Jared Bernstein's Head is Spinning
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Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-hosts. Hey, Chris. Hey, Marissa. How are you? Hey, Mark. Good. How are you? Hanging in there. Hanging in there. I know. We're going to get right to it. We've got a guest, Jared Bernstein. Jared, good to have you back on. Great to be with you all.

Yeah, it's been, do you remember the last time you were on that great joke or story you told about the brown pants? Right, right. The red shirt and the brown pants. That was a great joke for the moment, yeah. Whether we were in a red shirt or a brown pants economy. Right, we're not going to explain that. I think we were in a red shirt economy, and I think I was right about that, but yeah.

All I remember was I had to explain the punchline to you, which I, you know, it's always... That's true. And I was like, it doesn't work if you have to explain it. Well, I'm not going to tell the listener what that joke was. I'll have to go back to the archives and listen to that podcast because that was a pretty good podcast.

And I've dragged two of our other colleagues into the conversation just in case. Matt Collier. Matt, how are you? Doing okay. Mark, how are you? Good. Good. Matt is our expert, inflation expert. And historically when the CPI came out, that was a big deal. Not so much. Not so much. Do what's going on. So Matt, I apologize if we don't even get to the CPI, but we'll see how that goes.

and then i also asked martin worm to come on hey martin hi mark martin is uh deep into the bond market yeah good right because there's a lot of stuff going on there it's been a long week it has been a long week but you know just to get the conversation i mean obviously the top of mind is this uh crazy trade war um i'm not even sure where to begin so i'm just going to begin this way

Jared, what's going on? How are you assessing things? I'm just a little bit shell-shocked. I got to tell you that my head is really spinning, and it takes a lot for that. I've been around a long time. I don't think it's an exaggeration to say that one person who happens to be the president of

is responsible for a trade war that is really striking at the foundations of decades of global trade

creating massive turmoil in the markets. A few days ago, we were talking about trillions of dollars of wealth lost. And then today, last I looked, the markets were way up. This is not how... You might think down market, bad, up market, good. And okay, I get that. But healthy markets don't move like this. They just don't with this kind of volatility. I have my own...

views based on where I was. I was one of Joe Biden's economists during his term. I chaired the Council of Economic Advisers. And while the Biden economy was far from perfect, Mark, I know you would endorse this because you've written about it many times. The macro economy that we handed off to the Trump team was really very strong. In some cases, the envy of all the other advanced economies. And in less than three months,

they've squandered that inheritance at a pace that I find alarming, scary, and of tremendous concern. So look, I'm not going to be all doom and gloom here, but you ask what's up, that strikes me as the first response.

Yeah, it's so funny. I didn't even introduce you. I just like because, you know, we talk regularly. I kind of just thought we're talking like everyone needs no introduction. No introduction. Yeah. But yeah, absolutely. You're the chair of the Council of Economic Advisors under President Biden. And it's really good to have you on. I apologize for that. OK, I don't care about that. Hey, here's what I mean.

One thing I don't get, there's a I want to talk about things that are kind of bothering me about. There are a lot of things bothering me, but things that feel anomalous. And one is how is the president able to do this? I mean, the Constitution, doesn't it say the tariffs will be set? I think it explicitly says tariffs will be set by the Congress.

And, you know, he's used, I think it's the IEEP, I can't remember what that law is, that acronym, but a 1977 law that says that the president can step in with tariffs if there's a national emergency. And he's declared a national emergency and thus he's off and running. But doesn't it strike you that this is illegal? Is this even possible? I mean...

I think that the Trump administration is doing a lot of things that are illegal. I don't think the tariffs are one of them. There's section, there are these technical ways in which presidents can intervene in that market unless Congress steps in and tries to block them. And that's, I think, the answer to your question. I mean, I'm scratching my head about a ton of things, but this is one I feel pretty clear headed about, which is that one of the reasons we are where we are

and why my introduction featured this alarm about one person who just foundationally misunderstands both how the economy works and especially how global trade works, is able to wreck the havoc that he is, is because there are very few constraints on him. I was going to say no constraints, although he did evince some degree of a pain threshold the other day, which we'll get into, which is when he took down the reciprocal tariffs for 90 days.

But the Republicans, who of course are the congressional majority, could act more forcefully to try to restrain him. And there's been a little bit of noise there, but just a tiny bit. And I don't see that as a restraining force. When Trump won his second term,

I said there are two... I think there are two forces that could restrain his uniformly bad instincts, especially on the economy. And those are the markets and the courts. A few days...

Before yesterday, I would have said I was wrong on the markets. I'm not sure about the courts. It did, you know, the bond market, I think, upheaval that we saw, which we can get into, especially with our colleague here with Martin, I think that did raise a level of pain that at least according to what we're reading, the Treasury Secretary Besant and Lutnick from Commerce were able to convince him that we need to pause. But he has very few restraints.

So you think that what he's doing...

It may already be challenged in the court system, but you're thinking he's going to win that, that he's able to do this under current law. I do. I think he's able. I think he's probably able. I'm not a lawyer. I think he's probably able to administer these tariffs. Certainly did so in term one with impunity. That was section 230. There's these various sections of the trade law that allow him to do that. Yeah, that doesn't. I mean, we did some tariffs too by ourselves. So, you know, that you can do.

Right. Ours were very targeted, just to be clear. I think there's a huge difference between targeted and sweeping tariffs. I think targeted can be effective. I think sweeping is usually very misguided. Well, I think the tariffs under President Biden when you were there was, what was it, $18 billion, something like that? Something in that neighborhood. Solar panels and- Well, EVs were huge. EV batteries, yeah.

we, we tariffed Chinese. It was all on China. It was building on the China 301 tariffs that Trump had put in. and, and we viewed, uh, we, we tariffed Chinese EVs at a hundred percent. So basically we were trying to protect domestic EV production. Uh, but yes, solar panels, uh,

some other aspects of technology, things like that. Anyone else? Chris, Marissa, Matt, Martin, any views on the legality of this? No need to. I'm just curious if you've looked into it at all. I don't know. You don't know? I don't know. The national emergency piece has always bothered me. Yeah. Who can declare? What is a national emergency? How is this a national emergency if it's been going on for decades? Yeah.

That's just unclear to me, but I don't have any insight. Right, right. Okay. The other thing, the other anomalous thing, and when I say anomalous, it's just things that are bugging me that don't quite fit in my thinking about how things should be playing out, is the stock market. It's down. If you go back compared to the peak, the all-time peak, which now is two months ago,

You know, and you take account, I just looked at trading a minute ago before we got on, the market's up again, 600 points on the Dow. I think the S&P 500 is, it's in correction territory, down more than 10% from the peak, but not much more than that. I mean, it did get down to 20 a couple of days ago before the president backtracked on the so-called reciprocal tariffs. But we're only down 12, 11, 12, 13%.

Does that feel anomalous to you? I mean, are you surprised we're not down more than that in the equity market? I mean, that might not be a fair question. I'm just curious to see if you are not. You know, it's a lot of things that we're going to talk about today,

are unprecedented and we don't have models or history for them, right? People keep asking me, you know, I've done a lot of media lately and I often get asked, you know, what's going to happen with China? So we never tariffed a trading partner of that magnitude at 145%, nothing even close. So I have speculation and I think some of it is informed and I hope we get to talk about that. But it's really, you know, it's obviously hard to say. I will say the following.

I've never seen a stock market more elastic to any whiff at all about whether tariffs are going up or down. I mean, this elasticity is really clear to me. If the president says tariffs are going up a little, the stock market goes down a little. If he says tariffs are going up a lot, the stock market goes down a lot and vice versa, just change the sign to go in the other direction.

And clearly, the market believes that tariffs of this magnitude are bad for future profitability and uncertainty and investment. And I guess I don't find that much of a head scratcher. So I think that's, you know, I think that's what's going on. Now, there's some mechanical things that I'm hearing about that maybe others here want to talk to things that were the yes, I think it was the day that the market went up 10%. Apparently, there was some

covering of shorts that can be a mechanical factor that leads to a lot more buying. But I think that if you just stick to this idea that the market's moving inversely to where they think tariffs are going, you'll explain a lot of what's happening.

Yeah, I guess consistent with that is the action today. It's up and there's a rumor from the White House that the Chinese are going to come to the table and negotiate something. So to that elasticity that you mentioned. Guys, any other comments on this? That's just another thing that bothers me. Is it bothering you as much as me, Marissa, that the markets aren't down, even the equity market? No, it's bothering me how volatile they've been, though, and how they seem to react on any piece of news without a lot of...

digging in to figure out what the news actually is before the reaction. I mean, the other day when the pause happened, right, they had their best days since 2001 or whatever. But then overnight, as people realized, oh, the effective tariff rate didn't actually go down, just the distribution of this changed, right? We paused the reciprocal tariffs on all these other countries, but we really just put the burden back on China.

which is actually, I think, worse for the US given how large of a trading partner China is. And then they were down again. So it's annoying me how reactive they are without even fully digesting the information that's coming in. Okay, we'll come back to China. One more anomalous thing, or at least again in my mind, I don't feel like there's been any meaningful impact on the labor market so far. And that feels like the key to me

between a continued expansionary economy, a growing economy and a recession. That's when you go from positive to negative on jobs is when you go-- that's typically when you go to recession.

And the first indicator we look at, leading indicator we look at for that is, I'm not sure it's much of a leading indicator, probably even more coincident, but the number of people who are filing for unemployment insurance claims. And Jared, I know on your sub stack you were commenting on that today, or was it yesterday? It was yesterday, the Thursday, when it came out that they were still very low. And even continuing claims came down a little bit. Am I just jumping the gun here? I'm

it's just too early or is it, or my priors just, is it saying something about my priors about this? No, no. I think your priors are accurate. And I think that this is one of the bigger head scratchers. I think it's probably fair to say that the data you're citing tends to be a bit backward looking, not so much the claims, but, but the jobs reports, the Bureau of Labor Statistics jobs report. I mean, the claims report,

you know, they may be a little bit even forward looking, as you said, so still a head scratcher. But if you look at inflation, basically, there's a massive gap and one that I've lived with for a long time, but it's even larger now between the hard data and the soft data. The hard data being GDP growth, jobs,

unemployment, real wage growth, inflation, and the soft data being survey data, expectations about the future, investment plans, markets to some extent. That gap is, of course, one I lived with in the Biden administration, where we often had pretty good economic outcomes and people felt bad. I thought that had a lot to do with inflation and the price level in particular. But now there's all kinds of other things in the mix.

But to get back to your fundamental point, it's pretty hard. And I'd say you really can't have much of a downturn without layoffs in the job market. And we just haven't seen that yet. Now, people are obviously worried that that's coming. And you can put me down as one of those people who's worried. Certainly forecasts for Q1, if you look at GDP forecasts, including, I believe, your own,

are below what you would need to keep the unemployment rate from rising. So, you know, I'm seeing numbers around 0.5. I don't know. Where are you for Q1 at this point? We're at 0.3, and then we have a negative –

GDP number in Q2? So inconceivable to me, not inconceivable, very unlikely to me that if you're right, we don't see unemployment go up. Yeah. So part of this is what's backward looking and what's forward looking. But that gap between hard and soft data is quite pronounced. Yeah. Hey, Matt, any perspective on that, my anomalous thinking? It's funny. I mean, as Jared alluded to, the past two years has been

skepticism about soft data. This is a false flag in a lot of ways. Yes, inflation's not great, but I mean, I've talked to clients and made that pitch plenty of times over the past few years, and soft data just didn't have the predictive power that it used to. And now, can you make that case today? Is it going to happen again that soft data is wrong? I think that would be naive, especially because

a lot of that data looked good for about two months after the election so it's not that there's this you know inherent pessimism now since the pandemic ended uh there was a brightening and optimism that had happened that has since come crashing down so i think that's

And along with the reality that we see each day coming out of DC, I think it's pretty persuasive that hard data is going to converge with soft data. That's the more realistic case, at least in my mind, for the next three, four, five, six months. So the general view of the group is it's in train. It's coming. It's just not- Well, I have a question about that. So this is probably for Matt, maybe. So the-

The inflation prints for March came in considerably cooler than expected. I'm talking about CPI, PPI, and you can back out PCE pretty well. So PCE isn't out yet for March, of course, but that looks, I've seen an estimate for the month of 0.08%.

And so I looked at these inflation reports and I thought, well, that's good to see because you want to have some disinflation going back to target makes life a little easier for the Federal Reserve. Our progress against inflation, that is our disinflationary path had kind of stalled for a while.

But as I dug into the report, I was looking for evidence that maybe there's some softening of demand in here. That would be kind of a warning sign. Did anybody see anything like that? Yeah. Is there a specific that you're thinking about? Because there's two in my mind. Go ahead. Hotel prices and airfare are big concerns.

you know cyclical quick reacting components uh that we saw big time drops from february to march uh what's the story there if if hotel prices which are noisy and and can be more you know noise than signal here but a 3.5 percent drop from february to march in hotel prices what does that mean yeah airfare over four percent i think it's 5.3 percent in the cpi and similar in the ppi and then that was the second month in a row for airfares as i recall of a truck that's right and it's it's

corroborating with, you know, you look at different data sets, international travelers to the US, Canadian tourism from, you know, just not even airfare, but that speaks more to the hotel side of things. There's a softening there, which is a behavioral change, which is going to be weakening demand. It's going to flow through in a disinflationary way. And then you square that with goods prices fell 0.1% in March. I don't think it's realistic to expect that's the beginning of a trend for goods prices to be falling.

I think it's very likely to be the opposite if we have an effective tariff rate up tenfold. So yeah, I think the demand side of the story is there. It could also be noise. I'd like to see another month or two of it, but it's definitely consistent with other data. I think the decline in energy prices, gas prices, that's demand. That's the headline story. I mean, the global energy markets are saying...

there's going to be at least a weak global economy, maybe a recessionary one, therefore less demand, therefore lower prices. So we're down to $60 a barrel on WTI, and that's not supply. That's because supply hasn't changed. It's demand. It's demand. So that- There's also, sorry, there's also one other-

Hard indicator that I'm tracking really carefully which is real consumer spending That was down half a percent of January But January was always a little anomalous for a variety reasons cold month some seasonal issues But you didn't get the bounce back you expected in February So I put that on my list of hard data that maybe reflects some some of the weakening ahead Sorry mark. I didn't mean to cut you. No, not at all. I mean it's

The economy is weak. GDP at 0.3, that's tracking based on what you just said, real consumer spending and UI claims and all the monthly data that come in. So that's saying the economy –

Even before the trade wars effects really have gotten to come into come into full force or even close It's just starting the economies is was weak q1 was a really weak quarter you know that that that probably goes back to partly anticipation of trade wars, but doge cuts and funding issues and

all the drama related to a bunch of other stuff that we've kind of forgotten. Could it be related to me leaving my- There, there you go. Highly correlated. Just throwing that out there. Okay. Any other anomalies that folks have? I mean, this is a kind of a good place to throw out things that just don't quite fit with your worldview at the moment. Chris, anything?

Did you mention bond market? Oh, we're coming back to the bond market. We're coming back to the bond market. Yeah. That's a whole thing in and of itself. I'm just looking for other things that just don't quite fit the way you might think things should be playing out. Or there just might be, I think this is just early, but just

If there's anything that, okay, don't worry about it. Okay. So let's move on to China. Here's the thing. So the president, uh, did, uh, relent on the reciprocal so-called reciprocal tariffs and, uh, said, Hey, we're not going to impose those for another 90 days. Uh, uh, and, um,

Instead ratcheted up the tariffs on China and last I looked we're at or heard we're at 145% tariff on US tariff on Chinese imports into the US and I think the Chinese are now at

125 and i it was i got a little kick out of this the chinese are saying you know we're not going to raise them anymore because it doesn't really matter there won't be any trade whatsoever after 125 and 145. so this is just a bit of a parlor game so we're not going to play your game with you you know i hadn't heard that but that's yeah very funny you said you gotta laugh to keep from crying yeah i go the chinese said this is just a joke now we're not we're not raising them anymore because trade's gonna stop

So it feels like really the war, the venue for the war now has shifted to China and we're going right at it with each other. A big game of chicken. And, you know, my question to you, Jared, is how do you think this plays out? I mean, play a little scenario or two with me. How do you think this plays out?

I like to think that there'll be some backing down. To some extent, we've seen back downs, people walking back from the cliff when they've gotten themselves into a jam that is clearly terrible for each of their economies. I mean, I like to think that the word war and trade war is actually a well-chosen word because in wars, both sides suffer.

And that's what's happening here. I do think there are compelling questions or other compelling there. I think there's an analytic question as to who will blink first. I don't know the answer, of course, but let me throw out some things I've been thinking about and see if they resonate with the group. So, of course, we import much more from China than they import from us.

And in that regard, you know, 440 billion of imports in 24, 140 billion of exports. So we kind of have the upper hand there, right? Because we can hurt them more than they can hurt us. Trump has said as much when it comes to Canada and Mexico, same sort of dynamic. And he very much gets that idea that we can hurt, you know, we can hurt you more than you can hurt us because we buy so much more from you than you from us. So that, you know, edge, edge U.S.,

China has a very authoritarian government, to say the least. We kind of do too in a way, but not as bad as theirs yet. Or I don't know. I'll leave others to decide how that weighs out. But that's a point for them in the sense that they might have a higher pain threshold than we do. Third, our economy in terms of its fundamentals, some of the things we were just talking about,

although you introduced some very important, you know, facts to be seen at least forecast for Q1. So there's an asterisk here, but broadly speaking, our economies are doing way better than theirs for quite a long time. And so their pain threshold might be a bit compromised by the fact that, uh, they've been kind of slumping for a while with deflation, with, uh, excess capacity in some key sectors. And the whole economy in China is set up so much in this mercantilist framework where, uh,

uh the manufacturing over capacity is exported to other countries that's such a key part of the growth model that when you start um whacking at that that might give us you know a point on the edge in terms of who blinks so if you sort of tick through those kinds of indicators

I kind of think that we may, and you weight them out with some kinds of subjective weights in your head. I think that we may have a bit more leverage than they do, but at least to listen to them, there's some real face losing concern going on that I'm hearing among the Chinese and a real belligerence on both sides.

And that just can make things go on for longer. So I'm really worried. I don't think you can have a significant decoupling from China without a huge cost to both economies. I'm probably most concerned about ours from where I sit. And, you

You know, this is not to say, by the way, that China hasn't engaged in unfair trade and that perhaps some level of decoupling would be good for us and frankly, probably good for them too in terms of more internal investments in their population. But the way we're going about it is far from the gradual approach that would make more sense. So what I heard, the answer I heard was someone's got to blink first, right?

It's probably in a way that they both sides can kind of save some face, but it feels like given the balance of leverage here that it might be she who blinks first.

relative to President Trump. That's kind of sort of how you're thinking. That's what I just postulated, but there's confidence intervals around that. Yeah, yeah. Here, let me, that's a great way of thinking about it. Maybe I'll push back a little bit on the balance of leverage because, and we're seeing it in the bond market, and we can now maybe even segue into that. I mean, because if the Chinese, if the trade between the US and China goes full stop,

That means there's no more trade deficit, right? We go from a big, the US trade deficit with China goes from something big to something small or maybe even zero if there is no trade, by definition. Therefore, the Chinese don't have dollars. They don't collect dollars in trade. And what they've been doing is taking those dollars they're earning in trade and coming back and they have to invest it in the United States and buying something. It could be an office building, it could be a manufacturing company.

Or what they have been doing is by buying Treasury bonds. They own, they're the second largest holder of Treasury bonds in the world after the Japanese. It's coming down. They've been allowing that portfolio to wind off, as you would expect, but it's still very large. Isn't that in their side of the ledger, on the leverage ledger? Interesting. Yeah. And maybe one reason why bond yields have gone up here is they're

We don't know for sure. We don't have the data, but maybe they're I don't know if they're selling, but they're certainly not buying. And it's not even it could be not even nefarious in the sense that they want to exert pressure. It's just that, hey, guys, I'm not collecting dollars. I can't I can't buy treasury bonds. I just don't have the dollars to buy them. You've got to find someone else to buy these bonds. Yeah, no, that you might be right. I mean, also under that scenario, I think the dollar appreciates.

and relative to the yuan. And that makes, of course, our manufacturing less competitive, having the opposite effect of what the Trumpies would want. And to some extent, you might argue that that dulls the effect of the tariff, but not if it's 145%. There's just not enough room there. So you might be right about that. But don't they have pretty deep dollar reserves?

I think sitting in Treasury bonds as the reserves are in Treasury bonds, right? I mean, they're not adding to them. They're, you know, they may be reducing them buying euro because the euro is up in value. The yen's up in value. The pound's up in value. The Canadian dollar's up in value. So maybe they're taking that and saying, hey, I'm going to hold...

my cash in some other currency. I mean, it's consistent with what we're reserving. I don't know if it's right or wrong. Here's the other thing on before we... Oh, go ahead, Martin. Go ahead. I was just going to add one thing to this. The People's Bank of China, the Central Bank of China, earlier this week issued guidance that they're not going to let do on just slight. And that requires them unloading some amount of dollar reserves onto the market.

They can either do that directly. The Chinese banking system is very state controlled. So another thing they can do is simply instruct banks not to hold dollars. That's gone on to a degree. It's not that outright ballistic thing where you can say, I'm just going to start fire selling bonds. They could do that too. But I think that would be considered a hostile act, really. Yeah. And I'm going to come right back to the bond market. I promise, Martin. But one more thing to throw into this calculation of who's got the leverage is

is fiscal and monetary policy. So the PBOC, rates are very low, but they still can cut and they are going to cut. They said they're going to cut. And they still have a lot of fiscal capacity at the federal level. Their debt loads are very low and they're going to use more stimulus. So they can come to the rescue with fiscal and monetary policy. They're already doing that. Yeah. Here in the US, the Fed's not, has point blank said they're not going to do that. And I don't blame them, given the inflation and inflation expectations.

and can you imagine congress in in the current state of affairs coming to the rescue i i just don't see it so that's a really good point and you know if you put both your points together maybe the balance is more even than i yeah i thought i mean i think your first scenario is a little wacky just because i just can't imagine the trade deficit going to zero so i think there's some intervention and pullback and i just asked jared did you think

You're going to be here. We're going to be talking about a global trade war.

But what if Trump was to say, he's actually said this before, what if he were to say, as a condition of backing down on this, I want to see a lot more Chinese FDI, foreign direct investment, in this country. You guys want to make electric vehicles? You got to make them over here. You want to make batteries? You got to make them over here. He has actually said that, and he said it about China. Now, that seems pretty far away from where he is now, but...

i think that would be a kind of a winnish winnish thing if we got there so you know it may just be a fantasy but that's it so anyway uh getting back to the original waiting i i think your first thing's a little far out but you're you're directionally right and then your second point seems uh kind of compelling to me that uh that's a way for them to kind of lower their pain threshold can i let's go can i add one quick point

Absolutely, Matt. Go ahead. Fire away. Yep. China's only in... It better be a good point. I'm just saying. I hope so. China's only in a trade war with the U.S. while, you know, 10% is better than 20%. The U.S. has a lot more enemies. We're kind of in a trade war with everybody. That's a great point. I don't think the EU is dying to hug China for, you know, geopolitical reasons, but, you

you know, I don't think Trump could have more efficiently made that a possibility than he has in the past couple months. Yeah, I couldn't agree more. I worry that we're pushing a lot of other countries towards China. The Spanish president is meeting with Xi today to talk trade alliance. Let's turn, because we're running out of, I can't believe we're running out of time already, but let's turn to the bond market real fast. And I know that's not an easy subject. So,

Just to frame it, 10-year Treasury yields have gone from – if you go back to last Friday, we were sub 4% on the 10-year yield. We're now, last I looked, close to 4.5 or up 50 basis points.

That's a big move in a very short period of time. And it feels counterintuitive, you know, all else being equal in the current context, you'd think the yields would be falling given, you know, all the things that supplies for growth, but we're not getting that. So Matt, excuse me, Martin, can you kind of just lay out what you think is going on here? We talked about one potential, you know, force at work. What else could be going on here, you know, driving the yields up?

Yeah, so to be clear, I mean, so normally what you would expect is this flight to safety response to the stock market. The stock market crashes, there's uncertainty. One thing I can do, I can buy you this treasury that's going to pay me 4%, but it's safe. That's usually why yields tend to fall because there's more demand and a downturn. And we did see that last week when stock markets began to slide. So you see the yield falling for the first two days. But then over the weekend and really the beginning of the week, yields jumped up.

And now there's a couple of explanations for that. Broadly speaking, the easiest way is just supply and demand. It doesn't seem to be as much demand for bonds as we thought there would be in this scenario. One potential explanation is, well, maybe foreigners are nervous about the treasury market. Maybe we're looking for other safe haven currencies.

I do think there's something to that largely because the dollar has slid so much. The dollar has depreciated against the euro. It has depreciated against classic safe haven currencies like the Swiss franc. In the case of the euro, it's particularly interesting because euro's growth prospects aren't that good. Normally, you would think that maybe the dollar doesn't give in to that scenario, but it has.

So I think that's going on to some degree. When you're looking at the treasury market directly, the treasury had a couple of auctions last week, this week, a 10-year bond and yesterday a 30-year. These auctions saw a lot of demand from what is called indirect bidders, and indirect bidders usually include the rest of the world. So this is a partial response. It's probably not everything, right?

uh the second story is happy right there before you go and turn back to Jared so this this this concern or worry that the U.S is losing its safe Haven status so the U.S historically since Alexander Hamilton was money good triple A if things goes bad anywhere money comes flowing in here which is critical in a crisis because it keeps interest rates down and allows you to navigate through the exorbitant privilege that this provides

And that that is eroding here under the weight of all of this. Gerg, does that resonate with you at all? I think it does. I've heard that explanation many times in the past few days, and it's extremely worrisome. The

U.S. debt is, of course, foundational across the globe. I'm sure Martin would agree. It's just absolutely essential for global financial plumbing for that to be the safest and most risk-free asset. And, you know, I'm familiar. I'm a veteran of many debt ceiling debates, and that's where you start to see the same kind of dynamic occur. So it's a little bit, unfortunately, somewhat familiar to me. And, you know, perhaps this is a

related to that, where you see that the sovereign, you know, the government of, of, of, of the sovereign debt, uh, the world's most, uh, held and pristine sovereign debt is acting extremely erratically. It's sort of natural that you'd, you'd, uh, uh, maybe shop away from that. Yeah. Yeah. Chris, how do you feel about that explanation? Yeah. I think simplest explanation makes most of the sense. So Occam's razor. Yeah. Occam's razor. People don't want the debt. They're,

Right. They're going to take a pause here and wait for a little bit more clarity in the signals. Right. But of course, life isn't that straightforward. There's other explanations, right, Martin? Now, this really gets into the plumbing, I think.

Well, let's start with the Fed first and go to the point later. So the other consideration, we talked about this at points in the past, is these longer term interest rates, something like the 10-year yield is essentially an average of where we think short-term rates, that is monetary policy is going to act and there's sort of a risk premium baked in on top of that.

And the general sentiment when you look at futures markets that predict the federal funds rate is that the Fed is going to cut at some point this year. That's been very volatile. But the distribution of these bets is very torn apart. So you have folks in the market that bet on higher rates. For instance, Morgan Stanley doesn't predict a cut until 2026 by the Fed. And on the other hand, you have basically agents that bet on recession. So there is a lot of volatility in the market. There's a very broad spread, there's uncertainty.

And while sort of the average prediction points towards lower rate, the fact that there is so much uncertainty about this also contributes a little bit to the rate itself.

And I guess that also contributes to kind of wider mortgage spreads and higher mortgage rates because it increases the volatility. It certainly creates more volatility and raises prepayment risk, I guess. That is exactly right. We haven't really heard that much from the Fed. So Powell spoke last Friday when it started, and his initial response was, well, the tariffs are larger than we expected. We do think they're going to act inflationary, and then eventually it's going to diminish growth.

But that sounded more hawkish than dovish. So there are concerns that the Fed is going to wait here unless they really have to act. Okay. In the plumbing? That's my view. In the plumbing?

Yeah. So the plumbing, what's this happened during the COVID pandemic. So if you are a finance nerd, you might remember this is there are financial institutions that are fairly heavily. There it is. Definitely a financial nerd. Definitely. He definitely remembers. He talked about the dash. He's going to tell us about the dash for cash, right? Yes. We're, we're, we're getting to the hedge funds. So there's hedge funds and what hedge funds broadly do hedge funds are

Very simply speaking, take a bet in two different directions, right? You loan one asset and you short another one. You can do this with all sorts of things. You can do it with derivatives. You can do it with bonds. And one such market is the treasury market. And the way these bets work is the hedge funds borrow a very significant amount of money by essentially loaning out treasury bonds.

Now, as the price of these treasury bonds comes, what they're paying on these short-term loans, this happens in what is called the repo market or repurchase market. The cost of that can spiral and that forces the funds to drop treasuries very quickly. Basically, you need cash. This happened during COVID. Back then, the Fed stepped in because the repo market basically shut down. We haven't quite seen it yet. There is speculation that that could happen. We don't quite know where that threshold is.

The exposure estimated, the numbers vary. Apollo made an estimate in the vicinity of about a trillion. More conservative, maybe it's 800 billion. It's a very significant movement. So if the funds really start to dump treasuries because they have to, that could not just affect the funds themselves in the treasury market. It will spill into so-called money markets where banks borrow cash for their daily operations. And that could go really widespread. So that is a fear that's going around.

The problem is if you're a hedge fund manager, you have a prime broker, you're not posting your leverage in real time. You're not going to do that. So we don't quite know to which degree it's going on. But the Fed is concerned. We are concerned. But we'll see. What that would explain, though, is these very sharp intraday movements. So, for instance, today, the Treasury rose 20 basis points in the morning. Then in the afternoon, it fell 10 basis points again.

That's probably not a bank making large moves. That speaks more to the funds acting. Got it. Got it. Well, certainly it seems like it's on the administration's radar screen, right? They're using this as a... Let me ask Martin a question. And by the way, I've got to go in four minutes. Yeah, got it. Sorry to lose you. Martin, I think...

from things we've heard and read, reported out from the White House, that Besant and Lutnik explained to Trump that he was fooling around with a financial meltdown of the type that you were just kind of mentioning. To what extent does that risk still persist going forward?

Well, I mean, we've been here before. So the Fed watches these markets very closely. So the New York trading desk basically tracks this in real time. After 2020, they created a liquidity backstop. That's the so-called standing repo facility that has, I think, a total aggregate limit of 500 billion, which is pretty significant. So I think if there's problems in the funding markets, the Fed is probably going to step in. But there are certain

uncertainties. For instance, there's a central repo market which the Fed tracks, but then there's also bilateral repos, which is between primary dealers and others, and that's not centrally cleared. That is also estimated to be about a trillion. And if that unfolds, it's not clear how quickly the Fed can pick up on this. I think in the funding markets, the Fed is going to step in. But what it implies for the Treasury is a separate question. If the Fed is really going to step in like they did in 2020 and support the Treasury market itself,

with purchases i think there's probably a pain threshold for that but i suspect it's a little bit higher than say some hiccup in the repo market that's my guess all right thank you jared we're going to lose you but before you go uh and i don't know if this is a fair question but i'll ask anyway what is your probability that we're going into recession at some point this year i mean that's kind of the way economists are articulating to the world their general thinking about things do you have a probability

Yeah, I would say 50-50. Yeah, which is way up from a couple months ago when I was at the baseline, which is around 15-20%. So pretty elevated. And I think our China discussion

is gonna be very influential on that and the discussion we just had on bonds. We just haven't seen enough hard data to confirm the forecast of the type that you just trotted out, but I feel like at this point, that's a pretty good bet. We've seen enough to recognize the magnitude of the slowdown. I will say the following, which I think is important, I'll leave folks with this 'cause then I'll have to jump.

I've always thought that, obviously, recession is a dramatic and bad thing. Really terrible, especially when it's self-enforced and such a massive own goal kick. I mean, this is like Liz Truss on steroids. But there's this thing called a growth recession, which is what happens when you have a growth rate of the type you're forecasting, which is 0.3, I think you said, for the quarter. Yep.

From the perspective of regular folks, 0.3 doesn't feel that different from negative 0.3. Great point. And so if you're right, and I think you're likely in the ballpark, some tough sailing ahead. Yeah. Okay. Well, I'm sorry we didn't have time to do the game because I understand you had some really good stats, but save them. Well, they'll be different by then, but okay. Not Marissa. It's the same...

challenger report every every week oh that's good that's good to know that's good yes I'm looking for something bad in the job market yeah yeah yeah that's true good point good point good point well thanks Jared it was good to see you thanks for joining us we're going to continue on okay uh that was a good great conversation maybe we should play this I know that was rude that was actually pretty rude wasn't it I'm sorry about that Marissa that was a little stinging that that rebuke

It's all right, Mark. I'm like Teflon here. Let's play the game. Why don't we play the game? Unless anyone has any comments on what Jared said before we move on. Marissa, any comments on what Jared said? Anything strike you that you hadn't thought of before or just struck you where the emphasis was in what he was saying? Well, that last comment about a growing recession, right? Yeah, it's an interesting point. Growth could be very weak and it's not going to

People probably aren't going to differentiate too much on the basis of GDP growth. But I think where people will differentiate is inflation, right? If we get if we go a leg higher, back up the scale on inflation, I think that's going to be very apparent to people.

All right. Chris, anything? Any comments? I would just underscore that one of the very first comments around China's leverage, I think we should be careful here. They may have more leverage than we think. Just looking at the trade imbalance itself is not enough. Totally. We are very dependent. A lot of our intermediate goods, a lot of our manufacturers are

deeply dependent on China and it's not easy to pivot anytime soon. Yeah, I guess the other thing, and Matt may have said this, but just to reinforce it, you know, the Chinese will divert trade, right? If they can't buy soybeans from us, they'll go buy soybeans from Brazil. If they can't sell, you know, if they can't sell to us, they'll go sell to Europe or something. I know that creates other issues and tensions, but they'll do that.

We can't because we've imposed tariffs on everybody. It's like there's nowhere to go. There's just nowhere to go to find a more cost-effective way to do this. So I think we're – I think –

I don't think we have leverage here. I think it is pretty balanced. And you never know. The thing about these interest rates, you know, the thing that's going to break under the higher interest rates is something we don't have no idea what that is. It's kind of Liz Trust is a good example in the UK, you know, guilt yields rose. They jumped. I can't even remember the reason why, but they jumped to such a degree. It blew out this insurance product that, you know, and pension funds were using. And, and,

And no one expected that. It came out of nowhere. And that's the kind of thing that will happen here in all likelihood. Yeah, and I was just going to say on the hedge funds, when the hedge funds is one concern out there, there's a lot of stuff. And the way it unfolds usually is so lightning fast that you basically don't have a chance to respond. When it goes south, it goes very quickly. Well, on that topic, and then Matt, I'm going to come back to you and ask you if you heard anything Jared said that you want to call out. But do you think it could be...

The issue could be sitting in kind of private credit. You know, you've got all these non-financial corps that have been by PEs levered up with private credit. You know, that's the leverage debt being used to buy these firms and to maximize, you know, equity returns. That debt is generally short-term debt, floating rate debt.

And if you think rates are going down, you hold on and you'll work through problems. If you have a company that's having trouble making a debt payment, you do so-called distressed exchange. You don't make them actually make – they go into default. You just take the interest and tack it back on the principal and say, you owe me more down the road. And I think distressed exchanges are at a record high right now, last I looked.

But if the world shifts like it seems to be shifting and you don't think rates are going back down anytime soon, then you say, oh, maybe this isn't going to work and you actually have more defaults. What do you think? Is that a potential stress point?

I think it is something that occurred to me during the week and reality is I need to give it a little bit more thought in terms of looking at the data. But my knee-jerk response is this. I mean, for one, what private credit mostly is, it's risky corporate debt. So the rates are already anchored to the treasury rates. The treasury rate spikes is that.

On the other component, what we're looking at now is we're looking very significant ways, changes in which these companies operate. It's a private credit. It's very frequently tech producers, healthcare producers operating.

They are global firms. So you have this double whammy where the treasury comes up and at the same time spreads start to widen. For the private credit funds, it's not good. The ones that are listed, the business development companies, their stock took a pretty significant hit this week, which reflects that market expectation. The

The big counter argument is always that they're not runnable. What that means is if you have your money bankrupt, you cannot immediately take it out. It's something that will unfold a little bit slower. What is runnable?

is the funds that are invested. So the pension funds that have invested in private credit, in theory, they're runnable. How are they runnable, though? Well, I mean, they might be leveraged themselves. Oh, I see. Or you take your money out if you can. So I mean, there's options to do. It's not like banks where you can just go and withdraw, obviously. There's a bit more management around that.

But it's not that it's not runnable at all. It's probably not the kind of thing that would blow up in an afternoon like a hedge fund would, is my sense. Well, let me just say, Martin, if you get bored over the weekend, you know, just saying. I'm going to be doing that and I'm going to look at hedge funds. Can you just find out what's going to blow up before it actually blows up? Yeah, you know what? If I find out, I'm going to short it and I'm going to quit. Exactly.

Could you tell me first before you all act? Yeah, obviously. Naturally.

Matt, just to you, anything that Jared said that you want to call out or take leverage with? I think it's a reasonable balancing of where leverage is, but we're a tweet away from all of that being wrong or all of that flipping upside down. So it's very difficult. And Matt Martin, I do have to say this at good times, Martin gets all my half-baked thoughts about what's happening and then gives me the most articulate and thorough responses. So yeah.

Martin, whatever you're doing this weekend, please respond at the same pace you've been responding. Yeah, I appreciate that. It hasn't felt like that the last few days. It's chaotic. Yeah, I'll follow up. Appreciate it. Well, let's follow – why don't we – we'll keep this a little – well, it's not a really – actually, I was going to say let's keep this short, but I don't think it's going to be that short. Why don't we end on the game, the stats game? Everyone ready to play that game? Martin, are you actually ready to play that game?

I'm ready to play, but I don't have a number, and here's why I've looked at so many numbers this week that I don't seem to remember a single one. Yeah, it happens. Just make one up, and we'll match it to some number that did come out. 2%. Yeah, just say a percent. No, just say two. That's even better. All right, we're going to play the game, the stats game. We each put forward a stat. The rest of the group tries to figure that out with clues, deductive reasoning, and

questions. The best stat is one that's not so easy, we get it right away, and one that's not so hard, we never get it. If it's apropos to the topic at hand, all the better, but doesn't need to be. And Marisa, we always begin with you. What's your stat? 46.8. Is that coming from the University of Michigan survey? Yes. Is that expectations or is that present conditions? Present conditions. It's present conditions. No? No.

No. Is it expectations? No. Oh, but it's some something in the University of Michigan survey. Republicans? No. Consumer sentiment? Independence. Yes. Independent. It's independence and it's the overall consumer sentiment. Got it. Got it. Is that the lowest ever? It is the lowest ever. Yeah. And, yeah.

It is interesting because this month or for the April survey, Michigan put together a report on all of the partisan responses to the survey and the history of them and how they've tracked over time and whether the survey is representative between different political party affiliations. And I thought it was interesting. One of the conclusions that they drew was that

The response of independents tends to track, which is maybe not that surprising, it tracks much more closely with sort of the national polling on how people feel about the economy and the administration's economic policies. And it tends to track closer to the responses of the party that's not in the White House.

So right now it's tracking much more closely to the way Democrats are responding than Republicans are responding. And this is the lowest it's ever been going back to the 1980s. It's also it's also, though, the lowest I was looking at the Republican response right now. Republican response is the lowest of any response in a Republican administration. All right. Yeah. All the way back to 1980. Yeah.

Very interesting. Wow. So what about the Dems? That's like completely in the gutter. Yes. I mean, it's all it's all very low. And another another interesting thing was the inflation expectations this month is the highest since 1980. Mm hmm.

Yeah, I mean, I think in the overall index, abstracting from party affiliation, 50.6, I've got that memorized. There was one other, this is a great question for the group. There was one other month historically back into the 50s where it was lower. This is the second lowest ever. What was that month? When did that occur? June 22. Yeah, June of 2022, when inflation peaked in the current cycle.

Yeah, yeah, exactly. Yeah, wow. You know, this suggests the conference board survey, which is going to come out, will experience another pretty big decline. And that's my favorite leading indicator of recession, when that falls more than 20 points, and we're down 17 through the month of February, if it falls 20 points in the three months ending in March, which is

you know, feels likely that's going to happen. That is a strong signal that consumers are going to pack it in and we're going into recession. And I think this is interesting on the independence front. The reason I was on my mind is because talking about what is the impetus for President Trump to change tack on any of this stuff. So if

The pause the other day was because of the bond market and bond yields rising. You know, one other thing that people have posited has just been his approval rating and poll numbers. And if it looks like that's going down, especially as we get into next year and we approach the midterm elections, if this independent response among independents, people that aren't affiliated with either political party, is sort of representative of the whole nation and sort of the

the zeitgeist at large, then this could indicate that there is not going to be good news on the approval rating front. And that could be something that changes policy tack here. All right. That's a great statistic. Matt, you want to go next? Sure. 7.5%. From the CPI? Yes. It's a year-over-year price increase for some good or service? Yes. Year-over-year. Insurance? Say more?

Motor vehicle insurance? Yeah. Yeah. I sent an email about this earlier this week, so I gave up. I led the witness. Motor vehicle insurance is up 7.5%. That's right. So the CPI for motor vehicle insurance fell in March by 0.8%, but year over year is at 7.5%. That's been a long...

standing thorn in the side of the American consumer. It's a big part of household budgets. It's slow to come down. And the timing of the increase came after car prices shot to the moon in the immediate aftermath of the pandemic. But car insurance premiums had to adjust. The insurers had to cover the higher costs of cars. And that was just a long and slow decline. But this month was good. And I bring it up because

I think a few people on this call. Did you guys buy cars recently? Somebody? I did. I think it was Christian too. As savvy as that is that you're going to front run these tariffs potentially, your car insurance premiums, these insurers are going to have the same impetus, although not as dramatic as 2022, but the same impetus. Repairs are going to cost more. If you need a new rear view mirror from parallel parking, that's likely a part that's going to be imported or could be. And that's a higher cost. So they need to cover that and...

That's going to flow through in higher insurance premiums for people that didn't buy a car or front, you know, people that are trying to avoid these tariffs altogether are not going to outrun that, which is just kind of the inflationary and painful effect of higher tariffs, bad policy. You know, I got an amazing story on car insurance because I had to get I to switch insurance from one car to the next car. Right.

So I used the opportunity to evaluate, and it was right about the time for my annual renewal. I'm not going to tell you who the insurance company is, but I did call a broker, and the broker was able to cut my— I have a few vehicles, and the insurance was very high. At least it felt very high. I was able to cut it almost in half by switching carriers. Wow.

And the carrier, it's AM best, highly rated. I'm not worried about any of that. And I asked, you know, why? You know, what's going on? And no answer. He goes, I have no idea. I have no idea. Same deductible, same coverage.

you know, maybe, maybe they're slipping something in on me that I can't, you know, it's like, no, we don't pay insurance once. Even if you have a car accident, I don't know, maybe it's something like that. I don't know. Chris, what was your experience with the vehicle insurance? Cause you had to do the same thing. Yeah. I just added it to my policy around, but, um, I did have a more interesting experience negotiating the price of the car. Oh, cause I went, I bought the car before the tariffs went in, uh, to effect and, uh, they tried to slip in a, uh,

Did they? $5,000 market adjustment fee. Oh my gosh, really? And I said, well, you know, this guy's crazy. I don't know if he's going to actually go through with these tariffs. So I'm not paying that. They took it off, right? So I think it was just a negotiating tactic. Then of course, then I was stuck. I couldn't.

It was tough to bid under MSRP at that point, right? So interesting. And the showroom was packed, right? So they're saying, oh, well, if you don't take it, I've got 10 other people ready to go. Yeah, because vehicle sales, we have data through March, and it surged in March because people are front-running the tariffs.

But that argues for there's going to be a hangover here on the other side. And that's one reason why we have second quarter GDP declining, because we're going to see that hangover. OK, let's do one more.

Martin, should I go to Chris or should I go to you? I can offer a few numbers. They're not all easy to guess. The game is one number, not a few. Two related. Two related. Okay, that's fair. Okay. Okay, so one is 2.32% and the other is 2.19%. Well, those are interest rates because you went out to the second decimal point. Close. They're related to interest rates.

Oh, they're related to interest rates. What was the second one, Martin? 2.19. 2.32 and 2.19%. These are percents. And they're related to interest rates. Related to treasury yields? Yes. Is it a spread? It is a spread of sorts, but it indicates something.

But it's not a spread. It's a spread of sorts. I'm not even sure what that means. It is a spread. But if I say a spread, you're probably going to think of the wrong thing. Oh, we're going to go the wrong way. It's misleading. Is it a short-term rate? Nope. Is it related to long-term rates? Yes. US-related? US-related. It's related to topics Marissa touched on with her numbers. Confidence.

Confidence. Wow. Well, I was more thinking. Expectation, a break-even. Oh, inflation expectations. Oh, that's what it is. Okay, that's what it is. It's the five-year and the 10-year tips break-even inflation. What's interesting about that, unlike the Michigan survey, those numbers fell last week. They've actually ticked down.

Oh, that is interesting. That's interesting. And my suspicion is it's just the bond market or industries have such a heavy left skew towards recession. My guess, it's reflective of that. I see. We see this in other areas too. All right. Very good. Good. I do want to go again around the horn to end on the probability of recession. So Jared said 50-50.

I view that as a chicken call. If he hears that, that's a chicken call. That was your probability last week, Mark. No, no, no. That's mine. I was definitive. That was Chris's. I was 60%. No chicken stuff for me. But I want to go around the horn, and I want to see where people's recession probabilities are now compared to last week.

And then I want to talk a little bit about forecast philosophy, and then we'll call it a podcast, keep it around an hour. So I'll go to you, Chris. First, you were 50% last week. What are you this week? I have a very well-reasoned 50% call this week. Chicken, chicken, chicken. Chicken, chicken, chicken. 50 is a legitimate number. It's a legitimate number. Okay, that's true. I agree with that statement. It's legitimate.

Go ahead. Well, okay. Well, you're sick. Why is it very legitimate or whatever you said? Very well-reasoned. Oh, I'm taking into account all the variables here. I, you know, the biggest factor is still the, why is he acting so confused? This is like straightforward. What's your probability? Your probability session today is 50%. It was 50% last week. So nothing's changed. Nothing has changed. Nothing has changed. Okay. All right. Quiet week.

Yep. Yeah, quiet week. At the end of the day, nothing has changed. Effective tariff rate is still 25%. Quiet week. Nothing happened this week. Yeah, right. Marissa, what's yours? You were 40 last week, I believe. I was, and... You're at 50 now. Don't tell me you're at 50. Yes.

I can't say 50. I don't know. Is that a chicken? I'm just making that up. I don't know. I have no idea. Matt would know. Yeah, my son, the neighbors have chickens and every day he gets out of the car, he just says, bawk, bawk, bawk. And that's because he wants to go see the chickens. I remember. I remember that from when I was five years old. I would say it's...

55, 60, since I can't say 50. Oh, wait, wait, wait, wait. You were at 40 and now you're at 55, 60. Yeah. Ooh. Wow. Okay. All right. That's a big move. What's going on there? I mean, this is just so chaotic. It's so chaotic. I think it's impossible to...

I really think if we're being honest with ourselves, it's impossible to forecast in this environment what's going to happen in three months, let alone in a year. I just think it's just, yeah, it's just so volatile that I think the volatility alone is enough to cause recession. And these...

I know we discount the soft data, but the soft data is just tanking so hard that I am very convicted that this will quickly be showing up in the hard data. In the labor market data, in the spending data, I think the consumer is very much on edge.

Okay. That sounded like a 50-50 explanation to me. But she said 55, she said. Did she say 55? I said 55 to 60. Ooh, okay. Okay, 55 to 60. Okay, Matt, where are you, man? Probable. So 57%.

Four and seven chance. I think you're going to start to see canceled orders. That's idling plants. That's layoffs. That's, you know, more financial market volatility. I think the higher, you know, that negative wealth effect is...

Going to start showing up more not the consumer spending's got a ton of momentum as is and I think the most likely outcome which is you know big margin of error is that we are going to start to see increasing layoffs soon and we'll see more and more pullback consumer spending and That to me seems like the most obvious path forward admitting that obvious is Is variable here got it got it and Martin

Yeah, so I mean, I've been looking at financial markets data all week and everything is red, basically. So what I'll say is this, because I can't speculate in politics. If we keep up what we're doing, if there's no off ramp, I would say it's very likely. At some point, something's going to break. So I would put that more towards probably two thirds. That said, there are also plenty of off ramp options, right? So it is perfectly possible that we can get out of this. Some damage will get done, but I think it really critically depends on that.

Okay, so I'm still at 60%. But here's the, oh, and the reason is, I think it's high because consumer spending, which is the engine of growth, has been flattish now since the end of last year. If you look at, and Jerry brought this up, real consumer spending, the total shoot and match,

As of February, the last data point, it's no higher than it was in November. It goes up, goes down all around. It's basically gone sideways here and very consistent with – it actually went from November – it went up in December, came down in January and basically didn't go anywhere in February. So we're kind of gone nowhere. Very consistent with the idea that all the uncertainty and drama around trade and doge and immigration and everything else –

has, it's certainly in the sentiment indices, has also weighed on consumer spending. Consumers are becoming more cautious. And this is before any of the consequences of the trade war, the real consequences of the trade war show up. And we're going to get higher prices, that's going to happen. The lower stock market and the wealth effects, all those things are, you know, we know they're going to happen. They're in train.

And once that happens, once it starts really showing up, we're going to get consumer spending moving south. And once that happens, that's when you really start to get the layoffs and you get in this kind of self-reinforcing cycle called a recession. So I think that's why I'm at 60%. Now, here's the forecast question that I want to end on. We historically have not changed our forecast, our baseline forecast, the forecast that we define as to being in the middle of the distribution of outcomes.

until we're very confident in that change, particularly if we're going from no recession to recession. I mean, putting a recession in our baseline forecast, that's a big deal. That happens once every forever. It doesn't really happen. So we want to be very...

sure about that, even though Jared made a great point. What's the real difference between our current baseline and a recession? But it is just the optics of that are such that that's a big deal. So our threshold for actually making that change in the baseline forecast is 2/3. And it sounds like you're there, Martin. You're at 2/3. You'd make this change. I'm at 60%. I wouldn't make that change.

As I said, pending, no change in the political front.

Yeah, see how he's already hedging now. See how he hedges? Well, that's what the market does too. You asked earlier why the stock prices not fall more. It's because some people are betting that there's going to be a change. Yeah, that's true. That's true. So here's the thing. So this is what I just said. It's very hard to explain to people. They go, you know, are we in recession or are we not in recession? And is your forecast a recession or no recession? And I say, well...

The baseline is no recession, but because even though I have a 60% probability, it's just very difficult to explain. So the question of the group is, is that OK? I mean, does that make sense, what I'm saying? Or is there a better way to articulate it? Because I'm trying to figure out a way to articulate what we're doing here. So anyone got a view on that? Chris? Yeah.

or martin go ahead yeah so i guess what is your forecast error on the probability of recession are you usually 10 off yeah on average well there you go i mean that's the explanation right you know you're not that's a great confident that it's different from 50 not that anyone's going to understand it any better but you know but that's right but it's it's scientific right yeah yeah

Right. Yeah, because the standard deviation is at least 10 percentage points, right? Yeah. So I'm still at the tail, I'm at 50%, so therefore I can't quite change. I think that's a great explanation. Chris, do you have a view? There's a lot of volatility in that probably recession scenario.

You're saying the same thing. I'm saying the same thing. Yeah. But you're saying that's a better way to explain it. There's a lot of volatility in that probability. Yeah. Exactly. Okay. And if we're going to make a move, I think to your point, it has to be a significant move. If we just move the GDP growth rate down to negative 0.01-

Yeah, right. Yeah, it's not really making sense. Well, I think the definition for me is negative jobs. I mean, because you go back to every recession, it's when the job goes from positive. When you start losing jobs that month, that's, I think, in the vast majority of cases, that's the month that the National Bureau of Economic Research actually says that's the start of the recession. And so to me, that's recession. You can have negative GDP, but

a quarter or two or even three, if it don't get the negative jobs, that's still not a, I don't think you're going to, we're going to call that, the NBER is going to call that a recession in all likelihood. Marissa, any perspective on this? I think the way our clients use our forecast, we have to be very cognizant of that, right? And what they're using the forecast for. And to put a recession in the baseline is, you know,

It has a lot of downstream effects on the models that they run, both banks and other financial institutions. So I think it's best to err on the side of a no recession baseline, even if that kind of looks like a recession in practice or it might feel like a recession in practice. Makes sense. That makes a lot of sense. Matt, any perspective?

I think the conservative approach makes a lot of sense. I think about severity too. Recession is always like a binary conversation. And last two recessions were these spectacular implosions in their own way. That's not usually the case. So recession means different things in different times. And I think that's always important to articulate when you can. But yeah. Got it. Okay, good. Well, I think...

This ended up being an hour, a little longer than I expected. It always does. You know, it's a little longer. Any last parting comments? I mean, there's

A lot of script to be written, I assume, between now and the next podcast. But any parting words of wisdom? Between now and the end of the weekend, I think, probably. Yeah, probably. Or maybe within... Oh, the markets have closed. I don't know. Anyone... Well, I was going to say, is anyone going to take a look? But I'm not going to take a look. Time to get a beer, I think. There you go. Yeah, there you go. All right. With that, dear listener, I hope you enjoyed the podcast. We are going to call it and we'll talk to you next week. Take care now.