June 12, 2025 • 25 mins
- Lindsay Rosner, Head: Multi-Sector Investing at Goldman Sachs Asset Management
- Norman Roule, Senior Adviser at Center for Strategic & International Studies
- Frances Donald, Chief Economist at RBC
- Adam Posen, President at the Peterson Institute for International Economics
Lindsay Rosner, Head: Multi-Sector Investing at Goldman Sachs Asset Management, joins to react to PPI and discusses signals from the bond market. Norman Roule, Senior Adviser at Center for Strategic & International Studies, joins to discuss tensions in the Middle East as the US ordered some staff to leave its embassy in Baghdad after Iran threatened to strike American assets in the Middle East. Frances Donald, Chief Economist at RBC, discusses her outlook for the Fed and US economy. Adam Posen, President at the Peterson Institute for International Economics, talks about the economic impact of unilateral tariff rates.
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Episode Transcript
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Speaker 1 (00:00):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
with Lisa Bromwitz and am Marie Hordernt. Join us each
day for insight from the best in markets, economics, and
geopolitics from our global headquarters in New York City. We
are live on Bloomberg Television weekday mornings from six to
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or anywhere else you listen, and as always on the
(00:33):
Bloomberg Terminal and the Bloomberg Business App. Team over at RBC, writing,
while this may have temporarily calmed markets, households are still
grappling with the after effects of significant inflation over the
past five years. Francis Donald of RBC joined us now
from More Francisco, Morning to You.
Speaker 3 (00:49):
Good Morning.
Speaker 2 (00:49):
Spoke to a lot of people yesterday and they all
said a very similar thing. We're going to see the
past through today. We're going to see it today. Then
we didn't see it, and they said we're going to
see it next month and the month after. Your team's
taken a different approach to this. Just walk us through it.
Speaker 3 (01:01):
It's going to be a couple more months, and there's
a range of reasons why, and one of them is
you might remember this massive inventory build that we saw
in the past few months. That means there's plenty of
inventories that did not get hit with those tariffs yet,
and that's going to take some time. We've got to
see that inventory depletion. We saw this in twenty eighteen
with washing machines, three to five months before we saw
it show up in the data, so there is some
(01:23):
precedent there. We also don't know how many of these
tariffs are going to come through in CPI versus PPI,
so we're still going it's going to be a couple
more months before we see this. And I think that's
the reason why. While I'm happy to see that inflation
is not accelerating right now, two things One it's a
bit early, and second, inflation is not just a tariff story.
Inflation is actually also a story with respect to a
(01:44):
tight labor market. We have a very strong ultra wealthy consumer,
we have big governments, so there's structural forces under inflation
as well. And actually, while tariffs are important, they're not
the most important story with inflation.
Speaker 2 (01:56):
Credits even the tame for the approach you've taken so far.
Let's sit on the labor mind. I think I agree
with you that it's ultimately very important for the pass
through and whether we can stomach it as consumers. This
is something we discussed over the last several weeks. It's
the labor market tight enough for individuals to demount high
wages to fund high prices.
Speaker 3 (02:14):
So in my view, Americans don't need to worry about
losing their jobs this year, but they do need to
worry about their grocery bill. And in this particular case,
we have to segment which consumer is doing what, because
if you're a low in middle income household right now, yeah,
you probably have a job, but rent food prices, those
are up almost thirty percent in the past five years.
(02:36):
And even though on aggregate we've seen wages rise more
than the inflation over the past few years, that's not
true for low and middle income Americans, whose inflation basket
is tilted towards those areas that have seen larger inflation.
So we can't paint the same brush with inflation or
wages to the entire consumer household. Now, if you're trying
to get a sense of what are retail sales going
(02:56):
to do. If you're forecasting GDP, you pretty much are
focusing proportionalately on that high income household and they're going
to be just fine in this environment. But forecasting GDP
and saying what's best for the American economy and American
people is a very different thing.
Speaker 1 (03:10):
When you're talking about underline inflation, you're saying tariffs aren't
the biggest story.
Speaker 2 (03:13):
What is it?
Speaker 1 (03:14):
Is it the labor market or is it big government?
Speaker 3 (03:16):
Well, there's structural forces and it's both these things. So
when we talk about the labor market, we're not talking about, oh,
there's so much cyclical demand here, the economy is booming.
We're talking a lot about demographics, and we think of
demographics as being a ten year horizon story, but the
demographic crisis is accelerating. Every single month we see more
retirees than we did the week before, the month before.
(03:39):
That's creating huge exits out of this labor market, and
there's not enough replacement demand. So that unemployment rate, even
though we believe the economy will soften this year, we
have it peaking around four five, four six percent. I mean,
I'm well enough to remember when that was an extraordinarily
strong labor market. That's going to be our bar for
a weaker labor market right now. We can't use the
unemployment rate anymore as a cyclical indicator of growth. We
(04:01):
have to turn towards other area. You're talking about retirees.
Speaker 1 (04:03):
What about Trump's immigration policy, what's that doing to labor market?
Speaker 3 (04:06):
Well, that's going to amplify the issue that I remember
being here at the end of twenty twenty five and saying, yeah,
tariffs are going to be a big deal, but keep
your eye on the immigration story. In our view, how
much available labor is actually going to be the big
issue in twenty twenty six and twenty twenty seven. We've
said it before. America doesn't need jobs. America needs workers.
And if you want to see a boom economy, you
(04:27):
got to have people not just who are willing to
do those jobs, but actually in the labor force. Sometimes
we get pushed back and they say, oh, well, the
labor force is that there's been a decline since two
thousand and one. The labor force participation rate is around
sixty three percent, but prime age worker labor force participation
rate in the United States eighteen to fifty four is
near its highest ever. So there's not a lot of
(04:48):
folks sitting on the sidelines right now who are of
that age. And this is having impact on a month
to month data. Now a structural trend that's showing up
in the cyclical data as something we need to monitor.
Speaker 2 (04:57):
It's going to take time to figure out, and we
need to be a minded about potential outcomes because I've
been surprised so many different ways since the pandemic with
regards to the economy. How much flexibility does the Federal
Reserve have with.
Speaker 3 (05:08):
That in mind, Well, not enough, and so the key
is just going to be what side of the mandator
are they focusing on and also how are they being
flexible with respect to how the data is changing in
this environment. CPI is one indication of what's happening with inflation,
but we're going to see a dashboard of inflation that's
going to see problems in some area of prices and
other areas where it's going to be okay. So this
(05:30):
isn't just a divergent economy in terms of growth in
terms of consumers. It's also going to be a divergent
economy with respective prices that's going to complicate the fence job.
Speaker 2 (05:38):
You've heard of Trump derangement syndrome, no data of Renmack
is kinded a new term that the Treasury Secretary used yesterday,
Tariff derangement syndrome. Does the Federal Reserve have TDS?
Speaker 3 (05:48):
Okay, Well, we don't know what the policy's going to
be and we don't actually know exactly how it's going
to impact the economy. So we have two sources of
uncertainty in play. And that's why I say yes, tariffs
are hugely important. When we look at inflation forecast, it
can be as much as half a percentage point on
headline CPI, which could be make or break for the Fed.
But the time right now is to focus on what
are these underlying trends that are happening this key shape
(06:11):
that's involved in the economy. Massive government spending, which can
argue is muting the economic cycle in play. We got
to talk about that labor market and how things are changing,
and we have to talk about some of these other
issues like a very extended, troubled electrical grid that is
limiting the ability to move forward. These are things that
exist with or without trade in tariffs and I can
come up with a whole economic view on which the
(06:33):
teriff is sort of the whip cream on top of
the ice cream, but not actually the core meal. Even
if right now it's the area where we have the
most volatility.
Speaker 2 (06:41):
Sometimes I'll take that's the cool meal. Francis donald a
vampi sick just to turn back to the market. So
let's talk about crude giving back some of the gangs today.
After smiking on reports of rising tens in the Middle East,
the US ordering some of its embassy staff and Bangtann
(07:03):
to Leisa region due to heightened security risk. Joining US now,
as the former senior US intelligence official Norman Rule, No'm
welcome to the program, Sir. We always enjoy leaning on
your expertise and a sign like this, could you just
frame for us whether this is the real deal, something
to be concerned about, or just one of those things
that we typically see every few months out of this region.
Speaker 4 (07:22):
Good morning, Well, it's something to be concerned about. What
we're watching her Three issues that are coming together after
months of work, the lack of progress in the Iran talks,
the dangerous expansion of Iran's nuclear program, and right now
the IA Board of Governors finding that iron is in
non compliance with its nuclear safeguard obligations under the Non
(07:44):
Proliferation Treaty. The DUMP administration is committed to diplomacy, but
it shows every sign of willing to use military force
to prevent Iran from acquiring a nuclear weapon, and the
actions taken over the last twenty four hours are meant
signal Iran that that intent is indeed sincere without raising
(08:06):
the temperature in the region significantly.
Speaker 1 (08:09):
Norman, what does it say to you that the ia
Board of Governors is saying Iran is non compliant of
its obligation? What does this mean? I mean we're going
to see more countries take more action and sanctions on Tehran.
Speaker 4 (08:21):
Well, first, the issues that the iae has worked on
in the last few weeks are long standing, in some
cases for many years. But diplomacy has very slow wheels,
and people put a lot of effort into trying to
avoid this step. Indeed, this censure of Iran is the
first time something like this has been done in twenty years.
(08:43):
This will require now that the IAEA pushed this towards
the UN Security Counsole for what is known to snap
back to in essence, restore all UN Security Console sanctions
on Iran, probably in September. They have until October, but
since Russia takes over the UN Security Council in October,
that's unlikely to happen. What we're seeing is that Europe
(09:07):
is seeing that diplomacy is coming to its end. There
are no other options here, and they are agreeing with
the United States that the more severe pressure needs to
be placed on Iran. And again, Iran's nuclear program is
reaching a very advanced stage. Most of its enrichment capacity
is now being devoted to military which is not nuclear weapons,
(09:28):
but still military great enrichment for which it has no
actual purpose.
Speaker 1 (09:34):
Well norm maybe in even further breach of IEA obligations.
What we're hearing today is that Iran says they're going
to establish a new uranium enrichment center in response to
this decision. At the same time, the Omani foreign minister
confirmed that the sixth round of talks between Iran and
the United States is still set to go on on Sunday.
(09:54):
How is there a path for diplomacy if Tehran is
continuing to enrich uranium and announcing new centers.
Speaker 4 (10:01):
It's a great point. I think you're seeing several things here.
At first, I think whatever Iran announces it planned to do,
in any case, it's just using the IEA Board of
Governor's resolution as an excuse. It's likely going to expand
its scale of nuclear enrichment, as I say, to continue
its program in this dangerous direction. We should be most
(10:22):
concerned if it further restricts ie access to its program,
which it has been doing for a number of years,
that would be most concerning. Iran, however, has all the
reason in the world to continue talks to drag out
this process, and that is what has been of greatest
concern to the Trump administration and others, because again, there
(10:43):
has been no substantial progress in the talks. Iran refuses
to halt domestic enrichment, to close any facilities, and to
halt advanced research and development. And unless you have significant
constraints on those activities, besides temporary constraints, do have a
program that any moment can be turned into a nuclear
weapons program?
Speaker 1 (11:04):
Normal, what kind of attack would it look like? Given
the fact that we do have reports that Israel is
ready to launch an operation into Iran, well, to.
Speaker 4 (11:13):
Be clear, there is no evidence that we're facing an
imminent attack by the United States or Israel on Iran.
Although such a likelihood is increasingly likely, it will grow
likely more likely as a Uran refuses to cooperate. Such
an attack would be would have a number of different
elements to it. It is certainly unlikely to take place
in a single strike. Iran knows this. Iran has almost
(11:35):
certainly been preparing to live through such an attack and
to respond with its own ballistic missiles and other tools
against Israel. It will be a prolonged event, both diplomatically
as well as militarily. But again, the United States has
more than sufficient capacity to overwhelm anything Iran may seek
(12:00):
to use to defend itself.
Speaker 2 (12:02):
And no, thanks for your signed today, no doubt will
catch up against soon. Norman Roll there of csis I
stand back to trade China, affirming a US trade deal
announced earlier this week. Officials out in the country always
(12:22):
quote keeps its word. Joining us now is Adam Posen
of the Peniston Institute. Adam, welcome back to the program sir.
Let's talk about what ultimately you've been engaged with over
the past week or so. I think yesterday, after the
inflation print, there might have been some excitement that maybe
we could escape the higher prices off the back of
the policy we've seen implemented over the last month or so. Adam,
(12:42):
do you think maybe we're getting a little bit too
excited too soon.
Speaker 5 (12:45):
I think we're being too excited too soon, Jonathan, for
two reasons. First, as you imply, there is still a chance,
and in fact, I think a very great chance, that
we are just at the start of the terror cycle.
I appeared before the Senate Finds Democrats and a hearing
yesterday and there were small businesses, array of them sitting
next to me talking about how they are having to
(13:08):
make hard decisions on what teriffs to purchase or what
to cut back on. And we're seeing that in all
kinds of data, even though it's not in the New
York Fed inflation expectations admittedly, and so I think the
Fed's right to sit tight. But the other thing that's
going on is we're not going to duck this as
a real income hit. There's huge income hit because we're
(13:30):
losing purchasing power of things people want to buy through TIFFs.
Where it's a real income hit because uncertainty has gone
up and it's going to remain up as the non
deals of the last month's show, And so we might
end up possibly with not that much inflation, but incomes
are going to be.
Speaker 1 (13:49):
Hit, Adam. When you look at the core inflation yesterday
we saw the decline was from airlines, cars, clothing. There
was a drop across the board. When it comes to
energy prices, when do you think it'll actually hit the
hard data?
Speaker 5 (14:03):
It's a fair question. Memory And after four months of
under expectations inflation, even somebody like me who's been forecasting
inflation to go up, has to take a pause. Four
months in a row is real information. But the fact
remains that the used cars new and used cars number
is weird, to use a technical term, given what we
(14:25):
know is going on at Forward, at GM, at Toyota,
stillantis at Honda, given what we know is happening to
their supply chains, given what we know is happening to
credit availability for cars. It's odd. Doesn't mean it's not
literally true, but I wouldn't put too much weight on it.
But more than that, I think it's just needs to
(14:49):
be as the FED I think is rightly doing by waiting.
You need to wait to see what happens if it
turns out there isn't inflation, then great, and we just
have to deal with the real income laws.
Speaker 1 (15:01):
Well, Adam, what about if we do get trade deals
and this is all wrapped up in terms of the
uncertainty by the middle or the end to the summer.
Speaker 5 (15:11):
It still doesn't fix the underlying problems. Emmery, I mean
two things. First is again two things again, it's both
direct and uncertainty. The direct effect is we still have
tariffs that are twenty times on average as high as
they were for eighty years, and that has to work
through the system, and that is paid for by American
(15:34):
companies or American consumers or American companies who buy inputs,
so full stop, that's there. Second, because of the nature
of the tariffs that they're not done through legislation, they're
done through presidential emergency power, executive orders. And because everything
gets negotiated, everything's up for negotiation at all times, the
(15:55):
uncertainty doesn't go away. I know Jonathan hates it when
I bring up Brexit, but the analogy is to Brexit.
From twenty sixteen to twenty twenty, people kept saying, well,
once the uncertainties resolves, once we know if it's a
harder soft Brexit, It'll be okay. And I kept saying,
the problem with Brexit is an uncertainty, the problem with
about Brexit, problem with Brexit is Brexit, and so it's
(16:15):
not the same thing. But there is that parallel here.
The regime has changed, and we're seeing that in the
fixed income markets. We're seeing that in the currency markets.
People do not view the US assets, or US policy
or US fiscal policy as safe as it once was.
It's not gone to heck, but it is less safe
more than zero risk asset, and that has a cascade
(16:37):
of effects that will not go away.
Speaker 2 (16:40):
Adam, if you asked me seriously what Brexit is, what
it was, I cann't tell you. I still following the
conversation a long time ago. I just feel lucky to
live in America and no longer than the UK. Is
trite that story anymore? Did you give up to one, Marie,
I sort of did.
Speaker 1 (16:52):
I did give up, especially because I moved to the
UK at a one seventy two handle self Brexit breasit
I'm still left after Brexit.
Speaker 2 (16:59):
Enough of that, Enough of that. I wanted to get
your view on the next FED chair and the kind
of characteristics that you would like to see from the
incoming FED chair after of course, Cham and Paus steps
aside next year.
Speaker 5 (17:10):
Right, I think Jonathan as Ben Burnanki, Thomas Lobocker, Rick
Michian and I argued for after Greenspan, it should matter
less who the chair is. It should be a system.
It should be less about the personality. Obviously it does matter.
J Powell has had unique attributes that have mostly been
(17:31):
extremely great leadership. I think the next chair is going
to end up having a very simple job because they're
either going to get lucky because AI kicks in and so,
like green Span in the mid nineties, you get higher
growth and lower inflation and they can sit back and
thereby please President Trump, or inflation will be obvious and
(17:55):
the committee will leave them no choice and they'll have
to hike. So there's going to be a lot of
hype around who's the next year and if there is
a crisis, it matters whether it's been Burnanki or not.
I don't mean to dismiss that, sure, but I think
people are overdoing it. The FED will do what the
FED does.
Speaker 2 (18:14):
Let's talk about Adam. Let's talk about what the FED
will do and what they'll do next. You said for
quite a while there's a real risk of the next
move might be an interest rate hike. And you also
acknowledge this morning that four months of self that expected
inflation is not nois it's information. So Adam, with that
in mind, what's the view now and what you would
expect to come from.
Speaker 5 (18:30):
The Fed, you're right to call me on that. I
had been expecting higher inflation this year, and I was
expecting that the FED would be hiking before the end
of the year a few months ago, even before this
run of data, I changed my forecast. It was still
out of market, out of consensus, and remains a bit
so that the Fed is not going to be cutting
(18:50):
until November December at the earliest, and if they do,
it's only going to be two cuts before the end
of the year. There are a bunch of reasons for
them to sit still. Some of them were articulately by
feder Atlanta president Raphael Bostick the other day. The general
sense of the committee, I think is broadly right that
we're not falling off a cliff in terms of unemployment
(19:13):
or growth. So anyway forecasts, they're going to sit tight
and they're going to sit tight at least through September,
probably till fourth quarter, and I think if they do
puty cuts in the fourth quarter that are likely you're
going to have still likely to have to take them
back by in the middle of twenty twenty six.
Speaker 2 (19:29):
Interesting, Adam, we get new information, the outlook changes. I
appreciate the update. Adam Poston at the Peterson Institute. Thank you, sir,
Thank you very much. Still ahead, Ben last on this afternoon,
(19:50):
thirty year debck coming to market, Lindsay Rosno, Goldent Sachs.
It's with us around the table for a preview, Linday,
it's going to see you.
Speaker 6 (19:55):
Thanks for having me.
Speaker 2 (19:56):
Let's talk about fixed income, the kind of risks out
that lots of people worried about the long bomb, the
thirty year issue.
Speaker 6 (20:01):
Yes, and that has been trading more like risk asset
than it has been trading as a flight to quality,
which I think we're used to. The big thing here
is just trying to figure out where fiscal is on
the going forward, and what we've been telling clients is
there's no need to go into the thirty year bond.
There are a lot of bombs in the belly and
the very short end of the curve. Stay there and
you'll be better served.
Speaker 2 (20:20):
If you're worried about risk and treasuries. Does it upend
how we perceive risk elsewhere in corporate credit.
Speaker 6 (20:25):
Absolutely, because treasuries are the base, which is what we
then build everything off of. It's the risk premium above
it that gets us to where spread risk is valued.
So what we're seeing in the back end actually influences
our views on back end investment grade corporates, for example,
And as a result of what's happening in the back
end of the rates curve, we've actually also stayed in
the front end of the corporate curve and stayed away
(20:47):
from the back end of the corporate curve.
Speaker 1 (20:49):
Jeff Gunlock yesterday talking to Lisa. John's been talking to
a lot about these comments, but he says, it's certainly
behaving differently than it was for the last four decades.
Things are behaving differently. So when I won't touch the
thirty year treasury, why do you think this is so
different than what we've seen with skirmishes in the last
four decades.
Speaker 6 (21:07):
Yeah, I do disagree a bit in that this isn't
something we've never seen before. Questioning fiscal questioning the fiscal
sustainability or unsustainability of the government is not anything new,
and it has been a concern. What's different is the
problem's gotten larger and larger and larger. And I think
we're getting pretty close to a breaking point. And that's
(21:28):
what the back end of the curve is telling you.
That being said, there's always a right price for something,
and I think we're getting fairly close in the back
end to an area where it seems interesting. And certainly
we've bounced off today. Yields are lower on the back
of the economic data that we got that we're surprising,
But there will be a point in time where the
thirty year is something that you want to own because
(21:50):
we're putting in some real, real yield in the back end.
Speaker 2 (21:53):
Let's talk about this economics it no doubt. So what's
with us Moments ago? I'm sure you heard I got
worried about the labor market and continuing claims. I wonder
what your perception of where the economy is right now
is and ultimately have that shape in your approach to
corporate credit more broadly.
Speaker 6 (22:06):
Sure so, for us, the labor market is gradually softening
and I think each piece of that phrase is important.
Gradual is comfortable, and softening is actually okay. It's when
you have something that's more extreme. And I think that's
what Neil is trying to sus through, is that are
we seeing continuing claims at an alarming level? Are there
things that we should be more worried about? The non
(22:26):
farm payroll last Friday, I think was kind of the
beginning and telling us that we are for sure in
this softening episode.
Speaker 1 (22:34):
But the read through for that for.
Speaker 6 (22:35):
Us is not that the economy is falling off a cliff,
but it puts us in a position where we think
it is important that the FED begins acting. Agree with
Neil completely, it's not at the next meeting. I know
that he joked he said that they should cut, but
I don't think he really means that. We don't think
that they should cut either. But I think it'll be
really interesting to see the dots, and we are hoping
(22:56):
that they at least preserve one or two for twenty
twenty five. I think if it was zero, that is
really going to upset the market.
Speaker 2 (23:04):
Speed matters, and it's not happening quickly, and I think
that's important not just for policy makers, but also for
corporate balance sheets. So can you describe the kind of
corporate balance street strength that you see at the moment
and how resilient corporate credit would be in a continued downstid.
Speaker 6 (23:18):
Sure, so balance sheets look really good. All the things
that we look at, metrics, leverage, metrics that they've termed
out debt, thinking about just their business models. Not all
of them, but most of them are in really really
good standing. For example, we did have a fallen angel
earlier this week with Warner Brothers that's getting a lot
of fair and fair. That's the fifth largest fallen angel.
(23:40):
But if you take that out of the equation, we've
had a really solid investment grade corporate market that's been
extremely resilient. That makes us feel comfortable with the balance sheets.
The problem that we're dealing with right now is spreads.
So are you being compensated for the potential going forward
economic softness? Spreads are really tight right now, and they
(24:01):
are pricing in that everything's going to go fine. That's
where we take issue.
Speaker 2 (24:05):
Our role in yields attractive enough to compensate for that.
Speaker 6 (24:08):
They have certainly in some of the backup we've had
gotten to levels that have hit triggers for some of
our clients. We've seen clients saying that we're actually interested
in getting into fixed income. We want to add we're
underweight our fixed income allocation, so yes, we all in
yield is good. But what we really encourage, and I
think our clients agree is important, is active management around
(24:28):
this exciting guild thing because not every corporate is going
to have a solid balance sheet on the going forward,
and tariffs are happening. Maybe they're less than we thought,
but they still are happening.
Speaker 2 (24:38):
So down one night, one hundred Goldman Sachs. As a
management it's the pitch.
Speaker 6 (24:41):
I think, yes, that line should ring.
Speaker 2 (24:43):
Thank you, Lindy, thank you. I appreciate it as always,
so Lindsay Rosen, there have goldment sex. This is the
Bloomberg Sevenans podcast, bringing you the best in markets, economics,
an gio politics. You can watch the show live on
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Subscribe to the podcast on Apple, Spotify or anywhere else
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(25:06):
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Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:11):
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
with Lisa Bromwitz and am Marie Hordernt. Join us each
day for insight from the best in markets, economics, and
geopolitics from our global headquarters in New York City. We
are live on Bloomberg Television weekday mornings from six to
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or anywhere else you listen, and as always on the
(00:33):
Bloomberg Terminal and the Bloomberg Business App. Team over at RBC, writing,
while this may have temporarily calmed markets, households are still
grappling with the after effects of significant inflation over the
past five years. Francis Donald of RBC joined us now
from More Francisco, Morning to You.
Speaker 3 (00:49):
Good Morning.
Speaker 2 (00:49):
Spoke to a lot of people yesterday and they all
said a very similar thing. We're going to see the
past through today. We're going to see it today. Then
we didn't see it, and they said we're going to
see it next month and the month after. Your team's
taken a different approach to this. Just walk us through it.
Speaker 3 (01:01):
It's going to be a couple more months, and there's
a range of reasons why, and one of them is
you might remember this massive inventory build that we saw
in the past few months. That means there's plenty of
inventories that did not get hit with those tariffs yet,
and that's going to take some time. We've got to
see that inventory depletion. We saw this in twenty eighteen
with washing machines, three to five months before we saw
it show up in the data, so there is some
(01:23):
precedent there. We also don't know how many of these
tariffs are going to come through in CPI versus PPI,
so we're still going it's going to be a couple
more months before we see this. And I think that's
the reason why. While I'm happy to see that inflation
is not accelerating right now, two things One it's a
bit early, and second, inflation is not just a tariff story.
Inflation is actually also a story with respect to a
(01:44):
tight labor market. We have a very strong ultra wealthy consumer,
we have big governments, so there's structural forces under inflation
as well. And actually, while tariffs are important, they're not
the most important story with inflation.
Speaker 2 (01:56):
Credits even the tame for the approach you've taken so far.
Let's sit on the labor mind. I think I agree
with you that it's ultimately very important for the pass
through and whether we can stomach it as consumers. This
is something we discussed over the last several weeks. It's
the labor market tight enough for individuals to demount high
wages to fund high prices.
Speaker 3 (02:14):
So in my view, Americans don't need to worry about
losing their jobs this year, but they do need to
worry about their grocery bill. And in this particular case,
we have to segment which consumer is doing what, because
if you're a low in middle income household right now, yeah,
you probably have a job, but rent food prices, those
are up almost thirty percent in the past five years.
(02:36):
And even though on aggregate we've seen wages rise more
than the inflation over the past few years, that's not
true for low and middle income Americans, whose inflation basket
is tilted towards those areas that have seen larger inflation.
So we can't paint the same brush with inflation or
wages to the entire consumer household. Now, if you're trying
to get a sense of what are retail sales going
(02:56):
to do. If you're forecasting GDP, you pretty much are
focusing proportionalately on that high income household and they're going
to be just fine in this environment. But forecasting GDP
and saying what's best for the American economy and American
people is a very different thing.
Speaker 1 (03:10):
When you're talking about underline inflation, you're saying tariffs aren't
the biggest story.
Speaker 2 (03:13):
What is it?
Speaker 1 (03:14):
Is it the labor market or is it big government?
Speaker 3 (03:16):
Well, there's structural forces and it's both these things. So
when we talk about the labor market, we're not talking about, oh,
there's so much cyclical demand here, the economy is booming.
We're talking a lot about demographics, and we think of
demographics as being a ten year horizon story, but the
demographic crisis is accelerating. Every single month we see more
retirees than we did the week before, the month before.
(03:39):
That's creating huge exits out of this labor market, and
there's not enough replacement demand. So that unemployment rate, even
though we believe the economy will soften this year, we
have it peaking around four five, four six percent. I mean,
I'm well enough to remember when that was an extraordinarily
strong labor market. That's going to be our bar for
a weaker labor market right now. We can't use the
unemployment rate anymore as a cyclical indicator of growth. We
(04:01):
have to turn towards other area. You're talking about retirees.
Speaker 1 (04:03):
What about Trump's immigration policy, what's that doing to labor market?
Speaker 3 (04:06):
Well, that's going to amplify the issue that I remember
being here at the end of twenty twenty five and saying, yeah,
tariffs are going to be a big deal, but keep
your eye on the immigration story. In our view, how
much available labor is actually going to be the big
issue in twenty twenty six and twenty twenty seven. We've
said it before. America doesn't need jobs. America needs workers.
And if you want to see a boom economy, you
(04:27):
got to have people not just who are willing to
do those jobs, but actually in the labor force. Sometimes
we get pushed back and they say, oh, well, the
labor force is that there's been a decline since two
thousand and one. The labor force participation rate is around
sixty three percent, but prime age worker labor force participation
rate in the United States eighteen to fifty four is
near its highest ever. So there's not a lot of
(04:48):
folks sitting on the sidelines right now who are of
that age. And this is having impact on a month
to month data. Now a structural trend that's showing up
in the cyclical data as something we need to monitor.
Speaker 2 (04:57):
It's going to take time to figure out, and we
need to be a minded about potential outcomes because I've
been surprised so many different ways since the pandemic with
regards to the economy. How much flexibility does the Federal
Reserve have with.
Speaker 3 (05:08):
That in mind, Well, not enough, and so the key
is just going to be what side of the mandator
are they focusing on and also how are they being
flexible with respect to how the data is changing in
this environment. CPI is one indication of what's happening with inflation,
but we're going to see a dashboard of inflation that's
going to see problems in some area of prices and
other areas where it's going to be okay. So this
(05:30):
isn't just a divergent economy in terms of growth in
terms of consumers. It's also going to be a divergent
economy with respective prices that's going to complicate the fence job.
Speaker 2 (05:38):
You've heard of Trump derangement syndrome, no data of Renmack
is kinded a new term that the Treasury Secretary used yesterday,
Tariff derangement syndrome. Does the Federal Reserve have TDS?
Speaker 3 (05:48):
Okay, Well, we don't know what the policy's going to
be and we don't actually know exactly how it's going
to impact the economy. So we have two sources of
uncertainty in play. And that's why I say yes, tariffs
are hugely important. When we look at inflation forecast, it
can be as much as half a percentage point on
headline CPI, which could be make or break for the Fed.
But the time right now is to focus on what
are these underlying trends that are happening this key shape
(06:11):
that's involved in the economy. Massive government spending, which can
argue is muting the economic cycle in play. We got
to talk about that labor market and how things are changing,
and we have to talk about some of these other
issues like a very extended, troubled electrical grid that is
limiting the ability to move forward. These are things that
exist with or without trade in tariffs and I can
come up with a whole economic view on which the
(06:33):
teriff is sort of the whip cream on top of
the ice cream, but not actually the core meal. Even
if right now it's the area where we have the
most volatility.
Speaker 2 (06:41):
Sometimes I'll take that's the cool meal. Francis donald a
vampi sick just to turn back to the market. So
let's talk about crude giving back some of the gangs today.
After smiking on reports of rising tens in the Middle East,
the US ordering some of its embassy staff and Bangtann
(07:03):
to Leisa region due to heightened security risk. Joining US now,
as the former senior US intelligence official Norman Rule, No'm
welcome to the program, Sir. We always enjoy leaning on
your expertise and a sign like this, could you just
frame for us whether this is the real deal, something
to be concerned about, or just one of those things
that we typically see every few months out of this region.
Speaker 4 (07:22):
Good morning, Well, it's something to be concerned about. What
we're watching her Three issues that are coming together after
months of work, the lack of progress in the Iran talks,
the dangerous expansion of Iran's nuclear program, and right now
the IA Board of Governors finding that iron is in
non compliance with its nuclear safeguard obligations under the Non
(07:44):
Proliferation Treaty. The DUMP administration is committed to diplomacy, but
it shows every sign of willing to use military force
to prevent Iran from acquiring a nuclear weapon, and the
actions taken over the last twenty four hours are meant
signal Iran that that intent is indeed sincere without raising
(08:06):
the temperature in the region significantly.
Speaker 1 (08:09):
Norman, what does it say to you that the ia
Board of Governors is saying Iran is non compliant of
its obligation? What does this mean? I mean we're going
to see more countries take more action and sanctions on Tehran.
Speaker 4 (08:21):
Well, first, the issues that the iae has worked on
in the last few weeks are long standing, in some
cases for many years. But diplomacy has very slow wheels,
and people put a lot of effort into trying to
avoid this step. Indeed, this censure of Iran is the
first time something like this has been done in twenty years.
(08:43):
This will require now that the IAEA pushed this towards
the UN Security Counsole for what is known to snap
back to in essence, restore all UN Security Console sanctions
on Iran, probably in September. They have until October, but
since Russia takes over the UN Security Council in October,
that's unlikely to happen. What we're seeing is that Europe
(09:07):
is seeing that diplomacy is coming to its end. There
are no other options here, and they are agreeing with
the United States that the more severe pressure needs to
be placed on Iran. And again, Iran's nuclear program is
reaching a very advanced stage. Most of its enrichment capacity
is now being devoted to military which is not nuclear weapons,
(09:28):
but still military great enrichment for which it has no
actual purpose.
Speaker 1 (09:34):
Well norm maybe in even further breach of IEA obligations.
What we're hearing today is that Iran says they're going
to establish a new uranium enrichment center in response to
this decision. At the same time, the Omani foreign minister
confirmed that the sixth round of talks between Iran and
the United States is still set to go on on Sunday.
(09:54):
How is there a path for diplomacy if Tehran is
continuing to enrich uranium and announcing new centers.
Speaker 4 (10:01):
It's a great point. I think you're seeing several things here.
At first, I think whatever Iran announces it planned to do,
in any case, it's just using the IEA Board of
Governor's resolution as an excuse. It's likely going to expand
its scale of nuclear enrichment, as I say, to continue
its program in this dangerous direction. We should be most
(10:22):
concerned if it further restricts ie access to its program,
which it has been doing for a number of years,
that would be most concerning. Iran, however, has all the
reason in the world to continue talks to drag out
this process, and that is what has been of greatest
concern to the Trump administration and others, because again, there
(10:43):
has been no substantial progress in the talks. Iran refuses
to halt domestic enrichment, to close any facilities, and to
halt advanced research and development. And unless you have significant
constraints on those activities, besides temporary constraints, do have a
program that any moment can be turned into a nuclear
weapons program?
Speaker 1 (11:04):
Normal, what kind of attack would it look like? Given
the fact that we do have reports that Israel is
ready to launch an operation into Iran, well, to.
Speaker 4 (11:13):
Be clear, there is no evidence that we're facing an
imminent attack by the United States or Israel on Iran.
Although such a likelihood is increasingly likely, it will grow
likely more likely as a Uran refuses to cooperate. Such
an attack would be would have a number of different
elements to it. It is certainly unlikely to take place
in a single strike. Iran knows this. Iran has almost
(11:35):
certainly been preparing to live through such an attack and
to respond with its own ballistic missiles and other tools
against Israel. It will be a prolonged event, both diplomatically
as well as militarily. But again, the United States has
more than sufficient capacity to overwhelm anything Iran may seek
(12:00):
to use to defend itself.
Speaker 2 (12:02):
And no, thanks for your signed today, no doubt will
catch up against soon. Norman Roll there of csis I
stand back to trade China, affirming a US trade deal
announced earlier this week. Officials out in the country always
(12:22):
quote keeps its word. Joining us now is Adam Posen
of the Peniston Institute. Adam, welcome back to the program sir.
Let's talk about what ultimately you've been engaged with over
the past week or so. I think yesterday, after the
inflation print, there might have been some excitement that maybe
we could escape the higher prices off the back of
the policy we've seen implemented over the last month or so. Adam,
(12:42):
do you think maybe we're getting a little bit too
excited too soon.
Speaker 5 (12:45):
I think we're being too excited too soon, Jonathan, for
two reasons. First, as you imply, there is still a chance,
and in fact, I think a very great chance, that
we are just at the start of the terror cycle.
I appeared before the Senate Finds Democrats and a hearing
yesterday and there were small businesses, array of them sitting
next to me talking about how they are having to
(13:08):
make hard decisions on what teriffs to purchase or what
to cut back on. And we're seeing that in all
kinds of data, even though it's not in the New
York Fed inflation expectations admittedly, and so I think the
Fed's right to sit tight. But the other thing that's
going on is we're not going to duck this as
a real income hit. There's huge income hit because we're
(13:30):
losing purchasing power of things people want to buy through TIFFs.
Where it's a real income hit because uncertainty has gone
up and it's going to remain up as the non
deals of the last month's show, And so we might
end up possibly with not that much inflation, but incomes
are going to be.
Speaker 1 (13:49):
Hit, Adam. When you look at the core inflation yesterday
we saw the decline was from airlines, cars, clothing. There
was a drop across the board. When it comes to
energy prices, when do you think it'll actually hit the
hard data?
Speaker 5 (14:03):
It's a fair question. Memory And after four months of
under expectations inflation, even somebody like me who's been forecasting
inflation to go up, has to take a pause. Four
months in a row is real information. But the fact
remains that the used cars new and used cars number
is weird, to use a technical term, given what we
(14:25):
know is going on at Forward, at GM, at Toyota,
stillantis at Honda, given what we know is happening to
their supply chains, given what we know is happening to
credit availability for cars. It's odd. Doesn't mean it's not
literally true, but I wouldn't put too much weight on it.
But more than that, I think it's just needs to
(14:49):
be as the FED I think is rightly doing by waiting.
You need to wait to see what happens if it
turns out there isn't inflation, then great, and we just
have to deal with the real income laws.
Speaker 1 (15:01):
Well, Adam, what about if we do get trade deals
and this is all wrapped up in terms of the
uncertainty by the middle or the end to the summer.
Speaker 5 (15:11):
It still doesn't fix the underlying problems. Emmery, I mean
two things. First is again two things again, it's both
direct and uncertainty. The direct effect is we still have
tariffs that are twenty times on average as high as
they were for eighty years, and that has to work
through the system, and that is paid for by American
(15:34):
companies or American consumers or American companies who buy inputs,
so full stop, that's there. Second, because of the nature
of the tariffs that they're not done through legislation, they're
done through presidential emergency power, executive orders. And because everything
gets negotiated, everything's up for negotiation at all times, the
(15:55):
uncertainty doesn't go away. I know Jonathan hates it when
I bring up Brexit, but the analogy is to Brexit.
From twenty sixteen to twenty twenty, people kept saying, well,
once the uncertainties resolves, once we know if it's a
harder soft Brexit, It'll be okay. And I kept saying,
the problem with Brexit is an uncertainty, the problem with
about Brexit, problem with Brexit is Brexit, and so it's
(16:15):
not the same thing. But there is that parallel here.
The regime has changed, and we're seeing that in the
fixed income markets. We're seeing that in the currency markets.
People do not view the US assets, or US policy
or US fiscal policy as safe as it once was.
It's not gone to heck, but it is less safe
more than zero risk asset, and that has a cascade
(16:37):
of effects that will not go away.
Speaker 2 (16:40):
Adam, if you asked me seriously what Brexit is, what
it was, I cann't tell you. I still following the
conversation a long time ago. I just feel lucky to
live in America and no longer than the UK. Is
trite that story anymore? Did you give up to one, Marie,
I sort of did.
Speaker 1 (16:52):
I did give up, especially because I moved to the
UK at a one seventy two handle self Brexit breasit
I'm still left after Brexit.
Speaker 2 (16:59):
Enough of that, Enough of that. I wanted to get
your view on the next FED chair and the kind
of characteristics that you would like to see from the
incoming FED chair after of course, Cham and Paus steps
aside next year.
Speaker 5 (17:10):
Right, I think Jonathan as Ben Burnanki, Thomas Lobocker, Rick
Michian and I argued for after Greenspan, it should matter
less who the chair is. It should be a system.
It should be less about the personality. Obviously it does matter.
J Powell has had unique attributes that have mostly been
(17:31):
extremely great leadership. I think the next chair is going
to end up having a very simple job because they're
either going to get lucky because AI kicks in and so,
like green Span in the mid nineties, you get higher
growth and lower inflation and they can sit back and
thereby please President Trump, or inflation will be obvious and
(17:55):
the committee will leave them no choice and they'll have
to hike. So there's going to be a lot of
hype around who's the next year and if there is
a crisis, it matters whether it's been Burnanki or not.
I don't mean to dismiss that, sure, but I think
people are overdoing it. The FED will do what the
FED does.
Speaker 2 (18:14):
Let's talk about Adam. Let's talk about what the FED
will do and what they'll do next. You said for
quite a while there's a real risk of the next
move might be an interest rate hike. And you also
acknowledge this morning that four months of self that expected
inflation is not nois it's information. So Adam, with that
in mind, what's the view now and what you would
expect to come from.
Speaker 5 (18:30):
The Fed, you're right to call me on that. I
had been expecting higher inflation this year, and I was
expecting that the FED would be hiking before the end
of the year a few months ago, even before this
run of data, I changed my forecast. It was still
out of market, out of consensus, and remains a bit
so that the Fed is not going to be cutting
(18:50):
until November December at the earliest, and if they do,
it's only going to be two cuts before the end
of the year. There are a bunch of reasons for
them to sit still. Some of them were articulately by
feder Atlanta president Raphael Bostick the other day. The general
sense of the committee, I think is broadly right that
we're not falling off a cliff in terms of unemployment
(19:13):
or growth. So anyway forecasts, they're going to sit tight
and they're going to sit tight at least through September,
probably till fourth quarter, and I think if they do
puty cuts in the fourth quarter that are likely you're
going to have still likely to have to take them
back by in the middle of twenty twenty six.
Speaker 2 (19:29):
Interesting, Adam, we get new information, the outlook changes. I
appreciate the update. Adam Poston at the Peterson Institute. Thank you, sir,
Thank you very much. Still ahead, Ben last on this afternoon,
(19:50):
thirty year debck coming to market, Lindsay Rosno, Goldent Sachs.
It's with us around the table for a preview, Linday,
it's going to see you.
Speaker 6 (19:55):
Thanks for having me.
Speaker 2 (19:56):
Let's talk about fixed income, the kind of risks out
that lots of people worried about the long bomb, the
thirty year issue.
Speaker 6 (20:01):
Yes, and that has been trading more like risk asset
than it has been trading as a flight to quality,
which I think we're used to. The big thing here
is just trying to figure out where fiscal is on
the going forward, and what we've been telling clients is
there's no need to go into the thirty year bond.
There are a lot of bombs in the belly and
the very short end of the curve. Stay there and
you'll be better served.
Speaker 2 (20:20):
If you're worried about risk and treasuries. Does it upend
how we perceive risk elsewhere in corporate credit.
Speaker 6 (20:25):
Absolutely, because treasuries are the base, which is what we
then build everything off of. It's the risk premium above
it that gets us to where spread risk is valued.
So what we're seeing in the back end actually influences
our views on back end investment grade corporates, for example,
And as a result of what's happening in the back
end of the rates curve, we've actually also stayed in
the front end of the corporate curve and stayed away
(20:47):
from the back end of the corporate curve.
Speaker 1 (20:49):
Jeff Gunlock yesterday talking to Lisa. John's been talking to
a lot about these comments, but he says, it's certainly
behaving differently than it was for the last four decades.
Things are behaving differently. So when I won't touch the
thirty year treasury, why do you think this is so
different than what we've seen with skirmishes in the last
four decades.
Speaker 6 (21:07):
Yeah, I do disagree a bit in that this isn't
something we've never seen before. Questioning fiscal questioning the fiscal
sustainability or unsustainability of the government is not anything new,
and it has been a concern. What's different is the
problem's gotten larger and larger and larger. And I think
we're getting pretty close to a breaking point. And that's
(21:28):
what the back end of the curve is telling you.
That being said, there's always a right price for something,
and I think we're getting fairly close in the back
end to an area where it seems interesting. And certainly
we've bounced off today. Yields are lower on the back
of the economic data that we got that we're surprising,
But there will be a point in time where the
thirty year is something that you want to own because
(21:50):
we're putting in some real, real yield in the back end.
Speaker 2 (21:53):
Let's talk about this economics it no doubt. So what's
with us Moments ago? I'm sure you heard I got
worried about the labor market and continuing claims. I wonder
what your perception of where the economy is right now
is and ultimately have that shape in your approach to
corporate credit more broadly.
Speaker 6 (22:06):
Sure so, for us, the labor market is gradually softening
and I think each piece of that phrase is important.
Gradual is comfortable, and softening is actually okay. It's when
you have something that's more extreme. And I think that's
what Neil is trying to sus through, is that are
we seeing continuing claims at an alarming level? Are there
things that we should be more worried about? The non
(22:26):
farm payroll last Friday, I think was kind of the
beginning and telling us that we are for sure in
this softening episode.
Speaker 1 (22:34):
But the read through for that for.
Speaker 6 (22:35):
Us is not that the economy is falling off a cliff,
but it puts us in a position where we think
it is important that the FED begins acting. Agree with
Neil completely, it's not at the next meeting. I know
that he joked he said that they should cut, but
I don't think he really means that. We don't think
that they should cut either. But I think it'll be
really interesting to see the dots, and we are hoping
(22:56):
that they at least preserve one or two for twenty
twenty five. I think if it was zero, that is
really going to upset the market.
Speaker 2 (23:04):
Speed matters, and it's not happening quickly, and I think
that's important not just for policy makers, but also for
corporate balance sheets. So can you describe the kind of
corporate balance street strength that you see at the moment
and how resilient corporate credit would be in a continued downstid.
Speaker 6 (23:18):
Sure, so balance sheets look really good. All the things
that we look at, metrics, leverage, metrics that they've termed
out debt, thinking about just their business models. Not all
of them, but most of them are in really really
good standing. For example, we did have a fallen angel
earlier this week with Warner Brothers that's getting a lot
of fair and fair. That's the fifth largest fallen angel.
(23:40):
But if you take that out of the equation, we've
had a really solid investment grade corporate market that's been
extremely resilient. That makes us feel comfortable with the balance sheets.
The problem that we're dealing with right now is spreads.
So are you being compensated for the potential going forward
economic softness? Spreads are really tight right now, and they
(24:01):
are pricing in that everything's going to go fine. That's
where we take issue.
Speaker 2 (24:05):
Our role in yields attractive enough to compensate for that.
Speaker 6 (24:08):
They have certainly in some of the backup we've had
gotten to levels that have hit triggers for some of
our clients. We've seen clients saying that we're actually interested
in getting into fixed income. We want to add we're
underweight our fixed income allocation, so yes, we all in
yield is good. But what we really encourage, and I
think our clients agree is important, is active management around
(24:28):
this exciting guild thing because not every corporate is going
to have a solid balance sheet on the going forward,
and tariffs are happening. Maybe they're less than we thought,
but they still are happening.
Speaker 2 (24:38):
So down one night, one hundred Goldman Sachs. As a
management it's the pitch.
Speaker 6 (24:41):
I think, yes, that line should ring.
Speaker 2 (24:43):
Thank you, Lindy, thank you. I appreciate it as always,
so Lindsay Rosen, there have goldment sex. This is the
Bloomberg Sevenans podcast, bringing you the best in markets, economics,
an gio politics. You can watch the show live on
Bloomberg TV weekday mornings from six am to nine am Eastern.
Subscribe to the podcast on Apple, Spotify or anywhere else
you listen, and as always on the Bloomberg Terminal and
(25:06):
the Bloomberg Business app. Mm hmm
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