actually use it to stimulate the economy as opposed to refinancing all kind of underwater debt in local governments. But

It's hard when you tell people to... It's almost like what happened to... It's a weird analogy, but it's like what happened to GE, which is the kind of hub told each...

like spoke, you know, how much growth to achieve. And then those spokes achieved it at whatever means necessary. And then you kind of get screwed. You use fraud like the projects aren't as productive and don't, you know, generate the ROI you really want. And so you get those numbers at the top. You're getting 5% of GDP, but it's not through the means that you want. And so like you get more concerned that that 5% isn't legitimate. So yeah, I don't know. Like China is...

Sort of it's been screwed. It's sort of less screwed now, but I don't think it's out of the woods. Um,

I think they need to do a dramatic domestic rebalance to promote consumers, something Michael Pettis is really big on and I frankly agree with. And he is in China and I'm not. So I don't know, maybe he probably knows more about this. But yeah, I don't know. They're kind of making steps. I think if they do achieve a trade, like some sort of trade deal with the US in the next few years, that is the only bull case that is

somewhat close to them actually stimulating the consumer and rebalancing their domestic imbalances, which are so export heavy. I think them doing that is a low probability. I think the trade deal that alleviates these concerns is also low probability. So I'm not like I'm not there on China and like, sure, they the stocks rallied like they go like this over time. So like whatever, it's a great trade. But I don't know any long term. Like, I don't know any endowments that are like, let's buy

Chinese tech stocks, you know what I mean? Maybe that's the time to buy them is when Yale doesn't want them. Yeah, no, I mean, it probably is. I just think, you know, their macro is showing some green shoots, but it's not there yet. And there's a couple, there's so many more risks.

The risks are definitely asymmetrically skewed to the downside. And the fact that they're still deflating, like inflation is still going down and you're seeing news articles about like the government's telling producers to stop basically racing to the bottom on prices and out competing each other means that they don't know how to do this. Like it's really hard to manage an economy like this top down and stimulate out of whatever they're going through. So not bullish on China, you know, that could change, but I don't know. It's a tough one.

Yeah, I think the Chinese private sector, the real estate sector, incredibly levered. The Chinese government, central government, much less government, much less levered. The municipal government, local government financing deals, much more levered. So it's different. But when actual Chinese household, I think is extremely, extremely unlevered and they have a very high savings rate. So I think starting a bank or a lending company in China where you lend to the Chinese consumer, it was a very good business. Like just some companies...

I've been involved with, they have much, much lower default rates than American credit card companies. So that could be one way financial deregulation, which I think is kind of happening. But it's interesting. Okay. So Eric, what do you think about the 10 year? I saw on Twitter a few weeks ago, you got bullish on the 10 year bullish on bonds. Where are we now? The 10 year and are you a buyer? Yeah.

Yeah. So our range for this year or like coming into the year sometime in Q4, we set like a four and a quarter to four and three quarters percent on the 10 year yield. It's kind of been working. You know, we got the 4.8. I was buying around 4.6 all the way to 4.8 in my PA, like in my PA is not sizable. So whatever. But

As we were climbing, I kept buying and I think January 13th was the peak and that's when I bought the most, frankly. And then, yeah, it's been going down. What are we at? 4.3 right now? Yep. Sorry, 4.29. Okay. Yeah. So, I mean, like the Citigroup Economic Surprise Index does a good job of showing this. And frankly, like

break-evens decoupled for a bit from oil and break-evens were staying lofty while oil prices were falling, I think due to policy uncertainty and tariff fears or whatever. But at some point, the macro had a decent chance of slowing down. We're having a soft patch right now. It's fine with me. It's only on the services side and I don't think it's going to be long-lasting.

But and you also I think that gap would close, right? Like oil prices have so many catalysts to the downside right now. This administration is uniquely focused on boosting oil supply and the wars in the Middle East and in Russia, Ukraine arguably have end dates in sight now, right? Like there's something there's things to hold on to that the horizon is near versus six months ago. That wasn't not true. So.

I think, yeah, just as soon, I tweeted this and I really meant it. Like if you, every time you see term premium anywhere, buy bonds, like buy bonds, go, go buy futures, like buy options on TLT. That's all you can do. Or IEF, if you're a little shorter duration, buy it. Cause I was writing about term premium in the journal in 2023 and we got all the way to 5%. And you know what happened? We got all the way to 3.6%.

Like this is still kind of a nervous, jittery market. There's a lot of uncertainty. Bonds are going to get bid at the first signs that they should. A week at FP print. I didn't think the consumer was going to like have a soft patch right here, but I was like a week at FP print, whatever, something's going to happen. The odds that it falls, like you had asymmetric upside in bonds. The odds that yields fall are so much higher than them going up. I was like, there's no chance it breaches 5%. You saw the buying power come in when it got to 4.8%.

Like, for real money investors, asset managers, and even foreign investors who are hedging into U.S. dollars, 5% is great. Like, there's so much demand for bonds at those yields. I just don't think they're going higher. And we have no fiscal issues like we had last summer when the 10-year got to 5%. Like, Janet Yellen literally was like, oh, actually, I'm going to borrow a quarter trillion dollars more than I told you.

And we got to 5% with some higher inflation as well. That's not happening right now. Like I said, I think the latest budget is actually a little more contractionary on the fiscal side than people think it is. I think there's a lot of real buying demand there. We're going through a little bit of a soft patch in terms of consumer data. Why wouldn't yields fall? So no, I still haven't sold everything. I wouldn't be a buyer here probably. But we get to 4%. I'd probably sell everything.

At 4.1-ish, 4.2. Also, it's a little bit of a hedge just in case things go wrong, right? Like everyone's portfolio has a bunch of tech in it. My big hedge for the year was like buying leaps on MSTR. I was like, no, like it's working out really well. Wait, wait, wait, wait. Puts? Yeah, puts. Oh, puts. Okay. Yeah, yeah, yeah. Yeah. I was like Bitcoin could drop 10,000, but MSTR will get killed, right? Like

And I was like, even if the economy does well and Bitcoin does okay and everything's fine, MSTR still might go down. So that was my big PA hedge. It's going fine. You know what I mean? But it's for the rest of the year. I'm not going to touch it. But yeah, no, I think yields are probably good here. I doubt they get to 4% or much lower unless, again, something rough happens. You'd have to get a really bad payrolls print or something like that.

I don't like 4% to 5%, it's normal. It's historically normal. That's what the yields do. And I think the yield curve is not going to be that steep and that's normal. 1995 to 1999, most inagilous situation to today, yield curve was like 50 bps on average during that period. It bounced around. It wasn't super steep. It wasn't inverted.

is kind of bouncing around. I think that's what we're going to have here. And I think, you know, I don't think we're going to breach 5%. I don't think we're going to go to 3.5%. I think this is where yield should be in an economy that's growing nominally at 5%.

But why should if the economy is growing at 5%, why shouldn't the 10 year yield, which has some volatility risk, not be at 5% too? Well, I mean, like usually tips, 10 year tips are at like 2%. And now they're at like 1.8 or 1.7 or whatever, because we're in a little bit of a growth scare.

So people think growth is going to come in a little lower this quarter. So the 10 year yield is a little lower, but it's like volatile. There's some supply and demand issues. There's some like inflation volatility issues, which is still a question mark. But I think it'll bounce around that area. And that's it. You know what I mean? Like break evens are historically pretty steady. They don't freak out. They're actually a bad measure of inflation expectations. You know, 10 year tips are much less volatile than nominal yields.

So I don't know, like you get 2% on 10 year tips on average, you know, you get two and a half percent break evens on average. They both bob around. You have four to, you know, four to 5% on the 10 year.

And so Eric, you said that 4% to 5% is the average for bonds for the 10-year. I'm sure you're right about that. But that's the overall average. And starting when Fred started measuring these, it started at 4% in 1962, went straight up to 15%, and then went from 15% to 0.7%. So it's not like, oh, it's always at 4% or 5%. Yeah, no. I mean, I'm comparing more so to...

recent decades as opposed to the 70s and 80s. And that was actually back when Ed coined the term bond vigilantes. When yields were 15% was when he started to advertise hat size bond yields. So he became a big bond bull. When I first read that or learned of that, I was kind of confused. I was like, what does that mean? But hat sizes were like seven or eight. So it was like yields having, I suppose.

But yeah, I mean, that was when like Volcker was using money supply to affect interest rates and the effort wasn't like set through administered rates. It was way different. I don't think there's an oil shock on the horizon. Like we're bearish oil prices generally. So why like that? I think oil prices probably have the most direct feed through to inflation or to nominal yields. They're super correlated with break evens and they're very correlated with economic growth.

So 10 year tips and also they feed through into all inflation. They actually do feed through to core CPI. So oil prices are probably coming down and not for growth reasons, for supply reasons. It's not like oil demand is falling, it's that supply is rising. So yeah, I think everything... Why are we going to reach 5%? Are we going to have a fiscal issue where we're just spending crazy and the deficit widens much more? I don't think it's widening anymore. It's probably going to shrink a little bit.

Why would we go below 4% economic contraction? I don't see it. I don't see a recession. So we're good. We're here. You need something material to change to, I think, push them much lower than 4%. Also, we have higher for longer baked into our expectations. If the Fed doesn't cut,

why would the curve invert? Curves only invert when they expect a recession. So you're going to have the 10-year at least above 4%. Even if they cut once or twice more, I think you get like a 50 basis point positive spread on the yield curve. So I think it's fun as a trader. I'm sure the volatility is nice, but I don't think being a bond bull or a bond bear outside of like

you know month-long positions and stuff means much anymore i don't think like the whole six percent doomsayery stuff is wrong-footed and doesn't is not valuing the data with a level head and i think you know buy it as a hedge that it goes to three percent because there's a slowdown that's fine eric final question for you is the long term uh

impact of artificial intelligence? If it really is as transformative as some people say, won't it displace massive amounts of labor? And are you confident that similar to, okay, technology displaced a lot of people off the farms, but they find jobs in the cities, in the factories. Are you confident that the private sector or the economy can absorb these displaced workers with as much scale? I mean, like, what are people going to do if

you know every all of hr all of uh sales is done through ai what what are people going to do i mean is everyone going to become a podcaster what are good people going to do i mean people will probably stop getting humanities degrees but um no i mean i'm optimistic on ai from a productivity perspective i do think it's legit i'm not i'm like i'm way less pessimistic on its impact on the labor market that i am like optimistic about its positive impacts on real growth

I just, we do have a skilled labor shortage in the US like, and sure hiring quits are a little bit down, but by and large, like there's a skilled labor shortage. AI is going to, AI and a lot of the things that come along with it are going to augment that. Like the demographics across the world in every advanced foreign economy and even China now,

are going the wrong way. Like we have an aging population. We don't have enough like doctors and stuff like that to care for people. Like this is going to augment the workforce and it's going to be a huge help, I think. And it's going to offset what would otherwise be like negative growth, like, or headwinds to growth. So I'm not worried about it. And I think

When CHAP GPT happened, 2022, October 2022, it's February 2025. And the productivity gains have really only been seen within tech companies because they can augment their coding. A lot of the positive gains to growth have been building data centers, like nuts and shovels, picks and shovels, energy demands, and just kind of like the investment boom.

And half of capital spending, like non-residential fixed investment in GDP, half of it is high tech. So info processing equipment, R&D software. They actually all slowed a little bit in Q4, probably uncertainty reasons, but those are going to keep going up. That's all good. It's pro-growth. And I think it's not like so many, who's going to get kicked out of their job for this? Who's going to lose their job for these things that are like,

good at coding, like some software engineers, but it's the most innovative sector. These people can move around, they can learn new skills. It's just doing compute faster and faster. So I think the global economy needs this. The labor force is not growing. We don't have enough skilled workers in various sectors. Healthcare is the most

doctors take notes on pen and pad, right? Like you have to transcribe those. And there's literally people hired to transcribe notes into a computer.

And there's not enough doctors. This stuff will get over that hurdle and get over that hump. And I think it's good versus post 2008 Zerp era, tech was not great. It wasn't productive. It was a lot of zombie companies. And that's why so much productivity lagged because you had a huge overcapacity and just unproductive businesses with no cash flow or free cash flow was negative. They weren't earning anything.

like nothing productive happens in that environment. I think it's not really a shock.

And yes, timing, it's correlation or causation, whatever. It's probably more correlation. But it's not a shock to me that the tech investments coming out of right now when the Fed funds rate is above 4% and 10 year yields are historically normal, are much more productive and actually generating cash flows and have real tangible economic impacts versus 2008 to 2020. And even during the pandemic, it was way worse. Metaverse, crypto, everything crypto.

That was all nothing. Eric, what do you think about crypto? I don't really. I don't think about all that much. I recently wrote about MSTR and Bitcoin and MSTR is like financing strategy.

I think Bitcoin's probably here to stay. I think the fact that it stayed above 20K during the huge route was huge and I encourage institutional interest because that's a good floor. I think it's probably here to stay. People can use it. It's used for transacting, whether for illicit or normal above-table means. It's a decent store of value, I suppose. The price did not go to zero. I do think it actually would have went to zero or close.

if SVB was allowed to fail. That's like my big thing. I really like Circle was in there. Like, yeah, yeah, yeah, yes, yes. Other money. I think crypto would have collapsed right there if the 2023 regional banking crisis was allowed to become a crisis and a credit crunch. I'm not saying that's the right move. I do think SVB should have been allowed to fail. But like if that had its traditional monetary tightening becomes a crisis, becomes a credit crunch. I think that's when the speculative, the speculative assets

go away but they didn't and therefore they're here to stay because there's institutional interest now um so yeah bitcoin's probably here to stay mstr it's pretty stupid but you know it'll last for now like there's no reason it needs to trade in a nav to or like at a premium to its um you know the value of its bitcoin holdings um but whatever like

I don't know. I'm not going to say anything about Michael Saylor, actually. But yeah, I think Bitcoin is probably here to stay and it does trade like it trades exactly like TQQQ. Yeah, triple leverage ETF. Yeah. But the same thing that's driving gold higher, which is like interest from China, like Chinese central banks, gold reserves have more than doubled in percentage terms over the last few years.

Since Russia, Ukraine, that's like the big change for gold, where a lot of the historical correlations broke down. We're at like nearly 3K. I don't think it's going away. I think Bitcoin will experience some of those drivers over time. I think it's why it didn't go below 20K to some degree. And I think, you know, it's trading like a speculative asset because that's what it is. It's new. It's high beta. It's getting more institutional interest and on trading desks that are more like tech and speculative. Not like it's not like gold.

But I do think over time, it'll be viewed as an alternative to Swift and as a hedge against US hegemony. Hegemony, yeah. So, no, I mean, it's probably here to stay. Like, I get it. It's being used more. People are investing in it. I don't know about, like, altcoins and Solana and stuff like that. But, like, I think Bitcoin has...

It seems like that community tried to find a thesis or pitched and peddled theses for so long. And like finally a thesis hit and it's like institutionalization, which is like the opposite of decentralized currencies. But no, I mean, I think it's here to stay. I don't think it's a threat to the dollar. I think it's just a new norm and people should get used to it. Yeah.

Yes, its use case is store of value, which what it means is that it goes up and it doesn't go down. But even though Bitcoin does go down, it goes up more than it goes down. So it goes up. So that's the use case. It goes up and it has been extraordinarily good at that. I'm not denying it. Yeah, Eric, a topic we talked about stable coins, circle, tether. That's a topic of the market.

like financial activities moving outside of the banking system the tradfi version of that is in private equity and private credit and i think one thing like macro bears or economists who say you know credit uh bank consume um

commercial and industrial loans is only growing at four percent it's like yeah but have you counted Apollo and Aries and Blackstone all this stuff that is not captured in the banking system but we will leave that for another time Eric you can be found on on Twitter at Eric Wallerstein where can people uh find your work that you do for your Denny as well as your Denny's other work

Yeah. So, I mean, we obviously have institutional clients, but we do have a retail product or something that's better for an RIA or just a regular investor. It's pretty cheap. It's like less than 30 bucks a month. It's called Yardeni Quick Takes. Just go to the website, YardeniQuickTakes.com. And we write like every single day. We'll put like five charts together and we'll write a little bit about like the economic data that's come out or it's on the horizon. We'll tie it together into markets and we'll, you know, contemplate.

kind of help people think about macro and markets together and how we're thinking about both, you know, how they're interrelated. So it's pretty helpful. I like it. I liked it as a journalist. And then obviously, you know, now I write it. But yeah, I think it's good to get, you know, my thoughts and obviously Ed's thoughts on just like daily data that's coming out. Thanks again. Thanks, everyone for watching. People can find Monetary Matters not just on YouTube, but on Apple Podcasts, Spotify and wherever else podcasts are found. Until next time.

Thanks, Jack. Thank you. Just close this f***ing door.