Apollo Chief Economist Torsten Slok Talks Tariff Reversal
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Bloomberg Audio Studios. Podcasts, radio, news. Torsten Slog of Apollo joins us around the table. Torsten, good morning, sir. It's good to see you. Morning. Can I ignore all that? Well, this is a golden lock starting point for the Fed, at least. I mean, the dual mandate says inflation should be two. We moved a little bit more in that direction, better than expected. And on jobless claims, we also had a labor market that still is reasonably strong. So from that perspective, this is absolutely good news for the Fed that we did not get

yet any inflation surprise to the upside. But obviously we still have tariffs in the pipeline and what's left on the tariff front could still add as much as one percentage point to tariffs over the next, I'm sorry, to inflation over the next 12 months. So in that sense, this is backward looking as Mike is saying. The risks are of course that there's now more upside coming to inflation. - So this is the issue and it's a sequencing issue and I'd love to get your thoughts on it. So sentiment's collapsed, basically cratered over the past few months.

what we started to see with CPI is just a bit of softness, that's encouraging. How long before we see the weakness in the output data before we then see the higher prices in months to come? What comes before the other? Well, let's think about how companies might respond to this. So now you know tariffs are coming. For example, if you think about Amazon, of the sellers on Amazon, 71% they source their goods in China.

So one very important aspect is that it will be visible for everyone that prices are going up on things that are imported, of course, from China. So the conclusion to your question is how do you respond to that? Do you take your existing inventory and sell that at the old prices? Do you take your existing inventory and raise the price immediately? That profile will probably be individual for different companies depending on the competitive situation, which sector they're in, how sensitive they are to tariffs.

So we just don't know yet what the impact will be and how quickly this will feed through. But we do know that higher prices are coming as a result of goods coming from China becoming significantly more expensive. So even if companies decide to sell the existing inventory at the old price, we will over time see some upward pressure on goods inflation coming from this source. Is there a risk that we ignore this data at our own peril? The idea that

actually lower energy prices are giving more disposable income to consumers to potentially go out there and buy and that, oh yeah, it's also an offset for a lot of potential producers in the US? Absolutely. Low energy prices is very, very helpful for the consumer. But the other thing, of course, is that

whole surrounding sentiment around what's been going on is that we literally went from the last few days from nuclear winter to now back to talking about stagflation. And stagflation has these risks, of course, that you have headwinds from consumer sentiment being weak, corporate sentiment being weak. If you look at the Fed surveys for CapEx planning, they are really beginning to turn south. So companies are beginning to pull back more

likely because of the uncertainty. And let's not forget, we still have a $5 trillion net wealth effect on consumers from the stock market going down. So if I add this whole list together of weaker corporate sentiment, weaker consumer sentiment, tariffs coming, and a negative wealth effect, and on top of that, also retaliation from foreigners who might be doing things to us simply because of the trade war, that brings you a fairly long list of downside risks to the outlook overall. Which raises this issue of

how we even game out the idea of inflation. Why potentially are we not talking about deflation or disinflation? And I say this given the fact that we see Walmart, for example, saying that they are going to invest in price competitiveness. Basically, they're going to...

absorb all the costs from tariffs at what point could potentially the lack of demand be the main story more than inflation and that's why the key issue here is who is going to absorb the increase in tariffs who's going to absorb the price increase in goods that are coming here in particular from China is it going to be consumers that will face higher prices always a go to G taking out of margins with the E in the PE ratio go down as a result of this as companies such as Walmart Costco and of course Amazon begin to say well maybe we

are going to absorb some of this. And that remains to be seen exactly. Maybe it's going to be split across corporates and across consumers, but the bottom line still is that someone has to foot the bill when tariffs are going up.

Wall Street Journal has this morning that the president privately acknowledged that his trade policies could potentially lead to or trigger a recession, but he said he wanted to make sure it didn't cause a depression. Where are you now in terms of potentially having a recession this year? So, of course, the last few days it was pretty clear that there would be a sudden stop in the economy where

prices would go up significantly, literally on all trading partners and everything coming in. So that was a scenario where a recession was very likely almost at 100% where we came from. Today the recession probability is probably 50/50, meaning we think that there is still a likelihood we will have a slowdown, but the risk is we just don't know what the response is going to be from consumers, corporates, how much will markets go down further. In particular, this wealth effect on its own, think about how we

normally talk about when the stock market is going down, we go back to the spreadsheets and say what's the marginal propensity to consume, how do consumers react when the stock market goes down. Here on its own, the stock market down now 5 trillion so far and of course now it's rebounding and then coming a little bit back again. That's on its own a fairly significant hit to consumers and the wealth effect for the consumer outlook.