Trump Tariff Threats and Debt Concerns Weigh on Markets
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This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. We're going to look here at right now with Stephen Stanley at the American economy. Stephen Stanley is just fabulous at taking Fisherian macroeconomics and bringing it down to where we are right now.

There's been an underestimation of GDP. Is a productivity miracle still in place?

You know, I think that there's been a lot of talk about a big acceleration productivity. And, of course, AI is a big part of that conversation. And I think we might get there, but I don't think we're there yet. It takes a long time for these sorts of revolutions to kind of take hold in the economy. You think back to the 90s and how long it was after the NASDAQ began to shoot up until the productivity numbers actually showed it. So I think at the moment productivity is –

okay, but not great. And you know, the question is, when and by how much might it accelerate going forward? The split between hard and soft data, Michael McKee's completely focused on this right now. One shows oomph, the other not, which is right.

Well, I think at this point, generally, I'm a big believer in the hard data. And for example, I think that the correlation between consumer confidence and consumer spending is pretty weak over time.

But when things are moving fast, sometimes the soft data is telling you something in a more timely manner than the hard data. And I think right now we're just waiting for the hammer to drop from the impact of tariffs. And you can see that in the soft data. You haven't seen it yet in the hard data. I'm very interested to see what the May data look like, because it's

i have to say i was surprised at how little really almost not at all the april hard data um was affected by tariffs you we had you know the employment number was good retail sales was fine the cpi was normal um so i am expecting to see some of that wash through in the may data are you concerned about inflation are you concerned about slowing economic growth associated with the tariffs or are they just so

I don't know. I mean, they're out there and there are some real tariffs on real goods and services. How do you expect that to flow through? Well, my hope is that on both counts, both for inflation and for growth, that the impact will be mostly temporary. We'll see. I mean, obviously, all of this remains to be seen at this point. But certainly, I think for the Fed, the key question is, I think, on the inflation side. They're really focused on how long the inflation impetus lasts.

So what's our Federal Reserve to do, if anything, as a result of some of this uncertainty? Well, right now, I think they're, you know, as they've said, they're being patient. They're in wait-and-see mode. I think they feel like they're in a relatively good position. Coming into the, you know, before any of the tariff stuff began, the idea was, okay, we're modestly restrictive, and that's where we want to be because inflation is above our target. We need to see more progress on inflation.

That whole narrative was interrupted by the tariff situation, and now we'll see how long that inflation data continues to run high. This is what surveillance is about. We've got Blanchard coming on, on Stanley Fisher, with all that excellence of academic theory and theorists.

thinking about where we're going. You are a definitive acclaimed market economist out of Washington and Lee. Do the models that Blanchard and Fisher invented, codified and move forward, are they working today? Or is the Fed and others, are we just making it up as we go?

Well, I think certainly the models provide a good backdrop on how to interpret things. But there's always something new, right? Every cycle, every episode. What's new right now? Technology? Well, I think it's the uncertainty around policy, right? In the short term. In the long run, as you say, technology is a big...

but I think in the near term, it's the uncertainty around policy and how that's likely to impact the economy. - Steven Sanity, thank you so much. Greatly appreciate it. - If this government spending in defense goes towards things like R&D that have dual use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long lasting impact on growth.

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You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. Charles Schwab's Kathy Jones, who had an eventful weekend of ambiguity. A weaker dollar, but the news flow, it was sort of incomplete this weekend. There was this, that, and the other thing. Do we have confidence in acquiring full faith and credit?

out the curve this morning. I just don't see it. Yeah, we're not going out the curve very far. And the reason is simply that there is all that uncertainty there. The risk premium has increased. The term premium has moved up. So you do get paid a little bit more to take that risk. But I don't think you get paid enough.

until we get some sort of clarity. And clarity is the word the Fed uses all the time. It's a word we all want to use because we're waiting to see where policy goes. I mean, clarity Friday, Paul. I had clarity. The Knicks are on a roll. Things are great. Red Sox maybe would win one game. And then, boom, June came along. Everything changed. And to me, it's bizarre this morning, Paul. Yeah.

Absolutely is. Kathy, I mean, credit risk. Do I need to take credit risk here when I consider it a two-year treasury and get almost 4% here? You don't necessarily have to, but I don't think it's a big problem if you do in investment-grade credit. We're pretty cautious on high yield, growing more cautious. But high yield's been some of the best performance. It has because the coupon is there. So we're really meandering in terms of the rates right now, just going sideways, up and down, up and down, but going sideways.

But that puts the emphasis on returns on the coupon. So high yield has high coupons. So that's performing well. The other area that's performing well is international, and that's because the dollar is weakened. But otherwise, you're earning the coupon. That's all that's going on right now. What's the important driver for the fixed income market today? It doesn't feel like it's the Fed. It feels like it might be more of, I don't know, tariffs and tax bills and things like that. How do you think about...

Washington, D.C., as you think about the bond market? I try not to think about Washington, D.C. as much as possible, but obviously it's the factor there. I think at the end of the day, Treasury yields are driven by what the Fed's doing, what inflation's doing, what economic growth is doing. And I do think in the long run, if we do have these tariffs, and that's the question mark, what will the tariffs be, how long, how big?

We will get slower economic growth and we'll get lower inflation from that. But the offsets are that

that tariffs initially bump up prices and give us that inflation, and a weaker dollar gives us some imported inflation. So this is why we're going nowhere, because you have one policy that does one thing, you have another policy that does another thing. So are we kind of in a trading range here for the Treasuries? I mean, what do I do here? I guess I just buy them and clip the coupons, I guess? Yeah, I think you stay benchmark or lower in terms of duration. There's not really a lot of...

enough reward for the risk to go too far out the curve. Same story in credit. You get paid pretty decently in investment-grade credit. If you want to take risk in high yield, I'd just say stay at the upper end of high yield. And then you can look at international because we do see the dollar continuing to weaken from here. I look at this, and I want you to talk about Lizanne Saunders' world. There's a Chinese wall, folks, between what Kathy Jones is doing, but there isn't.

And the answer is there's dividend or share buyback as a yield proxy. There's the enthusiasms. People this weekend, Paul saying heavy into Mag 7. Folks, these are just opinions here now. Do you sense a point where there is a shift to people finding value in the coupon?

versus the game of equities? Yeah, we do. We see a lot of investors who have just gotten very cautious because of the volatility in the equity market and the concern about all these policies and not knowing where it goes. So we have seen people shifting more into fixed income, clipping the coupon, reducing some of the volatility and risk in the portfolio. So again, so my Federal Reserve portfolio

They can just sit on their hands for a while now, it seems like. Yeah, it looks like that's the name of the game. They sit on their hands for a while, maybe September, wait and see if unemployment goes up. I mean, that's going to be, they've talked about the dual mandate a lot, and that's going to be the driver, I think. Undergraduate from Northwestern and an MBA from Northwestern. There are other schools out there, you know. I mean...

Yes, I know, but I'm a Midwestern girl. Oh, you are? I've never asked you this. Did you study with Robert Gordon? Yes, I did. Tell our audience, folks, we mourn Stanley Fisher. The giant of Midwest growth economics was Robert Gordon. Massive influence. Good morning, Jim Glassman, formerly with J.P. Morgan out on the left coast. Tell me about big...

being in a classroom with the great Midwest growth economist. Yeah, he was a fantastic professor, so smart and so nice. He believed in the manufacturing process. Did he believe that manufacturing was different and it created a multiplier of jobs just different than all these other service sector baloney jobs, like what Paul and I do? And me. And you. Yeah, no, I think he did believe in that. You remember, you know, growing up in the Midwest,

the rust belt and all that. And I think he had a real affinity for that and felt that the widening of the trade deficit, the loss of those jobs, which were producing solid middle class incomes, was a big problem. We'll touch on this today. Kathy Jones, thank you so much for those comments. Professor Gordon, with the death, the passing of Stanley Fischer, maybe we'll find some other people in the coming days.

to speak to on this. - This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7:00 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say, "Alexa, play Bloomberg 1130." - Joining us, Justin Dior this morning,

Maya McGinnis, Committee for Responsible Federal Budget. We're thrilled that Maya McGinnis, really an authority on the mess we're in, could join us here. Maya, the critics of your world say CBO is too gloomy in their growth and that we will continue to grow our way out of this mess or at least sustain it. Do you buy it?

Yeah, there's a lot of CBO bashing going on these days. No, certainly I wish it were true. I think everyone wishes that you could cut taxes and that would unleash such huge growth that it would fix our fiscal problems. But clearly that's not the case. There are a number of outside estimators who are looking at the tax bill, the reconciliation bill, and trying to figure out what the effects on economic growth would be. And here's the way it works. Tax cuts have positive effects on growth.

but not enough to generate enough revenues that they offset all of the loss from the tax cuts themselves, usually about 20%. The problem is that this tax bill in particular isn't as pro-growth as what we saw in 2017, the corporate tax rate cuts. Those were very pro-growth, this less so, chops up the tax base in a lot of ways. And our debt is now so large that the negative effects of debt

can even outweigh those positive effects of tax cuts. So the bashing is just like angry parents yelling at the ref. - Oh, I love that. Sounds like my weekend. Maya McInnis, Henrietta Trace was with us. And the basic idea is we dash to the Senate for the big, beautiful bill that there will be moderate Republicans out there to save the budget day. Does that beast exist or are they prehistoric and have they left the room?

Yeah, no, I wish that's how I thought it were going to play out. I'm worried because I think the moderate Republicans, just like we saw in the House, may actually be pushing to make the bill worse. So the bill has big tax cuts.

and the medium spending cuts. And what you're seeing from the moderates is they're more concerned about fewer spending cuts than more fiscal responsibility. And then on the very conservative side, where you have people who are willing to do the spending cuts you would need, they also are more prone to believe the myths of the fairy tale that growth can fix everything and you don't have to make any structural changes. So the problem is nobody makes hard choices in the budget anymore. We can do taxes. Why?

Stop. Paul wants to get in here. I'm going to ask the root question. Maya, what in God's name happened in Washington? Where is the adultness of this debate? You know what killed adultness, I think, is

partisan polarization. We are so much more focused on Republican versus Democratic preferences than we are how you fix the country. It's not just fiscal. We're not fixing any of the big problems where there's anything you actually have to do because the political calculation of don't let that other side have a win is outweighing the calculations of compromise and country first. And I'm deeply concerned about it, just like

Polarizations undermining everything, our weak fiscal positions keeping us from being prepared for the AI race we're in, the need to fix our social contract, global national security issues that are riskier than they used to be. All of these things, I think our polarization has put so much sand in the wheels, we're not getting anything done and that's not allowing the adults to come forward. They exist.

behind closed doors, they're talking about it, but politically it's not rewarded right now in this populist and polarized moment. And we got to figure out a fix for that. Maya, I've been in this market since 1986. Nobody cares about deficits and international debt. Why should we, realistically? Well, you know,

The bond market is starting to be a bit of a reminder. We actually are hearing so many more reminders. I'm with you. It's been just deafening in terms of people being concerned about it other than those of us who work on this all the time for the past years. But you're hearing many more concerns right now with warnings, with downgrades, with problems in the bond markets, with

other countries looking at the U.S. debt and thinking this isn't as great, this isn't as sure thing as it used to be. We have the reserve currency. We're the safe haven. The central bank did a lot that kept rates down for a long time. Many of these trends could gradually be shifting. And the whole point is we should not wait to find out if and when we get ourselves into trouble. We should fix the situation where we still have all of those privileges and it's much easier to do so.

As long as people keep showing up at our debt auctions, Maya, we don't have a problem. What do you say to those folks? Yeah, I say that those folks have made that argument. And as a result, we borrowed more when interest rates were low. We now have trillions more in debt. And just small increases in interest rates have huge impacts on our interest payments as a result, which is why it's the largest growing part of the budget, the second line item in the budget. Those interest payments are much more...

of all the changing interest rates because of the arguments, don't worry, be happy, keep borrowing. We shouldn't have done it then and we shouldn't now. - Maya, don't be a stranger. We got to get you out of here. Somehow this is going to get worse through the summer and articulate as always with the Committee for Responsible Federal Budget. Brilliant work, Maya McInnis.

If this government spending in defense goes towards things like R&D that have dual-use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long-lasting impact on growth.

To learn more about the intersection of national security and global trade, subscribe to PGM's The Outthinking Investor in your favorite podcast app. AI is redefining what's possible for your business. Are you up for the challenge? Microsoft is helping leaders like you get AI ready faster with unified data and simplified platform management, unlocking up to 150% improved output.

Just look at the NDA. They're using AI-powered insights to deliver more personalized fan experiences. Then there's BMW, driving change confidently with safe, secure AI tools and guidance. And the LEGO house? They're creating new interactive experiences for people to explore.

No matter where you are in your business journey, Microsoft is here to help you achieve real breakthroughs that drive impact. Their industry-leading trustworthy AI fuels innovation in ways that are safe and secure. Business leaders Microsoft surveyed saw an average of 3.7 times ROI per $1 invested in generative AI.

Growing and innovating your business is your job. Microsoft helps you achieve that with innovative AI tools and experiences to guide you confidently into the future. Whatever change comes next, let Microsoft help you keep pushing forward. For more details, visit Microsoft.com slash challengers.

This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal. A million years ago, I decided I wouldn't learn Senate parliamentarian rules, Paul. Good idea. It's just like the only one that ever nailed this was Robert Byrd. Well, I don't know. We got...

The Virginia's. I mean, that's why we have Henrietta Trace is in studio now to explain. Henrietta, I thought a quiet weekend for our elected officials. They're all pondering what what's next for the Senate is they look at a big, beautiful bill, the parliamentary, the procedure of it. Will it be smooth?

Yeah, the parliamentarian is one of my favorite jobs for sure. So I will take on that burden for you because I think it's a blast. The senators are about to come in hot. It is all eyes on them for the next four to six weeks. And they have trillions of dollars literally with taxes, the Medicaid cuts.

All the various sanctions packages and the tariff bills, all these pieces are before them right now and all eyes are going to be on them. The parliamentarian is going to be very busy. As you know, the Democrats and the Republicans get an opportunity to go before her and explain what it is they'd like to see taken out of this bill. It's really a game of who knows the rules the best, who's the best player.

right now and that really makes a million dollar difference billions of dollars 13 years elizabeth mcdonough m-a-c-d elizabeth mcdonough is the most powerful person in america

Who's that? She's a parliamentarian. Oh, okay. It's like Alice in Wonderland. I mean, they have to go in front of her. Henrietta, are we going to hear from the Democrats ever in this Congress here? Is this a time for the Democrats to make themselves useful at all?

I mean, it would be about time. I'm continues to be shocked at how absent Democrats are. I mean, Republicans are putting taxes on cans of beer. How is that not an immediate talking point? But here we have over the weekend, majority minority leader Schumer

sending a letter to his colleagues saying, "Hey y'all, it's time to get in the game." And as you point out, Elizabeth McDonough has been in the Senate since the 1990s and has worked for some really esteemed folks and is now gonna be the key arbiter. And Democrats are gonna go in there and say, "X, Y, and Z is not permissible. Strike it from the bill." And that's gonna hit the tax plans

of the Republican conference. One of the reasons that the bill has to get more expensive and add even more to the deficit is because it doesn't have an economic impact by using the current policy baseline, which is the strategy that Senate Republicans are going to use, which will effectively write off $3.8 trillion worth of this package and say the cost is zero. You cannot pass legislation through reconciliation instructions unless it has a budget impact.

So they kind of shoot themselves in the foot here. You get $3.8 trillion in free money, but it's not permissible under reconciliation. So that's going to be one of the core things that Democrats try to go up the works with the parliamentarian and leader Thune. And it's about time Dems get in the game. So yeah, I would be watchful for that. Who is the Democratic voice, would you say? Is it Senator Chuck Schumer or is there somebody else in the Democratic Party that, I don't know, maybe they're looking to step up here?

I mean, I think the Democratic Party is at war with itself, trying to figure out if Hakeem Jeffries is the kind of speaker or minority leader that Nancy Pelosi could be or was. Certainly that's shown some lacking components at a minimum. The party over there on the House side is warring between the young folks and the older folks, and they can't get

get a clear answer on committee chairs and on the senate side they're struggling just to have relevance or find a message as i mentioned i don't think it's too hard to come up with a message against tariffs and taxes on really obvious things like that bull items but they're nowhere uh they have a lot of work to do what do we not understand about the impact of the president in a new 50 tariff on quote unquote steel what's the henry out of trey's insight there

What's fascinating to me about that is that Lutnik and Besson and Greer keep throwing the same playbook at all of these tariff actions that the president obviously wants. So the one I'm really ruminating on today is this idea that Secretary Besson has trotted out that he and President Xi are going to get on the phone this week. That seems very unlikely. But also, what is that going to resolve? They spoke on the phone four months ago, and now we have hundreds of billions of dollars worth of goods tariffed at, you know, at some points, 145 percent coming in from China. So

They have this playbook that's like, get Trump involved, but then also make sure he's not involved because we don't know if we're going to get 50% tires on steel overnight. Henrietta, hugely valuable. The surveillance parliamentarian will send you a fruit basket. We really appreciate it. Henrietta Trey's Vader Partners. This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at 7 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app.

You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg 1130. The newspapers make me smile, Lisa. I will try my best. Okay, so this one's in the Wall Street Journal. If you take a look at it, the headline is how much should the world's richest man get paid, right? So we're talking about Elon Musk. Tesla has to decide. No, not at all.

TESLA HAS TO DECIDE HOW MUCH TO PAY HIM. HE'S COMMANDING THIS BIGGER STAKE. SO HE'S ACTUALLY THE LOWEST PAID CHIEF EXECUTIVE OF AN S&P 500 COMPANY. LAST YEAR TESLA PAID HIM ZERO BECAUSE OF THAT LEGAL BATTLE. SO HE'S BEEN BACK AND FORTH OVER THIS BIG STOCK AWARD BACK IN 2018.

So they go through basically how much different founder CEOs make. Like the Wall Street Journal, they ranked it and they said the top one makes about $165 million. But then you go to Meta's Mark Zuckerberg. He made $27 million last year. Michael Dell got $3.1 million, mostly cash. So they say they go through a couple options like, well, what do you do? How do you approach this, right? So they say you either make him show up and go big, you pay him like a CEO, or you pay him like everyone else.

So this is the big struggle that Tesla has to deal with coming up. But it's a lot of money at stake, and the company's struggling. Just the world's richest person, correct? Correct. Okay, just want to make sure I can remember. Can I just say, take issue that they include stock awards as compensation? Because if the stock goes down...

there's not much compensation you know there's a risk to it right and that's always going up because the compensation is tied to eps growth or marketing whatever they can see the critics would say they rig it yeah i mean that's okay but you're right the world's richest yes okay just want to make sure i just want to make sure you have that okay yeah um so this one too um it's talking about meta how they want to fully automate um ads using ai

So advertising makes up the bulk of Meta's business, right? So Meta, their ad platform already has a couple AI tools. But the debate behind all this is that some brands worry that these AI generated ads, they won't match the human made quality because it's not being made by humans, it's being made by a computer. But smaller businesses say, we could benefit because it just makes it easier for us to create the ads.

So that's the battle going on as far as... So they're using AI for the creative? Correct. To create the ads. So none of the Don Trapper madmen type guys? No, to create the ads. To create it. Basically, you just punch in what you want and, you know, the video comes up. So AI will help them do that. But, you know, it goes to the... Are you using AI...

I use it for checking quick things, but I always have to fact check it. But I have seen a lot of these, like the Wall Street Journal did this, and they made like an entire movie trailer, just AI. Like you see this and how they're able to do that. It makes you sit back and wonder. I started using it this weekend, and it's...

It's, you know, I'm sure I'm way behind everyone else. It's like, wow, do one more. What else do you have? It is. Okay. Have you been to, let's say, like a casual dining place lately, like an Outback Steakhouse or an Applebee's or anything like that? So these casual dining places, they're starting to attract more Gen Z customers. And the reason why is because Gen Z actually says they like going back to the whole family, you know, sit down,

dinner. It's more stable. It's tough economic time. So they like that instead of going to like the fast casual, you know, going to like a cava or like a Chipotle, you know, as far as, you know, what's more economically friendly. So just trying to figure that out. They say that they enjoy going to like the sit down place. They want to talk to people. Gen Z wants to sit down and talk and have conversations. Who's Gen Z by the way again? Do we know who they are? I don't know.

Can I report on restaurant quality? We had the after prom party this weekend. And? It was catered by LaBelle to Talk. Ooh.

And I'm pleased to tell you that the Taco Bell salsa sauce, it was ground beautifully into the Chinese oriental carpet. I mean, the way that somebody got their stiletto heel right into it and got that salsa sauce right in there. Did it come with the margaritas, though? No, it did not come with the margaritas. That's thank you. I would be in trouble if it had come with the margaritas.

Read as well. Lisa Mateo, the newspapers. Thank you so much. This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

Thank you.

Whatever challenge comes next, let Microsoft help you keep pushing forward. For more details, visit Microsoft.com slash challengers.

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