Global Macro: Tariffs and the Fed Policy ft. Joseph Wang
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Welcome back to Real Vision. I'm Ash Bennington. Today, I have the pleasure of speaking with Joseph Wang, author and operator of FedGuy, formerly senior trader on the Fed's open market desk. Fed meeting starts today, ends tomorrow. Perfect timing to have you here, Joseph. Welcome back to Real Vision. Thanks so much for having me. It's a pleasure to be back.

Well, it's great to have you here, Joseph. I teed it up a little bit at the top of the show. All eyes on the Fed right now. Fed signaling last time a slowdown in the rate cutting cycle. 50,000 foot big picture. Where are we right now in your view? So right now, I think there's some disagreement on the FOMC. As you've noted, over the past couple of meetings, we've had some dissents. And, you know, the Fed is usually a very consensus driven organization. So that's not hasn't been common over the past several years.

My sense is right now that the more important people at the Fed, say, Chair Powell, Governor Waller, they're actually very dovish. And we'll get into a little bit why. But on the other hand, we have these new people who are a little bit more hawkish, and that's making them a bit more cautious going forward. Now, the market is only pricing in about one or two cuts this year. I think that is really much too hawkish. I think the Fed is probably going to cut a lot more. Now, the most...

recent signal that we got is from Governor Waller, where in response to the softer than expected inflation data we got recently,

He came out and said that he'd be open to cutting rates, you know, at least once the first half of the year, which the market did not price in. So if you listen to Powell and if you listen to Waller, every time they have a stickier than expected inflation print, they kind of go out of their way to explain it away. Now, Chair Powell most recently has basically invented up this new reason why inflation is going to be transitory. And that is that he's saying that, you know, a lot of the inflation stickiness in the

in the index, it's from non-tradable services. Basically, they are inflation that's model-based rather than transaction-based. So that stuff is just another reason he's giving to downplay the stickiness we're seeing. And so you can see that their bias is strongly, strongly to be dovish.

Now, as inflation, I think, comes in lower than expected going forward, we already have leading indicators in rents suggesting that shelter disinflation will be progressing. I suspect the market will finally be a little bit more reasonable. And rather than pricing just two cuts or one cut this year, maybe we can have as many as four. And depending on what happens in the equity market, maybe even more than that. Hi, Raoul here.

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So let's talk a little bit about inflation here, your view of it and what we see happening. PCE right now at 2.4%. Obviously, this is the Fed's preferred measure, slightly above the longer term average of 2% of the Fed targets. Talk a little bit about inflation and the balance between the concerns about inflation

job market and growth. Talk a little bit about how that gets hashed out. As you point out, there's some disagreement on the Fed now about the perception of the forward path of those trajectories. Talk a little bit about what that debate looks like behind closed doors.

You're exactly right. So the Fed's reaction function obviously has to do with their mandate, which is full employment and price stability. Now, over the past few years, we've seen the unemployment rate very, very low, trending higher, and the inflation rate go from very high, trending lower. So as inflation has come down and as the unemployment rate has gradually risen, the Fed's

reaction function has become more balanced. When inflation, of course, was when PCE was 7% year over year, of course, it's all about inflation trying to hike rates. Now that PCE is, as you know, just a little bit above their target. And at the same time, we have the unemployment steadily rising over the past, say, past year. They're a little bit more worried that, you know, maybe, maybe we might be overdoing this. Maybe, maybe that's

that the unemployment rate will continue to rise. And that was the key rationale behind the surprise 50 basis point cut last year. The Fed was looking at the data, thinking that maybe we're tumbling into recession. At that time, the unemployment rate had recently shot up. And so in order to get ahead of a potential recession, they cut rates by 50 basis points.

Now, over the past few months, data has come in better than expected. So there's less of a recession panic. And so you can see them trying to talk some cuts out of the market.

Now, an important component in understanding how the Fed balances these two mandates, unemployment and inflation, is how they view their stance of policy. So a lot of people have been mentioning, hey, hey, you know, economy is fine. Why are you cutting rates? That's because the Fed thinks that they're being very, very tight in their monetary policy. So they have this concept.

called the neutral rate. Whereas if you set monetary policy above the neutral rate, you're slowing the economy down. And if you set monetary policy below the neutral rate, you're stimulating it. And so that's how they toggle their stance of policy. It's not just up or down. It's up or down relative to where they think neutral is. Now, from their standpoint, neutral rate, maybe two and a half, maybe 3%. There's some discussion about that.

But right now, what they all think is that the stance of monetary policy, you know, four and a half percent is far above neutral. And so they're thinking that, you know, unemployment rate is rising, inflation is coming down. But at the same time, we're still very restrictive in our stance. So we got to come down a little bit, being a little bit less restrictive and maybe eventually towards something more neutral. So you need all these three components, both inflation, inflation,

unemployment and also how they perceive their stance of policy. That is to say neutral to understand what the Fed is doing now.

Yeah, and of course, Joseph, exactly as you point out, this idea of the neutral policy rate, the natural rate of interest, R-star, whatever you want to call it, this isn't something that you can look up directly. It can only be inferred from other indicators. One of the challenges to understand whether or not it's the gas or the brakes relative to that R-star rate, it gets tricky, it gets challenging. Let me ask you about unemployment. Obviously, most recent numbers

coming out earlier in January, I believe on the 10th, this is the December unemployment report from Bureau of Labor Statistics, 4.1%. Is there something about that 4% threshold that the Fed looks at just because it has that headline number effect that many people obviously look at this rate, the U3 rate, to see where the employment and labor markets are?

So I think there's a couple components to this. One is the trajectory and two is where the current unemployment rate is relative to where they think the neutral unemployment rate is, where the non-inflationary unemployment rate

So if you look at the trajectory of the unemployment rate over the past year, it's been trading higher. It hasn't been a straight line, but the direction is unmistakable. It's going higher. And historically speaking, when you look at this data, when the unemployment rate goes higher, it exhibits momentum. So it continues to tend to trend go higher. And that's where the Salm Dudley rule comes from, right? They observed that when unemployment goes up, it usually continues to go up. And so that's a worrying sign. You don't want the unemployment rate to shoot up.

So in addition to that, you know, they have these more model-based approach where they think of where the unemployment rate would be if the economy was in neutral. And that's, the unemployment rate is, you know, there's various ways of looking at this, but maybe 4.3, 4.4, something like that. So it seems like the unemployment rate is almost moving up towards that level where you would actually be potentially in a recession. And so that kind of

that kind of causes them pause now in addition to that they don't just look at the unemployment rate but there are many other signals in the labor market as well so if you look at for example job openings if you look at wages if you look at quits rates the whole totality of this suggests very clearly that the labor market is slowing and of course anecdotally we see all these

Announces on Bloomberg where you have companies like Meta and so forth laying people off. So it's very clear that the labor market is slowing, the unemployment rate is rising, and they're careful not to make it overshoot such that we get more unemployment than the economy actually needs.

So let's talk a little bit about the political framework of where we stand today. Obviously, lots to talk about there on that front. Donald Trump been in office as president for a little over a week now, doing some jawboning of his own from Davos, talking about the Fed and interest rate trajectory, making it very clear that he would like the cutting cycle to continue. Talk a little bit about the implications of that and how the Fed might be thinking about it.

That's a very good soundbite he'd had that he would demand interest rates to be lower. But I think you have to have some context in that particular discussion. He laid out a very clear vision of how he wants interest rates to become lower. So first off, he says he wants to get oil prices down, right? He wants to drill more. He wants to have OPEC cut open.

opec increase their production and that will make oil prices go lower and lead to rate cuts and that that's actually a reasonable plan because if you look at historically the relationship between oil prices and inflation it's very clear that there are oil prices lower prices lead to lower inflation expectations right people don't consume oil but oil is a major input into refined products like gasoline so when oil goes down gasoline goes down inflation expectations go down that's helpful for the fed

It does have an impact on headline inflation as well. Gas is directly in headline inflation. Now, the core inflation component, there's less of a connection, but there is some degree because when you have lower oil prices, things like jet fuel and everything else, diesel come down and that does feed through into the core inflation as well.

So with inflation just a little bit above target, if we do get oil prices down significantly, yeah, I think that will have a downward pressure on inflation, make the Fed more comfortable towards cutting rates. Now, whether or not Trump can get oil prices down, I don't really know. I think that's pretty complicated, but it's a reasonable path.

Now, when we think about interest rates, we have to, I think what people really care about is not so much the short-term interest rates, let's say, what's the overnight rate, but really the 10-year yield, because that's really where interest rates feed into the broader economy, right? So the 10-year yield has a big impact on mortgage rates and has a big impact on where corporations borrow. Now, when you're thinking about the administration interest rates, first off, obviously the administration would like to have lower interest rates

Now, that doesn't mean that they will have to challenge the independence of the Fed, though. So from a policy standpoint, at the end of the day, there are many, many levers that the government can pull to try to make the interest rates go down without compromising the independence of the Fed. Of course, that is always a path. We hope we don't go down that path. But

One way, as we've just discussed, is to try to get energy prices down. Maybe they could pull some diplomatic leverage. Obviously, the United States is a big protector to many countries in the Middle East. Maybe that can encourage them to lower oil prices. But in addition to that, I think some obvious things are just through regulatory moves. And we've heard people like...

Now, Secretary Scott Besson talked about how, for example, we have a big asset cap on Wells Fargo. Maybe we could lift that. They could buy more treasuries. I think a more significant way that the Michigan go about doing this is just through regulatory policy.

Now, the Fed is independent when it comes to their monetary policy, but not when it comes to their regulatory policy. And that's why, historically speaking, when you have a new administration, the vice chair of supervision actually steps down from that role and lets a new administration pick someone else. Now, when Biden came to power,

Randall Quarles, who was the vice chair of supervision at the time, gave up his chair seat. And now that Trump is here, vice chair of supervision Barr has given up his seat as well. Now, I say regulation could play a big role in lowering interest rates because a lot of the reason, well,

A lot of the reason banks buy and sell certain things or have certain strategies is due to regulation. For example, right now there is a very big gap between swap rates and the 10-year yield. A 10-year yield is about 50 basis points higher than the 10-year swap rate. In theory, this is a risk-free arbitrage. It's free money because you can buy the 10-year funded in repo and then you can pay a 10-year swap. You can hedge out all your risks and you'll harvest the 50 basis points

returns. But banks don't do that because of the regulatory costs in putting up that trade. This wasn't the case pre-financial crises. Pre-financial crises, these spreads were very narrow or very wide. So, well, the gap was very small. There's a shift in how LIBOR and so forth operate. But

Simply these simple regulatory measures that the administration could do could have big impacts on interest rates. And not just that, maybe just outright encouraging banks to buy treasuries. So there's a lot of tools that the administration can do to lower interest rates. They don't really need to have any takeover of the Fed to do that. Although it seems like over time, as Chirpawo term expires, they could probably have someone there that's more efficient.

more on their team. Joseph, so much to talk about there. You just framed out all the key political, economic issues and many of the intersections between the two. So much to discuss. First, let's start with President Trump's argument here, at least as I understand it, which is the idea that as you are able to lower the cost of production of energy in the United States, ultimately that will have long-term downward pressure on

on inflation, which will allow, this is what we're talking about in terms of the neutral policy rate, the ability to have the US interest rates lower without causing that inflation as a consequence. I guess my first question is, how long might this take? Obviously, you can change regulatory policy with the stroke of a pen, but it's more difficult to actually change the long-term price of the

those assets, because obviously you don't just turn the switch and get more oil and gas out of the ground today or tomorrow. This is something that takes a lead time to actually do stuff in the real physical world. Talk a little bit first about how you see that dynamic potentially playing out.

So, you know, just talking about energy policy narrowly. So obviously the trying to reduce the regulatory cost of drilling to encourage private sectors to drill, that's going to take time. And my understanding is that many of the private companies don't really want to at this price. Obviously, it's in their interest to have higher prices, right?

Now, in terms of things they could do immediately, whether they could just follow President Biden and just open up their strategic petroleum reserve. Now, it doesn't seem like they're going to do that. Trump has talked negatively about doing that and talked about refilling the strategic reserve. But that is a potential lever that they could do. Now, with respect to

increasing the supply of OPEC, I think that's something that can probably be done probably pretty quickly, but it just depends on the willingness. My understanding is that there's tremendous amounts of spare capacity in OPEC, that they are exercising discipline, trying to maintain oil prices. So

That's something that I don't think we'd have to wait too much, too long if it were to materialize. And I'm not familiar enough with the politics here to say if it will, but it is a lever that I think that could happen. And I don't think it's something that would take a long time like regulatory policy. But I just make this point to say that when we're talking about interest rates,

It's a multidimensional thing where the administration can do many things to try to get the result. So we have to be careful not to be too narrow-minded. This is a creative administration that is, I think, doing many things that other administrations have not been thinking about, particularly when it comes to geopolitics and trade.

Let's get back to that chart, the 10-year Treasury yield chart that we have up there on the screen. I can't read the x-axis on that at all. Too small for me. I guess that's a five-year chart. That's what it looks like in terms of the shape of the curve. But what you see there on that chart is essentially this rise over the five-year period from, I think, a low of around $1.

Let's call it about 50 bps up to where we are right now with some peaks in between roughly four and a half percent, 4.575 right now on my screen. This chart is interesting because you see, obviously, that pretty dramatic increase in rates from the time of the pandemic. However, if you were to zoom that chart out and go back 40 or 50 years, you'll see that this has been essentially down 50%.

and to the right from around almost 16% during the first term of the Reagan administration to that low point that we hit during the pandemic. Talk a little bit about this broader context of what's happening to interest rates. This is perhaps the biggest macro trade of the last, call it 40 years.

So I think the great bull market in bonds is over, but nothing goes in a straight line. Now, my best view is that the 10-year yield is topping here and that we're going to see lower yields throughout the year. But I think the overall trend does seem to be higher if you're looking in the medium to longer term. And that makes sense to me. There are a couple of things that I think are very powerful in making interest rates

and inflation a bit higher than it was in the past. One of them, of course, is that we do globally, the sovereigns are just, I don't have a very, very large structural fiscal deficit. And that infinite fiscal deficit is going to have upward pressure on inflation and interest rates, right? At the end of the day, when you are a government and you are paying for goods and services by printing treasuries, you're basically just printing money.

Secondly, we do have a very clear global demographic aging. And at the end of the day, that means that there's less labor. But at the same time, old people, they continue to live, they continue to receive government benefits. So they continue to have demand for labor. That mismatch between supply of labor, fewer young people, and still

structurally strong demand for labor as old people you know they go on cruises and they go on restaurants and you know basically enjoy enjoy their lives that's that's that's continued demand so these are structural forces

That could potentially be solved by robotics and AI and things like that, but that is speculative. But at the moment, these demographic things, they are structural and they are not speculative. So these are things that I think are inflationary. But again, nothing goes in a straight line. Right now, as I mentioned before, I think the market is being much too hawkish on the Fed. The Fed is, I think, very dovish and very worried about unemployment. And at the same time, many indications that inflation is going to come down this year. Now,

Again, nothing goes in a straight line. I think it would probably go up again next year and the year after. But for this year, definitely lower inflation, higher unemployment rate. That suggests more rate cuts than expected. And that's going to bring the 10-year lower. Now, in addition to that, these are very, very big structural changes in how the world economic order works.

And I think that's not appreciated by the market. Now, if President Trump really does realize or attempts to realize his dream of a new trade order, and I think he will try at least, that's going to be very disruptive for the financial markets. And whereas the market perceives that to be inflationary, I think that the economic disruptions, the growth concerns far outweigh

any potential inflation impulses. And so that's going to lead to, I think, more cuts. That's my downside scenario when it comes to yields this year.

So much, so much there to talk about. We're going to talk about trade and tariffs in just a second, but I would be remiss if I didn't focus a little bit on the shorter-term market action. We've been talking about all these longer-term structural trends. Obviously, yesterday, markets hit a buzzsaw with this deep-seek announcement. I'm looking right now, Wall Street Journal opinion page, top-of-the-line story right now, the deep-seek

AI freak out. This is a really just incredible story. This idea that perhaps the United States is not as far ahead on semiconductors, NVIDIA and others in terms of the chips that are needed to produce AI markets.

absolutely doing backflips yesterday over this new AI model being posted. I should say, NASDAQ, which got the worst hit yesterday, up about 1% in trading here today at 11.30 a.m. Eastern time or thereabout. This is a really, really

really big story and an incredibly, I think, confusing one to see the single day market trajectory on AI news from this sort of very obscure field of understanding the intersection between semiconductors, AI logic and open source code. This stuff gets real complicated real fast. But wow, what momentum in markets yesterday on that news.

Yeah, it was pretty exciting, right? And one thing I'll note is that DeepSeek appears to have been known by many people for some time, and it's only just yesterday that the market reacted. This reminds me a bit about COVID, where we saw COVID wreaking havoc everywhere in the world, and then one day the market realized that was not good. So markets are kind of slow. So I think that was an interesting observation. Now with about DeepSeek, you

My understanding, again, I'm not an expert in AI, is that it's very efficient. So it significantly reduced the cost of AI.

So if you are someone who buys AI stuff, that's really good. You don't have to pay as much. If you're selling AI, well, that's not good because you can't get as good of a price. And that's doubly not good if you've already spent a lot of money in investments only to find out that you can actually receive the fees, the IFEs that you thought you would through your monthly plan or so forth. And I think that's causing a lot of disruption in the market as to...

as the market finally realizes there's this change. In addition, I think this also shows that

you know, there might be many other new entrants into the AI field that are innovative and that undercut the current incumbents. Now, this is something we see frequently in technology, right? So AI themselves, very disruptive, and it's no surprise that you would have other companies that come and disrupt them. So, you know, maybe this is something that we will see more than once, right?

It can't just be one deep seek. If they can do it, I'm sure other people can as well. So I think that should put people on alert that there could be many other minds in this field.

Yeah, very well said, Joseph. Obviously, we're right on the bleeding edge here looking at what happened yesterday. I mean, look, I understand this imperfectly. Clearly, I'm not an AI engineer. I'm not a semiconductor specialist. The gyrations in markets, some of the chatter that was happening is around this idea of things like the training cost of the LLM models, the reliance on extremely high-end, cutting-edge, bleeding-edge technologies.

AI chips produced by semiconductor manufacturers like Nvidia and also this open source movement. All of these things putting downward pressure on the price of AI, at least in the thesis, and creating a world with more available, cheaper and more ubiquitous AI. What a day, what a story. Obviously, something that we're going to have to continue

to watch still in many ways in this, oh, I don't want to call it the rumor phase, but man, when you see just markets move so quickly on news that's just so abstract and so abstruse. I mean, I think it's probably fair to say that 99.999% of the people trading those markets don't really have a deep understanding of the mechanics of how this technology works.

And honestly, even if you did, I'm not sure it would give you an edge because no one else trades according to that, right? That's kind of how markets are. One thing I'll note is that a lot of people are sold on NVIDIA thinking that we would have less demand for GPUs. And then you have new people coming out and saying, actually, because the cost of the AI is so low,

everyone would demand more AI. And so it actually increases the demand for GPUs. So basically, NVIDIA can only go up because when it's expensive, people buy more. When it's cheap, people also buy more. That feels like cope to me. So I think I would be really careful over there. I actually coughed up the 20 bucks yesterday, excuse me, to sign up for Gemini Advance and to start playing around with the technology. It's just so interesting to see and follow and watch what's happening in that space.

Absolutely. Okay, shifting gears here to something a little bit more long-term and a little bit more in the macro wheelhouse, let's talk a little bit about trade and tariffs. Obviously, lots of speculation about this in terms of the new administration. Some

perhaps some indications about where this might be going, but no real clear policy yet. Talk about 50,000 foot, how you see what's happening in trade and tariffs right now. So I think this is the most underpriced thing in the entire market. It's almost shocking to me. So right now,

We have news yesterday that President Trump, Secretary Besant saying that he would be open to having a 2.5% tariff on everything coming to the US. And then we have President Trump saying, you know, that's too low. I'm happy with something that's much higher. Now, I think the market has been accustomed to thinking that these tariff threats, they're just for negotiation. He'll never do that. After all, that would be bad for the market, right? But I think that that's where the misunderstanding is, because when you listen to people talk in the Trump camp about tariffs,

It is about negotiation, right? We saw that happen with Colombia just yesterday. But it's also about collecting revenue and it's also about reordering the global trade system. And these two goals, I think, are not being considered by the market. And these are real goals. You can see this because

If you follow President Trump over the years, since the 1980s, you can find videos of him going on TV and complaining to the world that these trade relationships, they don't work. They're not fair. We got to do something about it. And if you look at his first term, he did indeed levy tariffs, right? He is a president that is different from the presidents before. He has a different ideology, different view of the world.

And he has been repeatedly over the campaign trail talking to everyone and telling them how much money he collected through tariffs and is very open in that he thinks that tariffs won't make America rich because we will, of course, collect a lot of revenue. Now, that tells you two things, really. One is that we are going to have universal tariffs that are high and that are meant to collect revenue to try to reduce our deficit and, of course, make it possible to pass tax cuts.

And secondly, because of there's this industrial policy angle, we're probably going to have much higher tariffs on China and it's going to be part of strategy, not just for negotiations. And it kind of makes sense. And I'll talk about these two things separately. First, about industrial policy or trade policy, which are linked and also about collecting revenues.

So just this recently, we've seen that the Chinese have a trade surplus with the rest of the world of $1 trillion. That's a mind-boggling number, right? That means the Chinese are selling much more stuff to the rest of the world than they are importing, such that at the end of the day, they're earning $1 trillion. Now, that's actually not really supposed to happen, according to theory, because according to theory, you know, if you make money,

If you're a Chinese company, if you're the Chinese state, you make a whole bunch of dollars. Well, one thing you could do is you could take those dollars and you buy something from the United States, right? And so that would naturally balance. So you wouldn't have this tremendous, tremendous trade surplus. That's not happening. Imports actually are not that high in China. Alternatively, you can say that you import all these dollars, you sell them for RMB.

your RMB strengthens and so your exports become less attractive and so that trade balance, trade deficit balance is not happening either.

These are not balancing because the Chinese government has a policy where they control their currency and also basically expropriate the surplus of many of these companies and use them for reserves or to invest in the Belt and Road Initiative and so forth. So it's this policy that they have that is causing this trade imbalance. Now, labor and so forth in China is very cheap.

But that really doesn't explain why the mechanisms, why the trade doesn't balance because of these other mechanisms that we talked about. And so the United States is trying to balance this by basically noting that because China has all these subsidies, they're going to raise taxes on China to try to raise the prices of these imports to try to make sure that, you know, maybe...

people in the US won't import as much and buy more from America. It's a way to basically artificially boost the price of imports and encourage domestic industry. Now, this is potentially something that could work because the United States have a tremendous trade deficit. And so we're basically buying too much. It wouldn't make sense for that to balance. So that's one thing that I think is actually something that could potentially work.

Simply because the trade deficit is so large. And politically, it would be something that would generate employment. Now, there are potentially inflationary pressures from this. But before we jump to that conclusion, we have to look at the evidence. Last time we had tariffs, we actually did not have an inflationary wave. If you look at core PCE or PCE in 2019, it was actually slightly below target.

So it doesn't necessarily have to be inflation. And there are a lot of layers that this has to go through. For example, when you impose tariffs on a country, your currency strengthens. So even though the prices go up, your currency also strengthens. That absorbs some of the increase. Additionally, sometimes the price

But who absorbs the higher prices? It's not the consumer, but the businesses. And that's actually what happened in 2019. There's a study where a bunch of economists looked at over 100,000 imported products in 2019, 2018. And they found that prices did not go up at all. There was no consumer inflation because the producers, the companies basically had narrow margins. They ate the cost.

And it's also, of course, possible where even if they pass on the cost to the consumers, the consumers simply buy less of those products. And so there's no rise in the general level of prices.

whereas tariffs can potentially be inflationary. And it seems like the market perceives it as such because when we have tariffs news, we see the bond yields go higher. That's not necessarily the case, and it was definitely not the case in 2018 and 2019. In fact, the market was so much more concerned about growth that we had a total meltdown in the equity market in December 2018, and that led to rapid rate

cuts and much lower yields. And I think that's probably the most likely outcome of the trade war this year, actually. Of course, secondly, of course, we talk a little bit about revenue. Now, the United States used to be largely funded by tariffs, actually. But today, we don't-- basically, that's a de minimis amount.

Most recently, we imported about $3 trillion worth of goods on a volume-weighted basis. The tariffs on that were about 2.5%, so it's a very, very low tariff rate.

If we just increase that slightly, I don't think it would have that much of an impact on the economy, but we would carry a little bit more revenue. So I think it's about diversifying the revenue base such that the government has money to fund tax cuts and maybe to subsidize the losers of the trade war. And that's something that's been repeatedly emphasized by the Trump administration. Now, this is all to say that if we do have, if, as I expect, we do have

wide tariffs and high tariffs, that will be very, very market negative. And that will overwhelmingly swamp any inflationary impact that we might see from tariffs, just like it did in 2018. I know I've kind of talked too much, but I think that's at a high level how I see this. Joseph, what an

excellent frame around this just enormous issue. We could spend 90 minutes talking about trade and tariffs alone. You hit on all of the key points that are being discussed out there. Gosh, let me just go through and I was taking notes while you were talking.

So many interesting points. First, and as you began talking about Trump's view on this, it's really interesting because whether or not you love or hate these policies, I always find it fascinating when people say that President Trump is inconsistent about this or transactional or that he's all over the place. To your point, you go back to those

interviews on Oprah Winfrey, on David Letterman in the 1980s. It is astonishing how consistent President Trump has been in his views on this topic. This is something that he feels deeply and strongly and has for decades long before he was involved in politics. It is really fascinating. And, you know, there are a lot of other things you could talk about. But if you just focus on that, the question of

Is this view of President Trump consistent or not? Overwhelming evidence that he has been so strong about this topic since long, long before he was in politics. But let's talk a little bit about this. And this is one of the fascinating things you you you you you mentioned the the showdown with Columbia. Now, obviously, you can you can talk about that as being something of a bit of a.

personal contest between two guys who could use your own perhaps less polite terms to describe what that disagreement looked like. That's a different sort of kind of thing when you think about the, you know, this is something that's kind of an in-the-news-cycle issue, I guess, to put it mildly, versus the structural aspect of the revenue that's generated from tariffs, specifically to the $1 trillion China trade surplus with the rest of the world, we should point out, not just the United States.

But it really is interesting to see if this is kind of a durable realignment in the way that the government in the United States collects resources

revenue and also manages trade policy with the rest of the world. I mean, these are issues that are as large as one could imagine from a global macroeconomic context. Also, with these kind of interesting personal stories about, you know, the battle over what plane people are heading back to their countries. And I mean, these are just just very, very big issues.

Absolutely. That was a great summary, Ash. And these are things that we're going to be talking about a lot for the next few years. But what I would just note, and as you've noted yourself, Mr. Trump, very consistent on these. He believes in these issues. And these issues, these policy prescriptions he's been talking about, have big implications on global macro and on markets. And honestly, I just don't see that in the price, in the equity market, in the rates market either, actually. A little bit in the foreign exchange market.

But it is really fascinating to talk about when you hear Secretary Besson talk about 2.5% versus 25%. I mean, order of magnitude difference. What is a personality? What is structural? How does that shake out? I mean, these are really difficult questions to handicap. One thing I note is that Stephen Moran, who is a member of FinTwit,

a great, great economist. He has a plan and in his plan, it's a white paper. He says that we got to start something small, maybe 2.5% and we'll ratchet it up, ratchet it up. And I think they're following his plan. So they're starting at 2.5% and just kind of going up every month. So even though it's starting small, I think that if they continue with this plan, it could be much higher.

Yeah, so let's talk a little bit about this, this idea of diversifying the revenue base collected by the United States, potentially away from taxes and toward tariffs. As you point out, historically, tariffs generated a great deal of revenue. Also, we should point out during that period, global trade, less a point, less a less dominant factor in an economy around the world. I think it's probably fair to say domestic production

production and consumption a greater factor rather than trade. But is that something that we could see where we could see perhaps that line, the moving average of that line, begin to tick upward toward revenue generated through excises, tariffs, whatever type of

fees that are put on goods coming into the United States. And I guess the risk that the free traders going back, and by the way, these folks were very conservative Republicans in the Reagan era talking about free trade. Is there a risk that we see a diminution of

that global trade that has been certainly good for the aggregate. Although we could talk a little bit about, as you point out, folks who have lost on that trade and in some very, very real material, powerful and painful ways for individuals and families. That's the plan of the Trump administration. I think...

No, I don't know if they'll succeed. There's so many moving parts. And obviously, if you are on the other end of this trade war, if you're China, if you're Canada or the European Union, you're going to try to retaliate. And that has domestic political implications in the US. So it's a difficult thing to do. But they're definitely going to try. Now, I think this will be very disruptive for the equity market. Because let's say Apple, one of the largest companies in the world in market cap,

They make everything in China. Now, what's going to happen to them if everything coming in from China has big tariffs, right? What's going to happen to their margins? And there are many, many other companies like this. Now, I'd also go on and say that in the US, the S&P 500, again, great American companies, but American companies are all global companies, right? We have Procter & Gamble. Everyone sells stuff throughout the world. And so...

the huge valuations, the huge revenues and profits these large caps have is in part through globalization. And if we have a reduction of that, they're going to suffer. And that's why I think this is not an equity crisis. Now, whether or not they can succeed, my own view is that it is possible.

Actually, I would say it's probable. The reason being is that both parties support some version of this re-industrialization in the U.S. When we had President Biden, he had his, you know, the...

Inflation Reduction Act, which was a boom in domestic manufacturing. So both parties are fully in accord with this, not just for to create jobs in the US, but also, more importantly, for national security reasons, noting that it's not good to depend on other countries to make bullets in medicine and so forth. So I think this has a good chance of succeeding

But of course, it's hard to say. But, you know, this is ultimately a political question and it does seem to have the political will to go through this. There will be losers and the losers have a lot of political power. So we'll have to look at that as well, though.

Yeah, it's very much political. Obviously, it's difficult to talk about. I will get yelled at probably from both sides about being on one side or the other of the issue. Here's what we do on Real Vision. We try and talk about this in a way that's neutral so that people can understand what's happening underneath the surface. And by the way, we'll talk a little bit about the trade imbalance with China more broadly. The United States, roughly 70% of our economy, if you remember the GDP formula, C plus G plus I plus NX, it's about 70%.

consumption. China, roughly the reverse of that, literally the reciprocal in terms of exports versus domestic consumption, something that both sides in the interest of rebalancing, obviously the way that gets done gets complicated and lots of questions there. What does the United States export to China? Well, one answer to that question would be inflation. And when you talk about the pain that individuals have had, the other side of that bargain is that obviously we're all able to

if you live in the United States, you're able to get in your SUV, go down to Walmart and load up on things that

prior to the pandemic era had continued to fall dramatically in real terms relative to wages in terms of consumption. The flip side of that, of course, is that those jobs that producing all of that stuff that became cheaper got exported, got offshore, in many cases, sent overseas to China, figuring out how to rebalance this, how to understand how the policy mechanisms work to get people who were really hit down

by that. When you see entire regions, entire industries getting offshored, I mean, obviously devastating to the economies of those regions, those industries. You know, this is really interesting when we talk about this, the broad accord on left and right. I think it's fascinating. Whenever AOC and Steve Bannon

agree on something. I'm listening, right? And obviously very different policy prescriptions about the changes that they want to see happening. But there is that broad agreement that lots of American workers, lots of American families suffered

tremendously in the way that this unfolded. I don't want to say it was planned or executed, but in the way ultimately it played out, because these are obviously very broad forces. I mean, gosh, so much to talk about here. And it's fascinating. Obviously, none of us have a crystal ball. We don't know whether things are going to be successful or not. But it's interesting to hear you say that you think that there's the possibility that this could, could

And in fact, it sounds like you're more overweight toward the optimistic case, the bullish case there for the success of tariffs and trade policy readjustments more broadly under the Trump administration. So I think this is so that there's this one aspect of trying to push industries back in the U.S. But if you look at what Mr. Trump is doing, there seems to be kind of a more holistic effort to try to reindustrialize U.S., not just through tariffs. That's one thing. And that's the stick.

But there's also trying to cut corporate taxes. Now, it's not in his power to do that, but he's been speaking with Congress and it looks like we will have some degree of tax changes this year. And that's enticing companies to come here by increasing their profit and

Secondly, we have energy policy. We talked about oil earlier. Again, this is in comparison to other countries. The energy costs in the US are low currently, especially when compared to, say, the Eurozone. And if we really do have more investment in energy and more drilling, it will continue to be low.

President Trump is trying to make the US a more attractive place for business to come. In a sense, he's stealing supply from other countries. And that whole mentality, and of course, if you look at inauguration, he made it a point to invite all these tech titans to come and stand by him. It seems like the administration wants to work with businesses

cutting regulation, making permitting more easy to come and basically come to America and set up factories. So there's a big effort here. And if you have someone in government who's willing to go to that extent to try to make it make sense for businesses to come to America, I think that reindustrialization effort is more likely to succeed than

And also more likely to be less inflationary because you're also cutting these other costs as well and taxes and so forth. And of course, it seems like

the Trump administration is open to having a lot more skilled migrants. And President Trump does not like illegal immigrants, but there is this very big public spat within the Republican Party where it seems like Elon Musk, who himself being a skilled immigrant in the U.S., and also a very large voice in the Trump administration, his viewpoint prevailed. And so we could have more skilled migration in the U.S., and of course that's very good for reindustrialization, very good for...

Inflation as well, because we're increasing the supply of workers. Again, some organizations take advantage of that to have cheap labor, but not all. Right. We have very good founders coming from other countries who created things like Google, like Tesla and so forth. So it does have a role in, I think, reindustrializing the U.S. and increasing productivity.

And boy, has that been a screaming match inside the Republican Party and on Twitter, the war over this idea of highly skilled legal immigrants to the United States. And it certainly seems as though the Elon Musk view is the ascendant one with Mr. Trump right now.

Yeah, that seems to be the case. You know, I suspect that Mr. Trump secretly agreed with him all along because as a person with a large business empire, he had H-1Bs himself. And so that's something that he has already done in his life. So it seems like that was kind of his viewpoint. But I think more broadly speaking, this is kind of a dangerous strategy for many other countries. Let's say the Eurozone or Canada or the UK. Like if the U.S. is offering you lower taxes, cheaper energy,

Well, it seems like a lot of companies can move to the U.S. or if the U.S. just opens up its skilled migration network. If you come to the U.S., the wages are much higher here on a post-tax basis. Right. I've lived in the U.K. before. I lived in Eurozone before. It's really shocking how much lower wages are in those countries than compared to the U.S. So if the U.S. is taking their companies, taking their people down.

You know, that's a recipe for medium-term significant outperformance. And it's a very dim outlook for other countries, especially since they have very generous welfare states. And those benefits are really contingent upon continued growth, which they haven't been very good at producing.

Yeah, we could talk about the euro area and some of the challenges that they face. I had a conversation with Vincent Deliord recently about exactly that, where we touched on that at the end of the conversation. Let me ask you this. This is a great question. It comes from Paul E. Boy, this is a $30 trillion question, Joseph. What do you think...

will really be going on behind the scenes between Trump and Powell? Obviously, this is a big question, and obviously none of us know what's happening exactly behind the scenes. But maybe if you could talk about some of the structural factors in terms of the publicly stated positions of both Mr. Trump and Mr. Powell and how those could intersect in the behind-the-scenes conversation that we're all so eager to hear about.

That reminds me of a very good clip I've seen on Twitter where a reporter asked President Trump, you know, do you think Powell was just cave to you? And he's like, yeah. So, you know, I think...

from the fed's perspective the fed is independent within the federal government but not independent of the federal government and this is a theme that we've seen all throughout the decades right even in the time of uh of nixon you know you can see arthur burns giving this big speech to the anguish of special banking saying that you know

I understood that we probably should have kept rates higher, but we had this whole cultural shift, both in government and in the press, where we really wanted to have more growth. We wanted people to have jobs. And I just couldn't get myself to raise rates. I could have raised rates to tank the economy and so forth, get inflation under control. But I just didn't feel like I had the political capital to do that. And so I kind of had to go along.

And what we're seeing right now, I think, in the U.S. is that President Trump, again, wins the popular vote, seems to have a large popular mandate. And we also have a culture that is, in general, becoming more populist, people who are more

i think value uh having jobs a lot and wanting to have more and i think that makes it more difficult in the fits context to be more hawkish and to try to create a recession to to um let's say get inflation under control

So I think what I would say is that the Fed is very much part of the government, very much part of our broader culture. It's not some kind of technocrat that does whatever they think is correct. It's a little bit more nuanced than that. And so with this big shift in the political culture, I think that the Fed really does have to have more weight on what the president is saying.

So, again, it doesn't necessarily mean that Trump is just going to strong arm everything. I think in the longer run, what it really means is that the people in the Fed will be people who simply just agree more with that more populist perspective. So it's not so much strong arming someone to do something they don't want to, but the people who show up

to begin with, are people just more on the same page as the rest of the country. It's really so interesting because, you know, look, you can go on Twitter or Blue Sky or the social media of your platform of your choosing and see people screaming at each other about this or that hot button political issue, this or that hot button stylistic issue. But when it comes down to some of these core issues,

about populism, about economic populism particularly, about things that I guess would be termed protectionism, there seems to be a great deal more agreement between the populist left and the populist right than you would believe if you just compared and contrasted what you read in the New York Times and the Wall Street Journal, for example.

We're living in a time of great changes and it's really exciting. President Trump is a Republican, but come on, what he says is totally different from the Republicans that you would hear 10 years ago, right? So in a sense, he's taken over the party and reshaped it. So we have a big realignment.

I think something was probably similar, maybe happening on the Democratic side as well, though I think it's early on. Again, they're still trying to work through what happened last November. But we do have, I think, this great political realignment. And that usually is a period of a lot of turmoil socially, politically. And I think that will impact the markets as well. So it's definitely a very, very interesting time to be living in.

joseph i could continue this conversation for another two hours uh but i know you've got to run let me ask you this we talked about a lot of issues here it's refreshing it's great to hear this broader bullishness from you on the probability of the economy and continuing to improve with some of these policy adjustments let me ask you this what are some of the things that you're going to be looking at as potential indicators potential bellwethers potential gauges on your dashboard to gauge

whether or not some of these policy prescriptions have been successful. - So I think going forward, I'm gonna be paying a lot more attention to what the White House is doing, a lot less attention to the Fed. We kind of know what they think, but there's a lot more unpredictability, both in the White House and on Congress.

Now, this is not just about tariffs, but it's also about things like foreign exchange, which falls under the purview of the US Treasury. Are they really going to depreciate the dollar like they talked about, like the US did with the Plaza Accord? Now, all these things are going to have tremendous impacts on the US economy, but these are not things that are going to show up in this month or next month. These structural changes on the economy are going to happen over a span of years.

a re-industrialization of the us if it happens is a decades-long project and the thing is these real economy variables move much slower than what happens in the markets so if we have some sense

So that's one thing. So rather than focus so much about whether or not this is successful as people who are market participants, I would focus more on the market impact because that's going to be almost instant. And that in and of itself could have impacts on how the real economy impacts roll out through things like the wealth effect.

I would be very cautious right now because all these things that they're saying, I believe they are long-term healthy for the U.S. economy, but that's not the same thing as being good for the financial markets, which at the end of the day is really large cap companies who have been benefiting from this current global order. So I think this transition could ultimately be very good for the average person in the U.S., but it may not be good for the markets. And, um,

So it's kind of a redistribution, I think, from people who have been winning over the past few decades to people who have not. And that's going to be very disruptive. What an inflection point, Joseph. What a conversation here today. Extraordinary covering all of these topics and all of these issues and doing it in a way that's focused on fact and policy and data. Joseph Wang, extraordinary conversation. Thank you so much for joining us. Thanks so much for having me, Ash.

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