June 13, 2025 • 31 mins
Trump’s policies have slowed the economy, making a downturn more likely. But Peter Berezin, chief global investment strategist at BCA Research, says the nation’s yawning deficit is a bigger threat. He joins this week to talk recession odds and strategies for investing.
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Speaker 1 (00:02):
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(00:45):
week's show.
Speaker 2 (00:56):
Welcome to Meren Talks Money.
Speaker 1 (00:57):
The podcast imish people who know the markets explain the markets.
I'm marrensumset where, but this week I'm speaking with Peter Barrison,
Chief Global Investment Strategist at BCA Research. That means he
heads up the team at BCA that provides global economic
and financial market analysis to its clients and helps them
shape their investment decisions. Peter has been economists for more
than three decades. Previously worked at the IMF, the International
(01:18):
Monetary Fund, and at Goldman Sachs. So we wanted to
get Peter on partly because we read all his work religiously. Peter,
by the way, religiously. We wanted to get him on
to talk about the global economic outlook. Back in March,
he was very clear that he felt the recession holds
for the US were still high. His year end SMP
target is four four hundred and fifty. That is quite
a drop from the current level, which is still knocking
(01:40):
around six twenty five percent drop. Actually, is he still
bearished on the US? What impact does he think Trump's
trade policies will have. Is there a bigger risk than trade?
And what does the endgame for markets in the US
and elsewhere look like right now, Peter, that's going to
take an offul lot longer than thirty five minutes that
we've got, So as you could talk really fast, I'd
appreciate it.
Speaker 3 (01:59):
I'll do my best.
Speaker 1 (02:01):
Welcome to Marrion, Dogs Money, Thank you very much for
coming on. Why don't we start then with the US
economy and this recession rescue. Latest peace puts the recession
risk for the US at about sixty percent, right, But
we have been waiting for this recession for a long time.
Speaker 3 (02:18):
Yeah, that's right. So back in twenty twenty two and
twenty twenty three was one of the few optimistic strategists
making the case that the US was not at any
great danger of recession. And then late last year and
certainly into this year, I moved into the recession camp.
And the reason I did so was because I argued
(02:41):
that a lot of the installation that had protected the
US economy had worn thin. So back in twenty twenty two,
there were millions of excess job openings. Anyone who lost
a job back then could walk across a street and
find new work and not prevented unemployment from going up.
There were over two trillion in excess pandemic savings, and
(03:02):
so when the FED began to raise rates, inflation rows
households just kept on spending. Now things aren't so simple anymore.
Those job openings have receded, the pandemic savings are gone,
consumer delinquency rates are rising, and on top of that,
we've got all these threats from the trade war, from
(03:23):
the bond market, and so I do think that the
risks of a recession this year are higher than they
would normally be.
Speaker 1 (03:30):
Yeah, although we do still keep seeing a numbers that
suggest things are just fine, and we know that consumer
confidence levels below but consumers are still really spending in
the US and the recent job numbers were fairly encouraging, right,
So we do keep seeing better than expected data just
keeps going, we do.
Speaker 3 (03:46):
Although there has been a slowing in consumer spending this year,
there's also been a slowing in the labor market. I
know we got pretty good numbers on payrolls for May,
but those numbers are like to be revised down. What
we've seen since the start of twenty twenty four is
(04:06):
that on average, past payrolls have been revised down by
about fifty thousand. That doesn't even include the benchmark revisions.
We know from the CENSUSUS quarterly data that was just
released last week that payrolls were overstated by round seventy
five thousand per month in the final three quarters of
(04:29):
last year. So fifty thousand plus seventy five thousand in
future revisions basically gets you down to close to zero
potentially on the May payrolls when all the data has
been cleaned up, so I think we are still seeing
It's not a dramatic slowdown, but the crew certainly is
a slowdown that's taking place as we speak.
Speaker 1 (04:50):
This idea that fast falling immigration in the US may
turn into something of a supply shocking, that you end
up with a fairly dramatic reduction in the growth rate
of potential workers, which could lead to rising wages, a
tighter job market, etc. Ivan a supply shock really in
the same way as we've seen over the last four
or five years, but in a different category.
Speaker 3 (05:12):
A that depends on how quickly the slow down and
immigration unfolds. Of course, we have like millions of people
being deported, that would be a supply shock. If it
happens more gradually, then it's not entirely clear whether demand
or supply will dominate it. And the reason I say
that is because if you reduce immigration, then of course,
(05:34):
arithmetically you're reducing labor supply. But those immigrants spend They
spend money on food, they spend money on clothing, they
spend money on shelter, so they contribute to demand. In
other words, and in the nearer tum it's not really
clear how you balance out those.
Speaker 1 (05:51):
Right, Well, let's look at the threats then, and one
of the things that everyone maris about, of course, is
the effective tariff rate we're going to end up with
and exactly how that will impact the US economy. How
are you feeling about that at the moment as a
recessionary risk.
Speaker 3 (06:05):
Well, right now, the effective terror frate in the US
stands at about fifteen percent, which is quite high. I mean,
we went into this year with an effective terror freight
of like three percent or so, So fifteen percent is
kind of in the same ballpark as to where tariffs
were in the nineteen thirties.
Speaker 1 (06:27):
So at a much lower level of impulses percent of
GDP in the nineteen thirty So the impact lower.
Speaker 3 (06:32):
Well, well imports as a share of GDPR about three
times as high now as they were in the nineteen thirties.
So the fact that we have the same terorforrate actually
does more damage to the economy today because trade is
a share of GDP is larger today than it was
back then.
Speaker 1 (06:48):
So that that is going to impact on growth.
Speaker 3 (06:51):
Well, if you look at the estimates that the Yale
Budget Lab and others have done. If current teriforrates remain
in play, this will reduce household income by about two
percent for the median US household, which is not a
trivial shock. Two percent is a meaningful decline in income.
(07:13):
And of course, the Trump administration is hoping that China
ends up eating the tariffs rather than US importers or
US consumers. We don't really see any evidence for that
hope in the data. We now have a few months
of data on Chinese import prices. This is data calculated
(07:35):
by the US, not by China, by the way, and
what we've seen is that basically Chinese import prices are
down about one percent prior to the imposition of tariffs.
So it's really US importers that have been shouldering the
burden of the tariffs. Consumers not so much so far.
But as we've heard from Walmart and others, if these
(07:56):
tariffs remain in place, then they're going to have to
pass on the cart of the tariffs to the ultimate buyer,
the consumer.
Speaker 1 (08:05):
Okay, so they will end up being a feed into inflation.
Speaker 3 (08:07):
Yes, yes, In fact, the CPI swop market is saying
that inflation's going to a rise by around a percentage
point over the next twelve months. That's a meaningful increase
in inflation.
Speaker 1 (08:18):
But you also think there's an even bigger risk, as
you put it in a headline recently, lurking around the corner,
something much worse than trade war. And I think everyone
knows what that is. It's the dynamics of US government debt,
which are increasingly out of control, and with a big
beautiful Bill on the way, that may get worse. And
(08:39):
that that's your big worry at the moment.
Speaker 3 (08:42):
Yeah, I think the market has taken comfort in this
kind of notion that Trump is pivoting away from tariffs
and focusing on tax cuts. Now, of course, that would
be good if the bond market did not react negatively
to the prospect of more unfunded budget deficits. But what
(09:04):
we've seen both in the bond market and from the
US dollar is that investors are getting a little bit
skittish about the current level of deficits. We estimate that
if the Big Beautiful Bill passes, the budget deficit will
rise to close to eight percent of GDP over the
(09:25):
next few years.
Speaker 1 (09:26):
From around six and a half percent at the moment.
Speaker 3 (09:28):
From around six and a half percent yes, that's right.
Now it's supposed to come back down after a couple
of years because of various cuts to social programs. But
the reason those cuts were inserted later on into the
ten year budgetary horizon is because they're politically unpopular, so
they might never actually end up taking place, which is
(09:53):
often the way things go in Washington. So the problem
is that you've got a budget deficit, let's say seven
and a half to eight percent of GDP, and you
need something closer to three and a half percent just
to stabilize the debt to GDP ratio. And so you've
got this completely unsustainable trajectory in debt to GDP and
on top of that fairly high interest rates. And I
(10:14):
think that's the big difference from where we were a
few years ago. A few years ago, we also had
high debt to GDP, but interest rates were very very
low up until twenty twenty two. Now we've got this
toxic combination of high debt and high interest rates, and
as a consequence, the amount of interest that the federal
(10:38):
government is currently paying stands at about three percent of GDP,
up from around one and a half percent of GDP
during Trump's first term. And if you look at where
interest expense is going, if bond yields evolve with market
expectations and the big beautiful bill passes, we're talking about
(11:00):
six percent of GDP in interest expense over the next
ten years. That would be completely unprecedented in US history.
Not that point, about one third of government revenue would
be going just to pay the interest on the debts.
So something needs to break. This can't continue in its
(11:20):
current form. And yes, it sounds a lot like that
story about the boy who cried wolf. People have been
talking about a debt crisis for many years. It hasn't happened,
But of course with the story, the boy does get
eaten at the end, and so I think that, unfortunately,
is where we're heading. I don't know if it's this year,
next year, but it's getting increasingly close.
Speaker 1 (11:41):
We talk a lot about how the fiscal situation of
the US is unsustainable, same with the UK, with other
European markets, etc. But let's focus on the US when
we say it is unsustainable, completely unsustainable, and something what
must change? What do we mean what must change? How
can it change?
Speaker 3 (12:01):
Well, the deficit needs to come down. It's as simple
as that, and that can happen either because spending is
cut or because revenue goes up. Now, in practice, I
think it's very difficult to cut spending because most of
what the government spends on is government programs such as
(12:21):
medicare and social security defense. Not a lot of political
support in cutting that, certainly not social programs for Democrats,
and not social programs or defense for the Republicans. Raising
taxes is a non starter for many Republicans. Democrats probably
a little bit more amenable to that. And so if
(12:44):
you can't spending and raise taxes, all you can then
really do is hope for growth, and unfortunately that's sort
of the direction in which the current administration is going.
They're saying, we're not really going to cut the deficit
in dollar terms, but we're going to grow the economy massively,
and that's going to fix all our problems. So you know,
of course, if growth does go up to three percent
(13:07):
four percent, that would fix a lot of problems. But
it's not clear where that growth is going to come from.
As the administration itself has admitted, much of what is
in the tax bill just goes towards extending the expiring
tax cuts. So existing policy doesn't change. And the other
tax cuts, you know, no taxes on tips, no taxes
on on over time, the self deduction, you know, that's
(13:30):
generally focused on households. It's not so much focused on businesses.
I mean, there are a few things for businesses in
the bill, but it's mainly focused on households. So it's
not really obvious why trend GDP growth would go up
a lot as a result of the big beautiful bill.
In fact, it could be quite the opposite, to the
extent that these big budget deficits raise interest rates and
(13:52):
that crowds out private investments that could reduce trend growth
in the United States.
Speaker 1 (13:58):
When we say on the sustain what is the endgame question?
Because you know perfectly true that there is no appetite
to cut spending, there is no appetite to put up taxes,
and it is not a given that growth will come through.
So what is it? What level of yield? For example,
what is it that might persuade an administration or force
an administration to actually do something about the situation as
(14:22):
it currently stands, rather than the wibble away about future growth.
There has to be a crisis of some kind, right,
what counts as a crisis.
Speaker 3 (14:29):
I don't know if you need a full blow crisis.
You could have something similar to what happened in both
the US and Canada in the early nineteen nineties, where
yields were very, very high. The budget deficits was lower
than it is today, but nevertheless, because yields were seven
(14:49):
eight percent, that was pushing up the interest expense on
the debt quite a bit. And you had the tax
cuts that George Bush famously forced to introduce breaking is
no new taxes pledge, and in Canada, will also had
the GST, the Government sales tax General Sales Tax, and
(15:11):
so revenue was found in the deficit declined and the
bond vigilianties right away. That didn't really require a crisis,
but it did require market pressure. You could, of course,
have a more adverse scenario where there really is a
crisis where bond yields start rising, investors panic, that dumped
the bonds, and that causes the yields to continue rising.
(15:33):
That could happen as well, but either outcome would probably
lead to the final result, which is that the budget
deficit goes down in one form or another.
Speaker 1 (15:46):
I then spending house all the tax cuts are things
that people have no appetite for until they're forced to
have an appetite for it.
Speaker 3 (15:52):
That's right, that's right.
Speaker 1 (15:53):
Yes, I'm guessing Peter that you are a little more
pessimistic about the US secuity market and perhaps some of
those more bullets commentators.
Speaker 2 (16:02):
Yeah.
Speaker 3 (16:03):
I mean, if you look at valuations right now, the
S and P five hundred is trading at about twenty
one and a half times forward twelve month earnings, and
those overd earnings assume record high profit margins. So it's
a pretty optimistic set of assumptions that are driving equity
(16:24):
prices today. And of course, if earnings do rise from
current levels, that would be fine, but that hasn't really
happened this year. Earnings estimates have sort of been flat.
They went down in April, they recovered in May, but
we're close to where we were in say January. I
think it's unlikely that we would get meaningful increase in
(16:45):
earnings estimates unless growth really ends up being quite strong,
and that is unlikely given the slowing in the labor market,
given the hangover from the trade war, and the fact
the bond yields remain quite elevated. So I think probably
in the best case scenario, if we avoid recession, then
(17:07):
the SMP goes up maybe five percent or so. But
if we don't avoid recession, then you have to ask
how low could the stock market go.
Speaker 1 (17:17):
Well, let's talk then about where other people's optimism lies.
And still even now, a lot of it lies in
AI on the huge potential for this sector to pull
not at the stock market but the economy, along the
idea that we really will have the great productivity revolution
we've been waiting for for so long, that will drive growth,
that will drive company earnings, that will make the evaluations
(17:40):
that we're paying today in the US licklick, nothing and
everything will be absolutely fine. Where do you come down
on the AI story.
Speaker 3 (17:49):
Well, right now we don't see the gains from AI
in the productivity statistics at all, actually been really really weak. Now,
maybe AI does boost productive I think that's entirely possible,
But even if it does, that's no guarantee that it
will boost profits, which is what matters for a stock
(18:09):
market and the internet period. It's a good example. US
productivity did increase in the mid nineteen nineties and stayed
fairly high for about a decade until about two thousand
and five, but it was only around two thousand and
five that the profits began to finally materialize, So there
was a long lag between productivity and profits. That could
(18:32):
happen with AI as well.
Speaker 1 (18:34):
Okay, so not madly optimistic there in this shorter term.
The other thing I supposed to talk about is that
there's an awful lot of reasons why foreign investors might
want to start applying a slightly higher risk premium to
the US than they have previously, or risk premium at all,
given they haven't really considered there to be must risk.
You have the things that we've already talked about, the
uncertainty around tariffs, we have the uncertainty around the debt
(18:55):
and the fiscal position, and of course the general uncertainty
around the current administration. And then you know, we all
woke up this week and around the world to the
pictures of la burning. Whether which parts of burning or
not burning, or exactly how bad it is, it's hard
to tell from far away, but nonetheless you see the
pictures and you look at that, and you can see
people who have an awful lot of money invested in
(19:16):
the US market. We were looking at these statistics the
other day, by the way, and really interesting because it
is only the last four or five years that foreign
investors have really poured money into the US and as
the risks begin to accumulate, or a pitch to accumulate,
it might be quite a fast move out.
Speaker 2 (19:34):
Yeah.
Speaker 3 (19:34):
I think that's definitely the risk for the US dollar,
and a dollar, despite the fact that it's weakened over
the last few months, still remains a fairly expensive currency.
And so if this notion of US exceptionalism fades, it
does have to go completely go away. But if investors
(19:55):
decide that US economy is going to be less exceptional
than it was in the past, that will justify a
smaller growth premium to US assets, which means capital is
going to flow out and the dollar could we confer
so structurally, I am fairly bearish on the outlook for
(20:15):
the US dollar.
Speaker 1 (20:17):
Okay, So if money flows out of the dollar, which
currency and which market does it flow into?
Speaker 3 (20:23):
Well, I mean, of course, if the dollar weekends, it
has to weaken against something, so most likely it'll be
the euro, maybe even the Japanese yen. Here in the
Bank of Japan seems to be finally able to raise
rates now that inflation increased and these deflationary pressures have abated,
might flow into other developed economies such as Canada, Australia.
(20:50):
Now it's true that all of these countries have their
own problems to contend with, and so that doesn't mean
that their currencies are going to skyrocket, but the margin
they could strengthen visa VI the US if the underlying
drivers that have compelled foreigners to buy US assets become
(21:13):
less appealing.
Speaker 1 (21:14):
And if money flows out of US equities, and when
you say your mildly underweight equities, I think what you
mean is that outside of holding fewer US equities and
would suggest holding fewer US equities and cash and bonds,
you're not talking about diversifying into other equity markets. But
if you were, which equity markets would you consider to
(21:37):
be attractive at the moment or interesting.
Speaker 3 (21:39):
In terms of where would that money go? You know,
in a global recession, it's hard to see other stock
markets doing well. If anything, most non US markets tend
to be higher beta. When US earnings estimates fall, they
tend to fall even more in places like Europe and Japan.
(21:59):
So you're not going to find a safe haven in
most other major stock markets in a recessionary scenario. Now,
once we get out of the recession and the dollar
bear market resumes and valuations become more relevant for investors,
then I think at that point you're going to see
(22:21):
Europe and other non US markets outperform. But I think
we have to get through the recession first, Okay.
Speaker 1 (22:28):
I mean our general feeling I think is that if
US markets full by twenty five percent, twenty percent something
like that, all of the markets will fall too, of course,
possibly even more, but the cheaper markets are likely to
wreak up faster.
Speaker 3 (22:42):
Yeah, so the Europe is cheaper, Japan is cheaper, China
is cheaper. They also tend to be a little bit
more stycklical, They tend to have more exposure to financials,
materials industrials. So sometimes it's a bit of a wash.
Speaker 1 (22:56):
Okay, what about China.
Speaker 3 (22:58):
I think China is an interesting stock markets. I mean,
clearly China has done a fantastic job in terms of
tech progress. Where I think the uncertainty still lies for
investors is around corporate governance politics, Like our Chinese company
(23:19):
is actually going to be able to make money for
their shareholders or will all of this just be about
maintaining economic stability and political stability. That's where the uncertainty lies.
And I think that question mark over whether shareholders will
capture the innovation coming out of China is a big
question mark and does justify a discount for Chinese stocks.
Speaker 1 (23:42):
Okay, so would you say that for you, maybe the
Chinese market is always a trade, never a long term hold.
Speaker 3 (23:48):
Right now, I would say it's more of a trade
than anything else. If we have shifts in kind of
corporate governance, that I think it'll go from being a
trade to an investment. We have to see those shifts.
Speaker 1 (23:59):
For when you think about markets, do you still think
of them in terms of EM and DM or yeah,
a different kind of category in your head.
Speaker 3 (24:08):
Yeah, I think that's becoming a bit of an antiquated label.
I sometimes choke with our em strategistic BCA Arthur Burdakian
that maybe the US is going to become an emerging
market simply if you look at how the dollar has traded,
and we've seen US interest rates rise relative to those abroad.
Usually that would signify a stronger dollar, but the dollar
(24:30):
is weak, and because the US itself is having some
of the same EM related issues around debt and political
stability that emerging markets have historically faced, whereas actual emerging
markets today are much better shape than they were a
couple of decades ago when I was first working at
the IMF and dealing with some of these issues. So yeah,
(24:51):
I think you have to kind of go on a
country by country basis now.
Speaker 1 (24:56):
Yeah, And as you say, the so called developed markets
have no moral high ground the political stability business at
the moment. That's right, Yes, across Europe, the UK, the US,
exact right, none of us, none of us are standing
on particularly thick ice at the moment. Yes, gold, silver, platinum, oil.
We're great gold bugs on this podcast, and we're excited
(25:18):
by the silver price now, and we're excited by platinum.
We're wondering what's going to happen in this market and
if there is a safe haven out therebuts it's a
yellow one.
Speaker 3 (25:27):
Yeah. I've generally been bullish on gold, and I'm structurally
still bullish that the price of gold is high, even
in inflation adjust the terms, it's close to its all
time peak. But I think when you're trying to value gold,
and of course it's difficult to value something like gold
because it doesn't pay any income to its holders. I
(25:49):
think what you have to do in that case is
sort of look at gold holdings in relation to something
like global wealth. If you do that, what you see
is that gold kind of look cheap because global wealth
has grown so much over the last fifty years that
gold has not caught up. So it's a share of
global wealth. Gold is much much smaller today than it
(26:10):
was in the early nineteen eighties.
Speaker 1 (26:13):
Okay, interesting, I like that way of looking at a
share of global wealth. I'm not sure we've done those
numbers before. We're going to do them. What about bitcoin?
We're talking the week beginning June the night and there's
been positive bitcoin years out of the US administration, and
the day we're talking bitcoins up two percent today. Are
you positive long term or Bitcoin or indeed on any
other cryptocurrencies?
Speaker 3 (26:34):
Well, I mean Bitcoin is interesting because we just talked
about global wealth and there's a large fraction of global
wealth that people don't necessarily want to disclose. They want
to maintain their wealth in as private as setting as possible,
and bitcoin does fulfill that demands. I wouldn't necessarily advise
(26:56):
investors to own a lot of bitcoin, but I can
see the use case for push comes to shove. I
would choose gold over bitcoin in the current environment, but
certainly bitcoin, I think at this point does deserve to
have at least a very small part investors' portfolios. Have
you got any I don't hold any. No, I've been
(27:19):
sticking to gold.
Speaker 1 (27:22):
Yeah, well I've got both. I've never been a big
fan of bitcoin, but I'm often wrong, so I like
to hedge myself. So as we keep telling people, I
get end litt hate mail about being mean about bitcoin,
but I've actually got some and half the people I
talk to who aren't mean about bitcoin at all just don't. Peter,
is there anything we haven't talked about that you think
we should talk about.
Speaker 3 (27:41):
I think one question mark is around oil prices and
where they go from here. I think if there's sort
of a bullish case to be made for the US consumer,
that bullish case could at least in part, hinge on
the possibility that gasoline prices fall, and it certainly does
(28:05):
seem as though OPEC is no longer able to maintain discipline.
The Saudis, of course understandably upset that countries that Kazakhstan
have been exceeding their quotas. US shale production still remains
quite strong now, of course, the prices fall For most
shale players, you need oil of around sixty to seventy
(28:27):
dollars a barrel to make money by drilling. If oil
prices would have fallen into the fifty range, that would
shut down quite a lot of US production. But nevertheless,
I think it's worth stressing that gasoline prices have declined
relative to where they were a year ago, and the
margin that is helping the US consumer. If that continues,
(28:48):
that tailwind could increase. That just worth monitoring.
Speaker 1 (28:52):
And how much would that take down your recession risk?
Speaker 3 (28:56):
Probably not a lot, because I think ultimately tariffs and
bond yields matter more for the economy. But it would
help certainly help offset some of these headwinds.
Speaker 1 (29:09):
What could happen, Peter to make you change your mind
about coming recession? What could happen to make you positive
on the US economy, positive on growth, and crucially positive
on the US equity market.
Speaker 3 (29:21):
We need to see a few things on the economic front.
One we would need to see Trump further dial back
the tariffs, especially against China, which you know they've come
down from one hundred and forty five percent, but they're
still close to forty percent. TERRAF rates on China's quite high.
If the Big Beautiful Bill passes without the bond market
reacting negatively. So, in other words, if we get the
(29:44):
fiscal stimulus without the adverse bond market reaction, that would
make me more positive. If we start to see AI
boost corporate profits in a more broad based way, would
make me more optimistic as well. So I'm open minded.
And my recesion probability is sixty percent. It's not one
(30:05):
hundred percent. There's still forty percent chance where things can
go right. And that's why I've been cautioning investors to
wait until they see the whites of those recession's eyes
before turning fully pessimistic.
Speaker 1 (30:21):
Okay, and let's hope that we see the whites when
they're coming. We're going to miss them. Indeed, Pete, what
are you reading at the moment?
Speaker 3 (30:29):
Oh gosh, I've been mainly listening to podcasts and things like,
things like that, and so a lot of great content
on Bloomberg. I would certainly start there obviously.
Speaker 1 (30:41):
Obviously, thank you so much. You for joining us today.
Speaker 3 (30:46):
My pleasure.
Speaker 1 (30:46):
Thank you so much, Thanks for listening to this week's
Marin Talks Money. If you like us, your rate, review
and subscribe wherever you listen to podcasts, I keep sending
questions or comments and Merrin Money at Bloomberg. You can
also follow me in John on Twitter or x I'm
at Marinus W and John is John Underscore Stepeic. This
(31:07):
episode was hosted by me maren' umset Web. It was
produced by Sumersadi and Moses and sound designed by Blake
Maples and special thanks of course to Peter Barrison
Bloomberg Audio Studios, podcasts, radio news. Hello listeners, Meren thumbs
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(00:45):
week's show.
Speaker 2 (00:56):
Welcome to Meren Talks Money.
Speaker 1 (00:57):
The podcast imish people who know the markets explain the markets.
I'm marrensumset where, but this week I'm speaking with Peter Barrison,
Chief Global Investment Strategist at BCA Research. That means he
heads up the team at BCA that provides global economic
and financial market analysis to its clients and helps them
shape their investment decisions. Peter has been economists for more
than three decades. Previously worked at the IMF, the International
(01:18):
Monetary Fund, and at Goldman Sachs. So we wanted to
get Peter on partly because we read all his work religiously. Peter,
by the way, religiously. We wanted to get him on
to talk about the global economic outlook. Back in March,
he was very clear that he felt the recession holds
for the US were still high. His year end SMP
target is four four hundred and fifty. That is quite
a drop from the current level, which is still knocking
(01:40):
around six twenty five percent drop. Actually, is he still
bearished on the US? What impact does he think Trump's
trade policies will have. Is there a bigger risk than trade?
And what does the endgame for markets in the US
and elsewhere look like right now, Peter, that's going to
take an offul lot longer than thirty five minutes that
we've got, So as you could talk really fast, I'd
appreciate it.
Speaker 3 (01:59):
I'll do my best.
Speaker 1 (02:01):
Welcome to Marrion, Dogs Money, Thank you very much for
coming on. Why don't we start then with the US
economy and this recession rescue. Latest peace puts the recession
risk for the US at about sixty percent, right, But
we have been waiting for this recession for a long time.
Speaker 3 (02:18):
Yeah, that's right. So back in twenty twenty two and
twenty twenty three was one of the few optimistic strategists
making the case that the US was not at any
great danger of recession. And then late last year and
certainly into this year, I moved into the recession camp.
And the reason I did so was because I argued
(02:41):
that a lot of the installation that had protected the
US economy had worn thin. So back in twenty twenty two,
there were millions of excess job openings. Anyone who lost
a job back then could walk across a street and
find new work and not prevented unemployment from going up.
There were over two trillion in excess pandemic savings, and
(03:02):
so when the FED began to raise rates, inflation rows
households just kept on spending. Now things aren't so simple anymore.
Those job openings have receded, the pandemic savings are gone,
consumer delinquency rates are rising, and on top of that,
we've got all these threats from the trade war, from
(03:23):
the bond market, and so I do think that the
risks of a recession this year are higher than they
would normally be.
Speaker 1 (03:30):
Yeah, although we do still keep seeing a numbers that
suggest things are just fine, and we know that consumer
confidence levels below but consumers are still really spending in
the US and the recent job numbers were fairly encouraging, right,
So we do keep seeing better than expected data just
keeps going, we do.
Speaker 3 (03:46):
Although there has been a slowing in consumer spending this year,
there's also been a slowing in the labor market. I
know we got pretty good numbers on payrolls for May,
but those numbers are like to be revised down. What
we've seen since the start of twenty twenty four is
(04:06):
that on average, past payrolls have been revised down by
about fifty thousand. That doesn't even include the benchmark revisions.
We know from the CENSUSUS quarterly data that was just
released last week that payrolls were overstated by round seventy
five thousand per month in the final three quarters of
(04:29):
last year. So fifty thousand plus seventy five thousand in
future revisions basically gets you down to close to zero
potentially on the May payrolls when all the data has
been cleaned up, so I think we are still seeing
It's not a dramatic slowdown, but the crew certainly is
a slowdown that's taking place as we speak.
Speaker 1 (04:50):
This idea that fast falling immigration in the US may
turn into something of a supply shocking, that you end
up with a fairly dramatic reduction in the growth rate
of potential workers, which could lead to rising wages, a
tighter job market, etc. Ivan a supply shock really in
the same way as we've seen over the last four
or five years, but in a different category.
Speaker 3 (05:12):
A that depends on how quickly the slow down and
immigration unfolds. Of course, we have like millions of people
being deported, that would be a supply shock. If it
happens more gradually, then it's not entirely clear whether demand
or supply will dominate it. And the reason I say
that is because if you reduce immigration, then of course,
(05:34):
arithmetically you're reducing labor supply. But those immigrants spend They
spend money on food, they spend money on clothing, they
spend money on shelter, so they contribute to demand. In
other words, and in the nearer tum it's not really
clear how you balance out those.
Speaker 1 (05:51):
Right, Well, let's look at the threats then, and one
of the things that everyone maris about, of course, is
the effective tariff rate we're going to end up with
and exactly how that will impact the US economy. How
are you feeling about that at the moment as a
recessionary risk.
Speaker 3 (06:05):
Well, right now, the effective terror frate in the US
stands at about fifteen percent, which is quite high. I mean,
we went into this year with an effective terror freight
of like three percent or so, So fifteen percent is
kind of in the same ballpark as to where tariffs
were in the nineteen thirties.
Speaker 1 (06:27):
So at a much lower level of impulses percent of
GDP in the nineteen thirty So the impact lower.
Speaker 3 (06:32):
Well, well imports as a share of GDPR about three
times as high now as they were in the nineteen thirties.
So the fact that we have the same terorforrate actually
does more damage to the economy today because trade is
a share of GDP is larger today than it was
back then.
Speaker 1 (06:48):
So that that is going to impact on growth.
Speaker 3 (06:51):
Well, if you look at the estimates that the Yale
Budget Lab and others have done. If current teriforrates remain
in play, this will reduce household income by about two
percent for the median US household, which is not a
trivial shock. Two percent is a meaningful decline in income.
(07:13):
And of course, the Trump administration is hoping that China
ends up eating the tariffs rather than US importers or
US consumers. We don't really see any evidence for that
hope in the data. We now have a few months
of data on Chinese import prices. This is data calculated
(07:35):
by the US, not by China, by the way, and
what we've seen is that basically Chinese import prices are
down about one percent prior to the imposition of tariffs.
So it's really US importers that have been shouldering the
burden of the tariffs. Consumers not so much so far.
But as we've heard from Walmart and others, if these
(07:56):
tariffs remain in place, then they're going to have to
pass on the cart of the tariffs to the ultimate buyer,
the consumer.
Speaker 1 (08:05):
Okay, so they will end up being a feed into inflation.
Speaker 3 (08:07):
Yes, yes, In fact, the CPI swop market is saying
that inflation's going to a rise by around a percentage
point over the next twelve months. That's a meaningful increase
in inflation.
Speaker 1 (08:18):
But you also think there's an even bigger risk, as
you put it in a headline recently, lurking around the corner,
something much worse than trade war. And I think everyone
knows what that is. It's the dynamics of US government debt,
which are increasingly out of control, and with a big
beautiful Bill on the way, that may get worse. And
(08:39):
that that's your big worry at the moment.
Speaker 3 (08:42):
Yeah, I think the market has taken comfort in this
kind of notion that Trump is pivoting away from tariffs
and focusing on tax cuts. Now, of course, that would
be good if the bond market did not react negatively
to the prospect of more unfunded budget deficits. But what
(09:04):
we've seen both in the bond market and from the
US dollar is that investors are getting a little bit
skittish about the current level of deficits. We estimate that
if the Big Beautiful Bill passes, the budget deficit will
rise to close to eight percent of GDP over the
(09:25):
next few years.
Speaker 1 (09:26):
From around six and a half percent at the moment.
Speaker 3 (09:28):
From around six and a half percent yes, that's right.
Now it's supposed to come back down after a couple
of years because of various cuts to social programs. But
the reason those cuts were inserted later on into the
ten year budgetary horizon is because they're politically unpopular, so
they might never actually end up taking place, which is
(09:53):
often the way things go in Washington. So the problem
is that you've got a budget deficit, let's say seven
and a half to eight percent of GDP, and you
need something closer to three and a half percent just
to stabilize the debt to GDP ratio. And so you've
got this completely unsustainable trajectory in debt to GDP and
on top of that fairly high interest rates. And I
(10:14):
think that's the big difference from where we were a
few years ago. A few years ago, we also had
high debt to GDP, but interest rates were very very
low up until twenty twenty two. Now we've got this
toxic combination of high debt and high interest rates, and
as a consequence, the amount of interest that the federal
(10:38):
government is currently paying stands at about three percent of GDP,
up from around one and a half percent of GDP
during Trump's first term. And if you look at where
interest expense is going, if bond yields evolve with market
expectations and the big beautiful bill passes, we're talking about
(11:00):
six percent of GDP in interest expense over the next
ten years. That would be completely unprecedented in US history.
Not that point, about one third of government revenue would
be going just to pay the interest on the debts.
So something needs to break. This can't continue in its
(11:20):
current form. And yes, it sounds a lot like that
story about the boy who cried wolf. People have been
talking about a debt crisis for many years. It hasn't happened,
But of course with the story, the boy does get
eaten at the end, and so I think that, unfortunately,
is where we're heading. I don't know if it's this year,
next year, but it's getting increasingly close.
Speaker 1 (11:41):
We talk a lot about how the fiscal situation of
the US is unsustainable, same with the UK, with other
European markets, etc. But let's focus on the US when
we say it is unsustainable, completely unsustainable, and something what
must change? What do we mean what must change? How
can it change?
Speaker 3 (12:01):
Well, the deficit needs to come down. It's as simple
as that, and that can happen either because spending is
cut or because revenue goes up. Now, in practice, I
think it's very difficult to cut spending because most of
what the government spends on is government programs such as
(12:21):
medicare and social security defense. Not a lot of political
support in cutting that, certainly not social programs for Democrats,
and not social programs or defense for the Republicans. Raising
taxes is a non starter for many Republicans. Democrats probably
a little bit more amenable to that. And so if
(12:44):
you can't spending and raise taxes, all you can then
really do is hope for growth, and unfortunately that's sort
of the direction in which the current administration is going.
They're saying, we're not really going to cut the deficit
in dollar terms, but we're going to grow the economy massively,
and that's going to fix all our problems. So you know,
of course, if growth does go up to three percent
(13:07):
four percent, that would fix a lot of problems. But
it's not clear where that growth is going to come from.
As the administration itself has admitted, much of what is
in the tax bill just goes towards extending the expiring
tax cuts. So existing policy doesn't change. And the other
tax cuts, you know, no taxes on tips, no taxes
on on over time, the self deduction, you know, that's
(13:30):
generally focused on households. It's not so much focused on businesses.
I mean, there are a few things for businesses in
the bill, but it's mainly focused on households. So it's
not really obvious why trend GDP growth would go up
a lot as a result of the big beautiful bill.
In fact, it could be quite the opposite, to the
extent that these big budget deficits raise interest rates and
(13:52):
that crowds out private investments that could reduce trend growth
in the United States.
Speaker 1 (13:58):
When we say on the sustain what is the endgame question?
Because you know perfectly true that there is no appetite
to cut spending, there is no appetite to put up taxes,
and it is not a given that growth will come through.
So what is it? What level of yield? For example,
what is it that might persuade an administration or force
an administration to actually do something about the situation as
(14:22):
it currently stands, rather than the wibble away about future growth.
There has to be a crisis of some kind, right,
what counts as a crisis.
Speaker 3 (14:29):
I don't know if you need a full blow crisis.
You could have something similar to what happened in both
the US and Canada in the early nineteen nineties, where
yields were very, very high. The budget deficits was lower
than it is today, but nevertheless, because yields were seven
(14:49):
eight percent, that was pushing up the interest expense on
the debt quite a bit. And you had the tax
cuts that George Bush famously forced to introduce breaking is
no new taxes pledge, and in Canada, will also had
the GST, the Government sales tax General Sales Tax, and
(15:11):
so revenue was found in the deficit declined and the
bond vigilianties right away. That didn't really require a crisis,
but it did require market pressure. You could, of course,
have a more adverse scenario where there really is a
crisis where bond yields start rising, investors panic, that dumped
the bonds, and that causes the yields to continue rising.
(15:33):
That could happen as well, but either outcome would probably
lead to the final result, which is that the budget
deficit goes down in one form or another.
Speaker 1 (15:46):
I then spending house all the tax cuts are things
that people have no appetite for until they're forced to
have an appetite for it.
Speaker 3 (15:52):
That's right, that's right.
Speaker 1 (15:53):
Yes, I'm guessing Peter that you are a little more
pessimistic about the US secuity market and perhaps some of
those more bullets commentators.
Speaker 2 (16:02):
Yeah.
Speaker 3 (16:03):
I mean, if you look at valuations right now, the
S and P five hundred is trading at about twenty
one and a half times forward twelve month earnings, and
those overd earnings assume record high profit margins. So it's
a pretty optimistic set of assumptions that are driving equity
(16:24):
prices today. And of course, if earnings do rise from
current levels, that would be fine, but that hasn't really
happened this year. Earnings estimates have sort of been flat.
They went down in April, they recovered in May, but
we're close to where we were in say January. I
think it's unlikely that we would get meaningful increase in
(16:45):
earnings estimates unless growth really ends up being quite strong,
and that is unlikely given the slowing in the labor market,
given the hangover from the trade war, and the fact
the bond yields remain quite elevated. So I think probably
in the best case scenario, if we avoid recession, then
(17:07):
the SMP goes up maybe five percent or so. But
if we don't avoid recession, then you have to ask
how low could the stock market go.
Speaker 1 (17:17):
Well, let's talk then about where other people's optimism lies.
And still even now, a lot of it lies in
AI on the huge potential for this sector to pull
not at the stock market but the economy, along the
idea that we really will have the great productivity revolution
we've been waiting for for so long, that will drive growth,
that will drive company earnings, that will make the evaluations
(17:40):
that we're paying today in the US licklick, nothing and
everything will be absolutely fine. Where do you come down
on the AI story.
Speaker 3 (17:49):
Well, right now we don't see the gains from AI
in the productivity statistics at all, actually been really really weak. Now,
maybe AI does boost productive I think that's entirely possible,
But even if it does, that's no guarantee that it
will boost profits, which is what matters for a stock
(18:09):
market and the internet period. It's a good example. US
productivity did increase in the mid nineteen nineties and stayed
fairly high for about a decade until about two thousand
and five, but it was only around two thousand and
five that the profits began to finally materialize, So there
was a long lag between productivity and profits. That could
(18:32):
happen with AI as well.
Speaker 1 (18:34):
Okay, so not madly optimistic there in this shorter term.
The other thing I supposed to talk about is that
there's an awful lot of reasons why foreign investors might
want to start applying a slightly higher risk premium to
the US than they have previously, or risk premium at all,
given they haven't really considered there to be must risk.
You have the things that we've already talked about, the
uncertainty around tariffs, we have the uncertainty around the debt
(18:55):
and the fiscal position, and of course the general uncertainty
around the current administration. And then you know, we all
woke up this week and around the world to the
pictures of la burning. Whether which parts of burning or
not burning, or exactly how bad it is, it's hard
to tell from far away, but nonetheless you see the
pictures and you look at that, and you can see
people who have an awful lot of money invested in
(19:16):
the US market. We were looking at these statistics the
other day, by the way, and really interesting because it
is only the last four or five years that foreign
investors have really poured money into the US and as
the risks begin to accumulate, or a pitch to accumulate,
it might be quite a fast move out.
Speaker 2 (19:34):
Yeah.
Speaker 3 (19:34):
I think that's definitely the risk for the US dollar,
and a dollar, despite the fact that it's weakened over
the last few months, still remains a fairly expensive currency.
And so if this notion of US exceptionalism fades, it
does have to go completely go away. But if investors
(19:55):
decide that US economy is going to be less exceptional
than it was in the past, that will justify a
smaller growth premium to US assets, which means capital is
going to flow out and the dollar could we confer
so structurally, I am fairly bearish on the outlook for
(20:15):
the US dollar.
Speaker 1 (20:17):
Okay, So if money flows out of the dollar, which
currency and which market does it flow into?
Speaker 3 (20:23):
Well, I mean, of course, if the dollar weekends, it
has to weaken against something, so most likely it'll be
the euro, maybe even the Japanese yen. Here in the
Bank of Japan seems to be finally able to raise
rates now that inflation increased and these deflationary pressures have abated,
might flow into other developed economies such as Canada, Australia.
(20:50):
Now it's true that all of these countries have their
own problems to contend with, and so that doesn't mean
that their currencies are going to skyrocket, but the margin
they could strengthen visa VI the US if the underlying
drivers that have compelled foreigners to buy US assets become
(21:13):
less appealing.
Speaker 1 (21:14):
And if money flows out of US equities, and when
you say your mildly underweight equities, I think what you
mean is that outside of holding fewer US equities and
would suggest holding fewer US equities and cash and bonds,
you're not talking about diversifying into other equity markets. But
if you were, which equity markets would you consider to
(21:37):
be attractive at the moment or interesting.
Speaker 3 (21:39):
In terms of where would that money go? You know,
in a global recession, it's hard to see other stock
markets doing well. If anything, most non US markets tend
to be higher beta. When US earnings estimates fall, they
tend to fall even more in places like Europe and Japan.
(21:59):
So you're not going to find a safe haven in
most other major stock markets in a recessionary scenario. Now,
once we get out of the recession and the dollar
bear market resumes and valuations become more relevant for investors,
then I think at that point you're going to see
(22:21):
Europe and other non US markets outperform. But I think
we have to get through the recession first, Okay.
Speaker 1 (22:28):
I mean our general feeling I think is that if
US markets full by twenty five percent, twenty percent something
like that, all of the markets will fall too, of course,
possibly even more, but the cheaper markets are likely to
wreak up faster.
Speaker 3 (22:42):
Yeah, so the Europe is cheaper, Japan is cheaper, China
is cheaper. They also tend to be a little bit
more stycklical, They tend to have more exposure to financials,
materials industrials. So sometimes it's a bit of a wash.
Speaker 1 (22:56):
Okay, what about China.
Speaker 3 (22:58):
I think China is an interesting stock markets. I mean,
clearly China has done a fantastic job in terms of
tech progress. Where I think the uncertainty still lies for
investors is around corporate governance politics, Like our Chinese company
(23:19):
is actually going to be able to make money for
their shareholders or will all of this just be about
maintaining economic stability and political stability. That's where the uncertainty lies.
And I think that question mark over whether shareholders will
capture the innovation coming out of China is a big
question mark and does justify a discount for Chinese stocks.
Speaker 1 (23:42):
Okay, so would you say that for you, maybe the
Chinese market is always a trade, never a long term hold.
Speaker 3 (23:48):
Right now, I would say it's more of a trade
than anything else. If we have shifts in kind of
corporate governance, that I think it'll go from being a
trade to an investment. We have to see those shifts.
Speaker 1 (23:59):
For when you think about markets, do you still think
of them in terms of EM and DM or yeah,
a different kind of category in your head.
Speaker 3 (24:08):
Yeah, I think that's becoming a bit of an antiquated label.
I sometimes choke with our em strategistic BCA Arthur Burdakian
that maybe the US is going to become an emerging
market simply if you look at how the dollar has traded,
and we've seen US interest rates rise relative to those abroad.
Usually that would signify a stronger dollar, but the dollar
(24:30):
is weak, and because the US itself is having some
of the same EM related issues around debt and political
stability that emerging markets have historically faced, whereas actual emerging
markets today are much better shape than they were a
couple of decades ago when I was first working at
the IMF and dealing with some of these issues. So yeah,
(24:51):
I think you have to kind of go on a
country by country basis now.
Speaker 1 (24:56):
Yeah, And as you say, the so called developed markets
have no moral high ground the political stability business at
the moment. That's right, Yes, across Europe, the UK, the US,
exact right, none of us, none of us are standing
on particularly thick ice at the moment. Yes, gold, silver, platinum, oil.
We're great gold bugs on this podcast, and we're excited
(25:18):
by the silver price now, and we're excited by platinum.
We're wondering what's going to happen in this market and
if there is a safe haven out therebuts it's a
yellow one.
Speaker 3 (25:27):
Yeah. I've generally been bullish on gold, and I'm structurally
still bullish that the price of gold is high, even
in inflation adjust the terms, it's close to its all
time peak. But I think when you're trying to value gold,
and of course it's difficult to value something like gold
because it doesn't pay any income to its holders. I
(25:49):
think what you have to do in that case is
sort of look at gold holdings in relation to something
like global wealth. If you do that, what you see
is that gold kind of look cheap because global wealth
has grown so much over the last fifty years that
gold has not caught up. So it's a share of
global wealth. Gold is much much smaller today than it
(26:10):
was in the early nineteen eighties.
Speaker 1 (26:13):
Okay, interesting, I like that way of looking at a
share of global wealth. I'm not sure we've done those
numbers before. We're going to do them. What about bitcoin?
We're talking the week beginning June the night and there's
been positive bitcoin years out of the US administration, and
the day we're talking bitcoins up two percent today. Are
you positive long term or Bitcoin or indeed on any
other cryptocurrencies?
Speaker 3 (26:34):
Well, I mean Bitcoin is interesting because we just talked
about global wealth and there's a large fraction of global
wealth that people don't necessarily want to disclose. They want
to maintain their wealth in as private as setting as possible,
and bitcoin does fulfill that demands. I wouldn't necessarily advise
(26:56):
investors to own a lot of bitcoin, but I can
see the use case for push comes to shove. I
would choose gold over bitcoin in the current environment, but
certainly bitcoin, I think at this point does deserve to
have at least a very small part investors' portfolios. Have
you got any I don't hold any. No, I've been
(27:19):
sticking to gold.
Speaker 1 (27:22):
Yeah, well I've got both. I've never been a big
fan of bitcoin, but I'm often wrong, so I like
to hedge myself. So as we keep telling people, I
get end litt hate mail about being mean about bitcoin,
but I've actually got some and half the people I
talk to who aren't mean about bitcoin at all just don't. Peter,
is there anything we haven't talked about that you think
we should talk about.
Speaker 3 (27:41):
I think one question mark is around oil prices and
where they go from here. I think if there's sort
of a bullish case to be made for the US consumer,
that bullish case could at least in part, hinge on
the possibility that gasoline prices fall, and it certainly does
(28:05):
seem as though OPEC is no longer able to maintain discipline.
The Saudis, of course understandably upset that countries that Kazakhstan
have been exceeding their quotas. US shale production still remains
quite strong now, of course, the prices fall For most
shale players, you need oil of around sixty to seventy
(28:27):
dollars a barrel to make money by drilling. If oil
prices would have fallen into the fifty range, that would
shut down quite a lot of US production. But nevertheless,
I think it's worth stressing that gasoline prices have declined
relative to where they were a year ago, and the
margin that is helping the US consumer. If that continues,
(28:48):
that tailwind could increase. That just worth monitoring.
Speaker 1 (28:52):
And how much would that take down your recession risk?
Speaker 3 (28:56):
Probably not a lot, because I think ultimately tariffs and
bond yields matter more for the economy. But it would
help certainly help offset some of these headwinds.
Speaker 1 (29:09):
What could happen, Peter to make you change your mind
about coming recession? What could happen to make you positive
on the US economy, positive on growth, and crucially positive
on the US equity market.
Speaker 3 (29:21):
We need to see a few things on the economic front.
One we would need to see Trump further dial back
the tariffs, especially against China, which you know they've come
down from one hundred and forty five percent, but they're
still close to forty percent. TERRAF rates on China's quite high.
If the Big Beautiful Bill passes without the bond market
reacting negatively. So, in other words, if we get the
(29:44):
fiscal stimulus without the adverse bond market reaction, that would
make me more positive. If we start to see AI
boost corporate profits in a more broad based way, would
make me more optimistic as well. So I'm open minded.
And my recesion probability is sixty percent. It's not one
(30:05):
hundred percent. There's still forty percent chance where things can
go right. And that's why I've been cautioning investors to
wait until they see the whites of those recession's eyes
before turning fully pessimistic.
Speaker 1 (30:21):
Okay, and let's hope that we see the whites when
they're coming. We're going to miss them. Indeed, Pete, what
are you reading at the moment?
Speaker 3 (30:29):
Oh gosh, I've been mainly listening to podcasts and things like,
things like that, and so a lot of great content
on Bloomberg. I would certainly start there obviously.
Speaker 1 (30:41):
Obviously, thank you so much. You for joining us today.
Speaker 3 (30:46):
My pleasure.
Speaker 1 (30:46):
Thank you so much, Thanks for listening to this week's
Marin Talks Money. If you like us, your rate, review
and subscribe wherever you listen to podcasts, I keep sending
questions or comments and Merrin Money at Bloomberg. You can
also follow me in John on Twitter or x I'm
at Marinus W and John is John Underscore Stepeic. This
(31:07):
episode was hosted by me maren' umset Web. It was
produced by Sumersadi and Moses and sound designed by Blake
Maples and special thanks of course to Peter Barrison
Host
Merryn Somerset Webb
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