The Macroeconomic Malaise | Juliette Declercq on Debt, Tariffs, Immigration, and Yield Curve
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door. Very pleased to be joined by Juliette de Klerk, founder of JDI Research. Juliette, great to see you. Welcome to Monetary Matters. Very nice to see you again as well. I like your show.

Thank you, Juliet. We like you. Glad you're here. You wrote out in your piece about that the issue is that macroeconomic malaise is entrenched. What is the macroeconomic malaise, Juliet? Because as we sit here today, the U.S. stock market is at all-time highs. Real growth continues to be good. Inflation is above 2%, but it has been falling. What's this malaise? So first of all, the malaise is the fact that the

Financial and Wall Street financial markets is not the real economy. So that's one part of the malice. What I'm really arguing in the piece is I find it really interesting to see all the headlines since the US election saying Trump recur. And it's like an extraordinary political comeback. For me, it's nothing extraordinary. Trump...

Trumpism is really here to stay. I think it absolutely did not disappear over Biden. I think Biden's election was just voters sort of like recalibrating Trumpism. But really, the deep-rooted malaise of capitalism stems from the fact that what many are calling like the Japanification of the Western world

which is basically we are losing main source of organic growth. So what is organic growth? It's basically the growth that you basically have to do nothing and that happens on its own. And that's the growth from the working age population.

And obviously, you do need organic growth because that's what creates, firstly, the whole financial system is based on growth. But also, that's what actually brings hope of increased standard of living and basically the basis as well for social mobility. So for me, that's really what I call growth.

the capitalism malaise, and that's what brought Trump in the US. That's what keeps bringing political change, not just in the US, but everywhere in the world. I mean, just look at what's happening in the UK. What's currently happening in France, basically, it's all rooted in the same issue.

So the issue, Juliette, is that across Western developed market economies, the working age population is not growing that quickly or in many cases it is shrinking. So how has it that growth, at least in the U.S., has been robust since 2009-2011?

But labor income has it. What sacrifices has the American economy made to keep growth high when we have these issues? And what have the consequences of that been? So let's go back to where demand comes from. So demand growth basically is you adopt the working population growth, which is the potential to make new income.

You add to this productivity slash real wages with obviously large and increasing gap between what productivity is like actually

given to wages instead of just kept in profits. And the last thing is debt. So per cent, the gross is basically you add up the working population gross plus the change in debt plus the change in productivity. So what's one of the easy fix to a lack of working population?

population growth is one that has been embraced, especially since COVID, by pretty much all the Western world, including Japan, which was previously massively against immigration. But that's really immigration. If you're looking at the US post-COVID, the whole growth in the labor force is down to immigration.

In 2022, you had a survey, like a Pew survey, actually estimated there was about like 8.3 million illegal workers in the US. That's about 5% of the labor force. Now, immigration is kind of like it works for government.

In terms of like it brings income and basically for whatever increase your income without increasing your debt actually fixes your debt to GDP ratio. It brings like fiscal gains.

And also it's good for profits because it's not that illegals have such a different skill set than other Americans. But the problem is with illegals, you actually increase precarity. And basically wherever you've got precarity, you've got like a pull down on lower wage growth and basically real wage growth. So immigration is

in a way like a kind of a quick fix for the government and is pretty good for profits as well. Unfortunately, when you get away from the aggregate level, it basically pulls down on real wages. It's one of the reasons why real wages are not keeping up with productivity. And obviously, when you look at per capita, sort of like standard of living per capita, you actually come down at the workers'

level rather than up. So really that's the reason that that's one that's been one of the quick fix in the US. The other one is obviously like productivity gains, which is again very much a story of a post-COVID story. Post-COVID we had like about and during Biden's term, we had about like 8.2% productivity gains. Unfortunately, this is not shared

at all with workers, which means that the wage share of income in the US has actually collapsed to new all-time lows this year. So when you had 8.2% productivity gains over COVID, you actually had no increase in real wages and basically standard of living.

So more and more in the US, you're getting growth from immigration and profits. And that's obviously at the expense. Both of that is basically at the expense of the average worker, of the working class. And what's really interesting since 2000 is that you obviously have also the emergence of the tech revolution. You've got the emergence of sort of like elite workers.

which is benefiting from a huge economy of scale, being able to reach out to the world in terms of demand. And there's like a move of the economic center of gravity away from the middle class into this sort of 15, 20% elite class, which is benefiting from globalization. And that class actually pulls, which is actually like a consuming class,

the same sort of basket pool that the middle class is actually pulling the price higher of medical costs, educational costs. But during Biden's term, purchasing power for basic needs has actually shrunk. So we're talking here energy, food and housing, and that basically directly hits the working class.

Through COVID, you had the middle class being hit in terms of being debased as to education, medical. But over COVID, it was really like basic needs where Americans started to, that's how they had to start working like double, triple jobs and et cetera, with a real loss of standard of living.

As we started, we talked about Wall Street is not the economy. The stock market is not the economy. If we wanted to construct a society, if the leaders of America were economic technocrats, they only cared about maximizing nominal GDP and real GDP. The current status quo is actually quite good of running very large deficits and having immigration. From an economist point of view, immigration is very frequently a good thing.

However, it has social consequences, which we have just observed with the American election. So I just want to start with that, Julia, to give people a sense of the scale of what you're thinking about and the issues you're thinking about. Let's now return to more traditional macro politics.

What are you worried about? There are two real threats to an economy. An economy and expansion as we have now, there are two threats, a recession or inflation. In 2020, we had a recession. In 2022, we had inflation. What are you more worried about now, recession or inflation and why? Yeah.

I mean, firstly, I didn't say immigration was a good thing. I said it's a good thing for government and an easy fix, but clearly it's not a good thing for the average worker. So I just want to get back at that before I get like a flow of negative comments. I meant for the PhDs who care about maximizing real and nominal GDP, it's often a good thing, yes? Yeah. For the second question,

Part of your question, okay, recently, no inflation. So I've been a huge inflationist since post-COVID. I think I remember being called a complete nutter when I think it was in 2020, three months after the beginning of COVID, I started warning about inflation. And we had a case of super tight supply actually hitting super loose demand and obviously

Both sides clearly create inflation. At this point, I'm much more worried about recession than inflation. I don't see any risk of inflation ahead. Yes, there is a very high risk of tariffs, but that's like a one-off on supply side, which is not going to be met with increased demand. And therefore, I think it will be absorbed into lower profits rather than

create any kind of lasting inflation. I am aware of the fact that the Fed has been burnt about calling inflation transitory post-COVID, but I think this time they will quite confidently look through any kind of inflation. Now, going back to what I'm looking at, the new report just came out like a week ago, and really what it looks at is

The difference between what markets are looking at in terms of what the sort of like Trump and Musk, some of them can achieve in a kind of the one, two year kind of, I would call medium term and the price that the economy will have to pay in the short term for this kind of like, you know, what I call in my report,

Dark night of the soul and back night of the soul is is really when you come out of the lifetime of denial to actually face the truth and and and the truth is that you cannot borrow into prosperity when you're working when you're working a population is actually shrinking I kind of use a

To explain this, I like to take the example of someone who is a 25-year-old who has all their wage growth ahead of them. If you borrow at 25-year-old,

Your wage growth is easily going to print in the, whatever, 20, 50 percent in years ahead. And you will very quickly grow out of your indebtedness. And probably in most cases, you will have wished you borrowed much more, which I'm sure has been your case in previous years. And it certainly has been my case.

Very different game when you're thinking about borrowing at 55, 60, where you've got absolutely no growth ahead of yourself. You better kind of think of sort of like a productivity miracle of an amazing idea to actually get yourself of indebtedness. So it's the same really issue we've got today in the Western world.

In the past, if you borrowed looking into increased organic growth forward, if you borrowed and basically used the fiscal lever to give demand a push, you would have CapEx following. And in coming years, you would have an increase in output, which means that it wouldn't be inflationary. And in fact, because...

you borrow and you've got like growth ahead, you're not actually increasing your debt to GDP ratio. We are in a totally different game today.

where you will not get a follow-up with CapEx and an increase in output because companies are smart enough to know that we have a final demand issue. So what you're going to get is like a boost in demand, which is like not meeting an increase in supply, much like what happened after COVID, right?

to a sort of like a lesser extent. So what you get is basically your sugar high, inflation, and then if you basically borrowed at the same rate level as your economic potential, then your debt-to-GDP ratio will increase.

increase and sort of like stabilize. But if you actually borrowed at a higher level, at a higher rate than your economic potential, then you're just going to see your debt to GDP ratio and basically indebtedness like increase and increase. So that's the issue. Like governments have been trying to borrow into prosperity at 55, 60 year old.

And by definition, this doesn't work. All you can create is basically a short term sugar rush inflation. And that's exactly what we saw over COVID. And, you know, what we've also figured out is that voters do not like it. Whether you're looking in France, whether you're looking in the UK, whether you're looking at the U.S.,

Voters have now realized that there is a price to pay to fiscal checks, which is basically either inflation or rising indebtedness. And more often than not, both. And then you shouldn't be really wondering. You're paying more and more interest and you get less and less social benefits. Your educational system is not as good.

efficient I used to be and the same for like medical care. So this kind of lack of organic growth issue is really like a deep entrenched and it's really the root of all economic malaise, political upheaval and basically like a very strong volatility and uncertainty as well. So I really want to point out

to the huge uncertainty ahead in 2025. And I'm actually really excited about it because we will see things happen that have huge macro ramifications and where I see a lot of potential for markets to get things completely wrong. And that's normally where I really like to start.

coming out with recommendations, with strong conviction as well. So to get back to your question, the first thing that we can look at is like immigration. So post-COVID in the US, all increase in the labor force has been down to immigration. If you take out immigration, which is what Trump wants to do, and I'm not even talking about deport, like deporting

mass immigration deportation here. I'm just talking about like, you know, potentially cracking down on easy hiring of illegals, closing the Mexican border or just going back to sort of like stay in Mexico rules that was there pre-Biden or just closing down the 30,000

a lot of immigrants per month from Nicaragua, Cuba, Venezuela, and etc. Well, if you take out all immigration, you basically have five-year rolling working population growth, which is basically coming below zero now. And as I show in my report, this is directly linked to the real rate equilibrium.

So because it's basically organic growth, organic growth potential, if you bring down your population and your working population growth, and again, without immigration, we're already at negative levels. So Japanification is there and it will be there on kicking in 2025 if, as Trump wants, you basically cut immigration.

Now, the second thing is government efficiencies. So we've got Musk now in charge of government efficiency. They are looking at saving like a third of the fiscal deficit by basically mass firing of government officials, government workers. They are looking at like potential $2 trillion of savings.

by Independence Day next year. And the whole idea behind that is basically to, IBI, take over the government database and actually look at

huge efficiencies. Obviously, we've seen it happen at Twitter. That's exactly what Musk did at Twitter. And the platform is still running. I think pretty much overnight, he fired half the workers there. And basically, thanks to productivity gains and AI, managed to make the whole thing still standing and recovering after

a year or so, like more than a year.

Well, the same thing might happen with government. And I'm not saying this is the bad thing. You know, I think we all want much more efficient governments and the savings made there. So if you're looking at two trillion savings, that could be something that allows you to, for example, cut taxes on overtime, which is a good proposal, especially when you're

your main issue is the lack of working, lack of growth in the labor force. One thing you can do is get sort of like incentivize how much people want to work. So that's a good thing. And that's about like the price that it would cost. So in the long term, great. The problem is if you look in 2024, you look at like ex-governments, so basically private payrolls,

On a three-month basis, we're only running at like 77,000. If you're looking at just October, we were already negative. So I think it was like minus 28K negative. Most of the growth in employment this year has been down to government employment.

And if you're looking at private employment, actually, we're now at pre-recessionary levels. So I'm not saying that rationalizing the government is a bad thing. I fully believe that Musk would not have taken that role if he didn't fully believe that he was capable of doing it. But there is a big price to pay in 2025 if you're going to slash down immigration and

government payrolls as well. So it's kind of like the dichotomy between the productivity gains that you think that you can achieve in a couple of years and the price that you have to pay to actually achieve that productivity. And that also goes back to the issue that we discussed before. The problem with productivity is that if it's not shared,

If profits are not shared and if you see a continued collapse of the wage share of income, in other words, capital is what gets remunerated and not labor, you actually still hit a wall of demand. It's the same story as debt.

when you rationalized agriculture. So you get a lot of machinery and suddenly you need a tenth of the workers to achieve the same output. In the end, people don't really eat more. So what you achieve with much higher productivity is actually a shrinkage in the labor force. And it's really the same that's happened in, I think, Trump administration.

blames a lot the manufacturing, the loss of manufacturing jobs to globalization and what he calls unfair imports and unfair current account deficit. But what is not really talked about is the fact that technology is probably responsible for at least half the loss of standard of livings from manufacturing workers.

If when you get the productivity gains, you don't actually pay the workers at a level where they're going to want to buy those goods. And so if the productivity gains don't lead to an increase in output, so you get productivity gains, you get real wage increases. And as a result, workers are able to buy more goods.

Standard of livings increase and you get a larger output, which means that, you know, you workers actually benefit. But if that's not the case, which I worry would not be the case if AI, you know, actually ends up replacing a lot of the white workers.

collar jobs then what you're left with is like a continued in inequalities with gross going more and more into profits and and and capital and the abs and and benefits less and less the workers and in that case you still so it's kind of like the

Oh, I really struggle to reconcile with Trump in a way, because I think Trump has clearly, you know, been elected with a mandate to give back.

purchasing power to the middle class and the working class. And I don't feel that's any of Musk's concern. And so when Elon Musk took over Twitter, he fired, I think, over half of the staff. And I always thought that Twitter would continue to run. I never believed any of the doomsday saying about Twitter. And yeah, Twitter still exists. And it appears that

not much has changed. But is that true about government spending? Because isn't it true that so much of government spending is mandatory spending that is paid to citizens and paid into programs, not government employees? It is Medicare, Medicaid, Social Security, and interest expense that the government has to pay it no matter what. And I'm looking at the number of federal employees in the

government is just over 3 million people. In 1988, it was 3.2 million people. So this narrative that there are all of these government agencies in the federal government that are employing all these people, I mean, we employ fewer federal people than we did

over 30 years ago. The government expense has ballooned because of Social Security and all these other programs. But if you really, isn't it true, if you really want to fire half of the federal workforce is going to put only a minor dent in the budget deficit. If you really want to tackle the budget deficit, you either have to increase taxes, which of course Trump will never do, or cut programs that are actually very popular, such as Medicare and Social Security and Medicaid. And I might add,

I think part of the reason Trump got elected is because it had been previously a part of the Republican platform to cut Social Security. And Trump came up with the now very obvious, but smart, say, hey, a lot of people who vote for the Republican Party are older. How about we not cut the Social Security? And he has now won two elections.

I mean, the first thing is like, I mean, cutting social security and any kind of benefits is a sure way to recession because that's where there's the largest propensity to spend. So those programs, in other words, that's got a really high multiplier. So you basically, pretty much all the money that's injected in the economy from benefits is basically spent because it's at the lower levels.

end of the wage cohort where everything is spent. So that's the first thing. The second thing is, so they're looking at like a savings of a third of the budget deficit, two trillions. What I do know is that Musk will try to achieve this. And if that's the cost of huge payroll loss, then this will be a guaranteed loss.

loss for the economy because you're basically hitting directly on demand and jobs and job creation, which is like basically the basis, the organic growth that we talked about earlier. So if you add to that wanting to, I mean, I don't really believe that benefits will be or social security will be cut. I mean, that would be completely against anything

Trump wants, especially... Yeah, he said that he wasn't... So, Julia, you have in your report a piece on the long-term financial consequences of many Trump programs. So, extending the Tax Cut and Jobs Act from 2026 to 2035, estimated, will cost $5.3 trillion. And then there's the exempt taxes on tips, that's $300 billion. So, you add up all

All of the stimulus programs will cost $10 trillion. And then all of these savings things, such as tariffs, because tariffs do generate income for the government, and then it's $3.7 trillion. So you say ultimately this will, from 2026 to 2035, so a long time horizon, cost $7 trillion. So your idea is that Trump will not decrease the deficit and he will

increase it. That is only what I can conclude from this table. Yeah. So, I mean, clearly, I mean, that's the promises. I mean, I'm just taking this and be like, OK, how can we get to that? Because one thing that we didn't talk about is the fact that markets, market vigilantes are back with a vengeance. What I mean by vigilantes is that

If you're looking at Japan, Japan's been able to issue debt and basically get that growth from debt without an explosion in the debt-to-GDP ratio. And the reason is that markets have allowed Japan to borrow at negative real rates, so at lower levels than the sort of like real growth potential that could be achieved.

Unfortunately, in the Western world, this kind of like bullet has been shot over COVID. So pre-COVID and in the last Trump mandate, so Trump 1.0, we'll say, was able to borrow at the beginning of his mandate at like negative real rates. So because markets were in the kind of really entrenched disinflationary mentality,

So if you can borrow at minus 1%, you should, and you think you can actually achieve some growth, you should borrow as much as you want. And that's exactly what's happened over COVID. Real rates were negative and governments went full on for it. The issue is we're not in that, obviously, bondholders got burnt massively.

basically landing at negative rates just to get hit four years later by pretty much like 20% of inflation post-COVID. So this is not, this bullet has been shot really. This is not going to happen again. So, which is also why, you know, post-Trump election, you've had this big steepening of the U.S. curve and why real rates are 2% and higher.

basically unable to get a lot lower than that, which is about the expected productivity gains. And the reason is that

If real rates were lower than that, you would give a sort of like another shot at basically trying to borrow into prosperity. So that's why I actually keep saying the curve will continue to steepen and that I'm not recommending any long duration, even if I truly think the name of the game in 2025 will be back to worry about recession.

And so you've got this chart comparing nominal 10-year yields to the growth potential of the U.S. economy. And for much of the past, the vast majority of the past 20 years, the bond yields have been below economic potential. So in 2012, let's say a 3% 10-year note was cheap compared to the economic growth potential of 5%. But now 10-year yields are...

It's kind of, they're still below, but they're getting very, very close to potential aggregate earnings growth. And that's bad. So you're not getting a good return on your investment. If the government is borrowing at 5% and it's only growing at 2% with that money, it's a bad investment. All you're doing is basically exploding your debt to GDP ratio if you do that. And what's happened post-GFC is that markets were inviting borrowing

because we needed that kind of shock out of the disinflationary mindset. But, you know, again, this can only happen once because then like bondholders got burnt and they won't be burnt again. And I find it really interesting as well to, I know we're talking about the US, but, you know, in Japan, the same thing has happened. Basically,

The last sort of like political change has been brought out by the weakness of the yen and inflation as well. So even in Japan, I think we're coming closer

to a time where markets are going to be a lot more vigilant about what governments are doing and basically preventing the sort of like borrowing at 60 year old, which obviously no bank would be allowing, right? Again, if you go to your bank at 25, try to borrow, they'll be, yeah, sure, sure, Mr. Farley. You know, if you come at 60, you better have a really good plan. And so I think it's really that

And obviously that's the reason why crypto has exploded as well. The sort of risk in the future that governments keep trying to borrow into prosperity and basically debase the middle class, debase the working class. And so I find that argument interesting.

Trump talking about potentially allowing Americans to pay their taxes in crypto, like basically making crypto legal, is extremely interesting because, again, it's basically preventing a government to shrink its debt-to-GDP ratio by just basically debasing everyone. So, again, brilliant idea, but in the short term, how do you...

How do you make the dots connect in terms of macro? Because if you can't debase anymore, then you've got a huge debt-to-GDP ratio problem. How does Bitcoin or...

I mean, how does US government adoption of crypto prevent the debasement of everyday citizens by an expansion of the debt to GDP ratio? And I'll just grant you that debt to GDP ratio going up is debasing people. I could argue with that, but I'll just grant you that. How does crypto solve that? Well, obviously, you can't print crypto, right? I mean, as far as I know. So, I mean, basically issuing debt and basically

exploding your debt to GDP ratio is basically printing dollar. The reason if you suddenly wish you can't print because it's a hard asset, for me it's

a bit the same as crypto, I like good quality land. It's all assets that you can't basically print and that AI can't produce. So I'm trying to really focus on those assets personally. So yeah, for me, it's like as simple as that. It's basically like gold, you can't print it. I think there are new tokens created every day where it is being printed and the supply can be very infinite. But for all to say, Bitcoin,

Absolutely. 21 million. That's all there's ever going to be. Sure. How does Trump embracing crypto solve that? Because in the gold standard, let's take 1925. Go back 100 years. 1925.

The dollar was pegged to gold. So if governments borrowed too much, they would basically have to pay it back in gold and then gold would flood out of the country. It must be deflationary. Yeah. Yes, exactly. So I understand if the dollar is tied to Bitcoin, of course, that would be very disinflationary and very, very, very strongly disencourage government borrowing.

But how does... I mean, a strategic Bitcoin reserve is not... That's just the government owning a bunch of Bitcoin in the same way the government owns a bunch of gold now. We don't have a gold standard and that's not a Bitcoin standard. So how does... Allowing Americans to pay their taxes in crypto and Bitcoin is a big thing. And basically making it legal is a big thing as well. And then obviously it's all about

things happening at the margin. But if at the margin you've got more and more circulation of crypto and less and less circulation of dollar, then by design you can debase less and less, right? It's like emerging markets dollar rising. Suddenly you can't go back to just inflation.

looking at whatever happened in Argentina, Turkey, and et cetera. Once you've dollarized, you basically stuck, basically completely become enslaved into what the Fed is doing. So same thing if you used a lot more crypto, then you would basically become less and less tied to the Fed, less and less likely to debase, and government would have to

Right.

So for me, that's the reason. I feel like if crypto as an investment asset, it could just go up a bunch in the same way stocks and private equity has gone a bunch. Like, I don't see exactly how that prevents government debasement. Like the fact that the S&P has gone up because there's a shortage of stocks. I mean, there are fewer stocks now than there were 20 years ago.

Definitely true in terms of the number of companies that are listed. They've just gone up a bunch and the government deficit has gone up, but there's been a lot of debasement. Stocks is not the same thing, right? Obviously stocks go up when debasement happens, right? That's the kind of one way to hedge.

Because stocks are like, have a direct link on inflation by earnings. So that's why stocks have gone up. The fact that stocks has gone up is actually telling you the extent of the massive debasement that you see between the stock performance and pure earnings performance, income earnings performance.

Right. I think the reason stocks go up ultimately is because of earnings growth and growth. And there has been earnings growth and growth because of debasement, because there hasn't been a lot of organic growth. But like in the 60s and 70s, there wasn't debasement. I mean, debt to GDP went down, but that was from organic growth. And now we have not that. Yeah. Obviously, in the 60s, 70s, you had the boomers coming online.

So you are, I think working population growth was like, at some point was like 5%. So today you basically are at negative level. It's a huge difference in terms of what you can borrow, what you can, and the sort of like macroeconomic cycle and macroeconomic tensions that you get, right?

So long term, you see a lot of the Trump programs in aggregate expanding the deficit more than it's reducing it, which would be expansionary. Not sure about that. We haven't talked about tariff. OK. Yeah. Let's talk about that. Yeah. Because tariff does increase the government income by $2.7 trillion, roughly from 2026 to 2035. That pales into comparison in terms of the spending. So it does raise money, but it also probably will reduce inflation.

American consumption. However, the idea is it's going to disincentivize buying from abroad and it's going to incentivize buying domestically and that will incentivize building domestically, which will be stimulating. So for me, I think markets are not worried enough about tariff. Many are seeing tariff as a kind of bargaining chip, especially when you're talking about Europe.

So some are talking about like 10% tariffs, some are talking about 20%. On China, it would be 60%. For me, I would really like to remind everyone that one of Trump's idols is like Mike Kingley, who basically was basically heading the U.S.,

at a time where most of the income was coming from tariffs rather than income tax. Yeah, President McKinley, president from 1897 until his assassination in 1901, President McKinley. I didn't even know he was assassinated, actually. Thank you for the... So you could actually... For me, tariffs is for Trump much more of an end in itself than a means to an end.

And I believe more and more that it's actually justifiable by the huge disparity of purchasing power, not only between the U.S. and China, but also between the U.S. and Europe. So, and that, I think there is a point to be made that you could actually generate income via tariff, that it would be a one-off in terms of

inflation. And that would be massively disruptive for the overall demand pie, but that in the end, the US would be getting a fair bit more of that demand pie. But in the meantime,

I think the dollar would strengthen a lot. And you are in the kind of like a super US exceptionalism, which for me is the one thing that I don't see disappear anytime soon. It's the one thing I was like on the election. I was like, strong dollar, this has legs. And I could actually see a euro making new lows.

new all-time lows on the back of that. I don't think this is going to be like a six-month thing that just gets Europe into spending more on defense. I think this is really like a strategic way to fill the U.S. purse to be able to potentially cut income tax. So more tariffs, less income tax.

smaller current accounts deficit and and so like tariff is is a main thing and i think it's a strategic tool a strategic way to actually fill the gap uh in terms of fiscal deficit that you're talking about right now so i'm not at all at all saying that the fiscal deficit will definitely widen

If you're looking at the estimation as to how much it would widen according to all the Trump promises, you're looking at the fiscal deficit that goes to 4%, and tariff is part of that. And you can basically pretty much achieve all your tax cutting at the domestic level. So that's a really interesting way to look at things. And obviously, this is massively disruptive tax.

for global capex. Don't forget that half the global trade is actually intermediary goods and equipment. So you're potentially headed to huge disruptions globally and in the US as well for 2025.

So wait, sorry, you said you don't think that Trump's policies would expand the deficit, but then you also said that debt to GDP would go to 144%. But maybe that includes the deficit going down, but debt to GDP goes up. Yeah, I mean, basically this year for the debt to GDP not to increase, you will need zero budget deficit. And that's because basically real rates are about at the same level as economic potential.

So you basically, if you completely tighten your belt, you basically just stabilize your debt to GDP. But obviously, any kind of deficit from here does rise the debt to GDP ratio.

So it's just about what will be achieved versus promises and how much of it will lead to true growth rather than just a sugar rush and higher rates. But yeah.

And so the debt to GDP is going to go up no matter what, unless the deficit is literally zero because interest expense is so high. And even if the deficit is actually zero, you would still get potentially the debt to GDP ratio increasing because you're going to end up in recession. So it's sort of like you need a productivity miracle for the debt to GDP ratio to stabilize.

Because if you've got no deficit, that probably means that you're fired after government potentially have to tighten your belt on subsidies.

as well, benefits, sorry. So you're probably in recession in the short term, which means like your debt is stable, but your GDP is collapsing. So your debt to GDP ratio is increasing. It is a real killer. Debt to GDP ratio without organic growth is a proper killer. And that's where the capitalism malaise comes from.

It is. It can be a killer. And I'm not saying everything's going to be fine if you get to 1000% debt to GDP. But it is true, Juliet, that in 2009, 2010, very well-respected economists came out. They said if debt to GDP gets above 90%, 100%, there's going to be a crisis. Economic growth is going to collapse. Debt to GDP is now at 125%. And growth, maybe it's because the debt has gone up, but growth has been high and it's

I think the sun still rises when it's dead at the GDP at 100%. I'm not calling for a crisis at all. I'm just saying you will not stabilize. And really the problem with it is that you're paying more and more interest and less and less benefits, education, medical care. And that's where you basically have massive political instability. So I'm not calling for...

a crisis at all. I'm not particularly worried macro-wise by higher debt-to-GDP ratio. I mean, Japan has done it for years. What I'm saying is it's got very clear macro ramifications in terms of the sort of like rising inequalities, the fact that you're going to struggle more and more to basically

stimulate demand, and it's going to be harder and harder, especially if you can't debase, which is basically what's happened post-COVID. So yeah, I'm not calling for a crisis. I'm just saying there are different avenues that can be explored. Some of them have already been explored, like inflation and immigration. Clearly, voters hated them, and it didn't make anyone happy.

In the future, we're going to try for huge productivity gains, which is going to come on the back of AI efficiencies.

but there is a price to pay in the short term to actually get this sort of like dark knight towards like huge efficiencies. And then you also have to make sure that new growth that is actually shared more equally, because if you end up basically just having it all into profits, you just end up into more political trouble.

And you say the bond vigilantes are back and you say that Trump 2.0 cannot afford to fight demographic headwinds via deficits. So they can't afford to fight it, but they probably are.

And so what are the consequences? And I'll also just make a note that bond vigilantes are back in that, you're right, term crema is expanding and the 10 years that's above 4%, it's no longer at 1%. But I would say that is, the bond vigilantes, they are reacting to high rates of nominal growth and particularly high rates of inflation and those risks. We are nowhere close or not close, I would say, to the UK September 2022 level of bond vigilantes

where a government budget gets released and then the bond investors, fixed income markets worry and freak out and say, the government is borrowing too much money. There's going to be too much issuance. There's a buyer strike. That has not happened in the US at all. So we are at stage one, but not stage two. I agree.

I don't think it will happen. And the big difference between the UK and the US is that the US still has the benefit of having the reserve currency of the world, right? When you've got, and also the rest of the world being kind of like in DC trends, meaning like 10-year US is like super interesting on a relative level basis. So yeah, you can't really compare the US with the UK.

And I don't expect the long end going completely lunatic. I think it's much more likely that the escape valve, in terms of if you really get like a big issuance and like widening of the fiscal balance,

deficit and an attempt to basically borrow to achieve more growth, I think the much more likely escape valve than much higher long-end rates in the US is actually a much stronger dollar. And I believe much more in a stronger dollar than higher long-end. And why do you think that the dollar is going to strengthen? And define what you mean by American exceptionalism. I don't even know where to start. Obviously,

Everything that Trump wants to do in terms of whether you want to go the Musk way of like sort of getting Europe to adopt US technology in terms of energy, energy storage, energy renewable, basically getting the whole Europe to buy more US technology. And basically that's a way to fill the current account gap.

So that's one thing. Europe basically has nothing to say on that because it's been way too reliant on U.S. demand for too long.

So that's the one thing. I mean, the main thing is really technology and the fact that the U.S. is able to actually get the rest of the Western world to adopt its technology and to basically feed the profits there. Whether you're looking at the Magnificent Seven, it's all companies that are international and that have very little competition. So for me, that's really what's feeding technology.

US exceptionalism. The fact that there are so many firms that are headquartered in the United States, but they have a global reach and companies in Italy and France and Spain all use them and the money goes to those companies that are headquartered in the United States. But does that go back into the current account, which is basically the trade deficit or surplus plus services? So

Before we talked about deficit, that's talking about the fiscal, the government. Now we're talking about trade, the current account. Does when Google makes so much money from European people using Google, does, I know they store money in Ireland and stuff. How does that affect the current account surplus? So for the current account is goods and services. The services, and shout out to Joseph Wang and the DEA where this came from, is publicized.

So the U.S. sells more services than it buys. So that's all the magnetism of seven companies. But it buys way more goods than it sells. And that's primarily China, Vietnam, the manufacturing leading the U.S. And that is related to all these social issues we're talking about. So the current account is on the whole negative. But for goods, it's way, way, way more negative. And that's modestly offset by positive services. Really?

And I was just saying that. So you're saying that basically the positive services account is good for the dollar. But why isn't the extremely negative current account bad for the dollar? Yeah, but I mean, obviously, if you add tariff to that, it's not about being good in absolute terms or bad in absolute terms. It's just like about being better or worse.

So if you add tariff, tariff is obviously on goods, not on services. Or at least that's not what they're talking about yet. So yeah, on the margin, it's just extremely positive dollar, in my opinion. So tariffs would be positive for the U.S. dollar. How are you thinking about the stock market, Juliette? I think the stock market is extremely expensive.

And that's the reason why, and I don't buy into the cyclical uptilt that markets have been pricing since the election. I think markets are way too focused on

on the sort of medium-term positives and completely blinded by Musk, Trump, and them. Too blinded to actually consider properly the direct implications of all the promises that have been made and that are likely

to be tried. So in that way, I'm still, I've gone actually long, gone back long tech, actually Tesla versus Russell, kind of like betting, yes, you can continue to bet on like massive productivity gains and stemming from like, you know, computer, quantum, quantum computering, AI, and

Also, like, you know, the promises that Musk made that he will basically power the whole planet with the sun, which also, I think, has to be taken really seriously. So I'm happy to buy all that. But what I do not believe is that Main Street will benefit, and at least not yet. Surely not in 2025. And for me, Russell 2000, as a small cap, is really like the Main Street.

So the giants will continue to win versus the more traditional kind of sectors. So I don't buy at all into the cyclical tilt and the sort of like a cyclical outperformance versus defensives that we've seen post-Trump. And I think that will be the big challenge.

turned around in January, in my opinion. Interesting. And so since the bottom of the market in October 2022, the defensive tech names have led the way and the cyclical small cap Russell 2000s names have suffered. But over the last 10 months, like this is your date,

The Russell 2000 is actually up more than the technology company. So you expect that to reverse and you express it long Tesla, short Russell 2000. But taking out the idiosyncratic single name, that also could be expressed as long technology, short Russell. Yeah, long technology is a bit, I mean, I was actually long tech versus Russell until mid-July. So actually like that gain was like 30% over Russell.

12 months. So, and, and actually it's, you're right that it's come back down a lot. And Russell has massively outperformed tech for the past, not just since the election, but actually since mid July. Yeah. When I said Russ, Russell has outperformed the S and P 500 year to date. I'm not talking about the tech. So I thought you were talking about tech. So yeah, I don't, I don't believe in that. I don't, I don't believe that it's got legs. Part of the reason as well is like the promises on deregulation.

I think that's got a lot of, there's a lot of reason to believe that will happen, but it's more a potential gain for the sort of like oil and gas industries that are directly linked with like federal laws. If you're looking at smaller businesses, state laws are much more important than federal laws. So I think deregulation will happen, but it's only a marginal positive.

What I could see as a very strong positive would be, for example, on the tax basis, basically simplifying the tax code. That could be a massive positive for small businesses, but that's not really something that's been discussed. If you look at the Small Businesses Uncertainty Index, we're basically at all-time highs in

So, and with no interest in CapEx, no interest in hiring. And for me, that's really the main street we're talking about. Like deregulation will happen, but it won't have a big positive impact. I think the one positive impact could be from like simplifying the tax code, which obviously is not a big problem at all for the large international companies who can basically use like loopholes and tax havens to

basically optimize their taxation. But for small businesses, which are not able to benefit from all those loopholes and to optimize their taxes, simplifying would be quite a big thing in terms of increasing confidence. As you referenced earlier, private payrolls is basically running at a recessionary level. And

this record economic uncertainty that you worry could breed economic paralysis. And also for small businesses, as you said, final demand is increasingly problematic. A lot of people are saying now that sales are a problem, which was not true in 2023, was not true in 2022. Juliet, over the past two years, there's been a fever pitch of recession worries from Wall Street, from the economists. They have been wrong. You were right that

the recession was not the thing to worry about. And I believe a lot of your case hinged upon the fact that this cycle was driven by very large income gains and that the basic market was really, really strong. So you should switch your view. So why was the argument that made you right then no longer true? And why have you switched your view about now being worried about a recession? What is true now that wasn't true in, let's say, January 2023?

What was true in January 2023 that isn't true now? Okay. That's a really good point. I think we should remember that everybody started 2024 being like really worried about recession. And I did a few researches.

interviews saying, I mean, to me, that was really the time in my career where I really was like talking to clients. Everybody was absolutely certain that the Fed was going to slash rates like 250 base point. And I felt like I lived in a complete parallel world because what I was saying was just completely the opposite. The reason is that wages has basically got a lag on inflation. So basically wages are fixed

on past inflation. So let's say you see like a 5% inflation last year, you're going to go to your boss tomorrow and you're going to be like, look, you need to increase my wage. If you've got no bargaining power, you might get 5% or 4%. If you've got bargaining power, you'll get 6%.

The point is like when you get a wave of inflation, wages lag. So what we saw in 2022 and 2023 was basically the huge shock of like real income loss from the fact that you didn't see inflation coming. You didn't have time to react and basically your wage to adjust.

What I expected in 2024 was exactly the opposite. So massive disinflation from like energy and from like the basically the natural gas

Inflation coming down because of supply shocks dissipating and basically demand coming down as well. So you had the huge disinflation, which I think was like more than 5% since mid-year last year. Wage growth was still really strong because it's lagging. So you look at everywhere in the world and that's really where confidence has been coming from, where you've just had

a 10% increase in your wage and you see inflation collapse, you feel like a massive winner. After being a loser for two years, you actually turn out to be a winner and you actually see real wages rebalancing. For me, that's really what's happened until even this summer, we had the large increase

full in energy prices this summer. And for me, that's really the reason why the economy has done so well in Q3 as well, where you had a large release of purchasing power from lower energy, lower goods prices into the services sector, which is the reason why it's remained strong. I really struggle to see any kind of like disinflationary shock from now. So let's say inflation kind of stays around 2.5%, 3%.

But what I do see is wages coming down. So you're going to see in 2025, you're going to see wage growths fall down quite dramatically because the labor market is much looser than it was at the beginning of this year. And no more disinflation. So you're going to see your real purchasing power actually collapse in 2025, even if you don't lose your job.

inflation shot up to as high as 8 or 9%. Wages only peaked at growing at 6.7%. So prices were going up way faster than inflation over the past year, year and a half. Actually, prices have gone up less than wages. So inflation is now at 2.53% and the wages have been growing at 4.55%. So real incomes have gone up, but they still have been debased just because they got destroyed so much in 2022.

You've got a cumulative chart showing the impact of inflation, how it has drastically, I think, since January 2021 or January 2022, it got up way more than prices, even though over the past year it's gotten better. So where do you, so let's say over the next year, you see inflation staying at 2.53%, wage growth, which according to the Federal Reserve Bank of Atlanta, nominal wage growth is at 4.6%. Where do you see wage growth headed the next year?

I think we're probably going to get back to pre-COVID, but wages are only one part of it. Obviously, I think there's going to be job losses as well, which overall diminishes real aggregate earnings from the economy. So assuming that you basically keep your job, you're not going to get any increase in real purchasing profits.

power next year or very little. When this year you had like a potential for 4% 2024, which allowed your consumption to stay really robust. That is very unlikely to happen next year, even if you keep your job. But in all likelihood, there will be a lot of job losses as well, which means that the aggregate real earnings produced by the U.S. economy is likely to basically shrink.

Interesting. Wow. And Julia, we haven't talked that much about Europe. What is your outlook there? And isn't also the case that inflation has fallen much more rapidly than... We're growing a lot more now in Europe, a lot faster than prices because the price of natural gas is no longer $40.

Yeah, I mean, Europe has been like a byproduct of the US, but like a sort of like a much smaller level. What's really interesting in Europe is you don't get the sort of high productivity gain potential. A lot of the economies are like services driven, but more like, you know, hospitality, which is much more difficult to replace by AI. So

What's really interesting in Europe is labor markets have been extremely strong, even despite everybody calling for a near-term recession. Obviously, there's huge... I mean, you can't talk about Europe without talking about the massive divergence between what's going on in Germany and what's going on in France, where in Germany, everybody's saying that is becoming a problem.

In France, everybody still wants more debt or at least more deficits. And I don't know what's happened if France still has a government right now, but you're almost kind of like either you're going to have no government or you're going to spend a lot more, even if actually it's been working against people because especially in France, wages have not kept up at all with the level of inflation. So it's the kind of,

Germany versus France dichotomy. Germany basically being a manufacturing economy. France being much more driven by services. But overall, if the U.S. bends next year, there is everything to bet that

Europe will be in a recession. And Germany is one of the weakest economic countries now, which most of the time is not true. 10 years ago, Germany was the strongest country. Now it's still a very big country. But I mean, industrial production has been flat for a very long time. Real GDP, right? That's true, right?

Yeah, and obviously the reason is it's all like the bet on manufacturing technology where the US is winning. Well, Julia, it's been a pleasure to speak with you as always.

People can find you on Twitter at JulietteJDI. Two Ts in Juliette, of course. Tell us, what services do you provide at JDI Research? So the service I provide is really everything you need macro-wise to be fully aware and with high conviction of the underlying macro trends that are driving markets.

And my view is I try to give out as little noise as possible so that my clients are able to use market noise and volatility to put the trades, the underlying trades I believe in. So I write down monthly, which is about 25, 30 pages. I write emails in between for any kind of game changers.

I also have a premium service where I speak daily to clients about how the macro game is evolving in between reports. And also I give very clear recommendations in terms of like, you know, what I see kind of like connect. My job is to connect the dots between what I see in macro and what is priced in markets. I basically thrive online.

When I disagree with consensus, I love it when markets go full on into a narrative helped by robots. And that I'm like looking at things and I'm like, this doesn't make any sense. Pretty much happened in January this year. I'm looking to the same kind of amazing opportunities in 2025 that we've seen in 2024.

So I really believe that GDI research will add value to any kind of macro or non-macro investment strategies.

One of the things that I like about your research is that very often the trade is very clear. So in the report you wrote, it's long Tesla, short IWM for the Russell. You also are bullish on the two-year note, which currently yields 4.2%. So when I hear someone's bullish on the two-year note that yields will go down, that basically means to me that over the course of the next two years, you think the Federal Reserve will cut interest.

by more than is priced in over the next two years. A lot more. Yeah. Yeah. A lot more. Okay. Tell me about that. Yeah. I mean, we just go back to the chance of recession and also the fact that one of the things I looked at in terms of, in a way, you need no one to believe in a recession for recession to actually happen. I think we are in really interesting markets where you've got a diverging real

equilibrium rate between the capital and the real economy. I think I see the economy being a lot weaker. So I think the real equilibrium rate is a lot lower than what markets believe right now. And the interesting part is that the fact that consensus believes

that a recession cannot happen means that the curve can be a lot steeper, you're pricing a lot less cuts, and that basically, you get that sort of like those tight financial conditions actually starting to hit the consumer. And I think that's what will happen next year at the same time as we see the sort of like a micro experiment that Trump and Musk are going to be putting together. So this is going to be explosive, really.

I'm not giving a definite sort of recommendation here. I mean, that's my views at the moment, that I think the market is not pricing enough cuts and that cyclicals are not going to, the sort of cyclicals outperformance as of a shot. But I'm ready to change that view when I see what's actually implemented. The last report is really about being able to start the year

fully ready to activate any kind of like trading lever according to what actually happens versus, you know, promises and also sort of like market belief in the medium term trends versus short term reality of what needs to be done to achieve those sort of like productivity gains that markets are currently pricing.

So as we record in early December 2024, you like the two-year note, you like the dollar, you generally like the idea that the yield curve will continue to steepen, and you like Tesla versus the Russell 2000. Of course, your views could change tomorrow. Juliet, a pleasure as always. Thank you so much. Thank you, everyone, for watching. A reminder, you can find Monetary Matters not just on YouTube, but on Apple Podcasts, Spotify, and any other place that you get your podcast. Until next time.

Thank you. Just close this door.