June 30, 2025 • 41 mins
Brian Wesbury discusses why the conventional wisdom about tariffs and inflation is wrong, how the Fed can save taxpayers $2 trillion over the next decade, and the positives and negatives of the Big, Beautiful Bill.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:11):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etsstrategist at First Trust.
Today, I'm joined by BrianWestbury, chief economist at
First Trust.
Brian and I discuss his outlookfor the US economy.
We talk about the budget andwhether the federal government
is capable of cutting spending.
We talk about the tax billthat's weaving its way through
(00:32):
Congress.
All that and more on thisepisode of the First Trust ROI
Podcast.
There's a lot of ways I want totake this conversation, but
we've got limited time and Ithink a good place to start is.
We talked about tariffs alittle bit last time, right, yep
, and you still hear thenarrative that tariffs are going
to cause inflation.
We've just recently had someinflationary prints that were
(00:56):
below the expectation.
Brian (00:58):
Four of them so what's your take there?
Ryan (01:01):
Let's revisit that for a second Explain.
Does that surprise you?
First of all, and why are weseeing the opposite of what
people expected?
Brian (01:09):
Yeah.
So, before we jump into tariffs, the number one thing, number
one way that I forecastinflation in fact, the only way,
is to look at the money supply.
And so, if we go back to 2008,that's when they started
quantitative easing.
Why didn't that QE turn intoinflation?
(01:32):
And it was because the Fed wasbuying all these bonds, printing
money, flooding the bankingsystem with deposits, but at the
same time, they jacked upcapital requirements and
liquidity rules and wouldn't letthe banks lend it out and, as a
result, m2, which is the moneysupply number that I look at and
(01:53):
the reason I do is becauseMilton Friedman told me to it
grew about 6% a year.
It was volatile, but about 6% ayear in the five, six, seven
years after COVID or after,excuse me, 2008 QE, and so
that's why we never gotinflation.
It was the same money supplygrowth as before 2008.
(02:17):
Then, along comes COVID.
We do QE again.
Many people said, ah well, itdidn't cause inflation the first
time, it won't cause inflationthis time.
But this time we actuallyreduced the liquidity rules, and
the reason we did is we wantedbanks to make the PPP loans and
(02:38):
also to take direct deposits forthe pandemic unemployment
benefits.
So what happened is the moneysupply exploded Between 2020 and
2022, m2 went up 40%.
It was literally one of theeasiest forecasts I ever made in
my career.
Inflation is coming and all youhad to do was look at M2.
(03:02):
Well, since then?
So M2 peaked in 2022.
It went down it actually wentnegative and we could talk that
gets a little like arcane, ifyou will but it went down and
then it went up and today the M2money supply is a half a
(03:24):
percent above where it was threeyears ago.
So I would call that flat.
I mean, the money supply hasn'tbeen flat, but technically,
from the peak to where we aretoday, it's flat and that's why
I think we're seeing better thanexpected inflation numbers.
Now, I would never use onemonth like one month of CPI at 0
(03:50):
or 0.1, or one month of PPI atnegative, 0.2, and everybody's
declaring victory or somethinglike that.
But no, but now we have fourmonths in a row of better than
expected inflation data on theCPI and the producer price index
, consumer and producer and, asa result, what I would argue is
(04:16):
yes, it's coming from thatslowdown in the money supply and
I expect inflation to continueto be better than people expect.
We've had a big bounce in oilprices, so maybe we'll have a
month where it jumps up, but thebottom line is inflation is in
a much better place todaybecause the money supply has
(04:38):
slowed so much so the tie-inwith the money supply.
Ryan (04:41):
The way I understand it, and mainly because of the way
that you've explained it, isthat the reason why that's more
important than, say, tariffs interms of influencing inflation
is because, let's say, as aresult of tariffs, I pay $10,000
more to buy a car, right, I'vegot $10,000 less to go and spend
on other goods and services.
Brian (05:08):
Therefore, it's going to put a downward pressure on the
price of those other goods andservices where there's less
demand, even though I'm paying ahigher price for the car, is
that pretty much Exactly right?
So, yeah, and all I talkedabout was inflation.
I forgot the tariff part of thequestion.
Sorry about that.
But yeah, tariffs will raisethe price of the things that are
tariffed.
But if we don't increase theamount of money in the economy
overall, then what that means isif everybody buys the same
(05:28):
amount of imported goods andpays higher prices for them,
then they have less money tospend on other things and those
prices, the demand for thatstuff falls and those prices go
down.
So it doesn't mean that in acertain month the CPI or the PPI
won't jump because we tariffeda whole bunch of things.
(05:52):
We have to remember that theCPI and the PPI are just
measures of prices.
They're not actually inflation,they're just our estimate of
inflation.
And so, even though they might,you know, when oil, like we
have a hurricane and they shutdown all the Gulf drilling, you
(06:14):
know, and they move everybodyoff the platforms, well, oil
prices go up and then the CPIwill go up that month, but then
the next month it'll come backdown.
So I'm not saying we won't seea month or two of measured
prices looking a little bithigher.
But overall, if the Fed doesn'taccommodate it by printing more
(06:36):
money, then that will allrecover and inflation itself
won't change.
Inflation is, by definition,money printing.
It's not tariffs, it's notwages, it's not hurricanes, it's
not drought causing crop pricesto go up.
It's printing money.
(06:57):
You print more money, you getinflation.
That's what inflation is.
Ryan (07:02):
Okay, there's another nuance there and something that
you've talked about on ourpodcast before, involving
government spending and a lot ofpeople kind of equate well, the
government's spending more,therefore it's going to cause
inflation.
But you have told me thatthat's not the case, Right?
Brian (07:16):
Only if the Fed prints the money to pay for the
government spending.
Ryan (07:20):
Okay, so that is a good segue to my next topic for you,
and that is government spending.
Okay, so that is a good segueto my next topic for you, and
that is government spending.
Yep, you know there's, there'sbills that are in process that
you know pass the Senate goingto the house and involving the
reconciliation bill, the taxbill and the spending associated
with that.
Were you surprised, or are yousurprised, to see the level of
(07:41):
spending that's kind of embeddedin that bill?
And I guess the bigger questionis is it possible for the
government to slow down spendingor to cut spending?
Brian (07:50):
Yeah, I guess I'm not surprised I've become more
cynical lately.
And just, I don't mean tocorrect you in public, but it
passed the House and it's now inthe corrections, don't worry.
It passed the House and it's nowin the Senate.
So it's a reconciliation bill.
And the craziest thing has goneon because in the
(08:12):
reconciliation bill so SpeakerJohnson, the Speaker of the
House, said, look people.
He actually used the wordpeople, look people, people,
look people.
It's not a.
This isn't a spending bill,it's a reconciliation bill.
And what that means is they.
They can only do things thatlike taxes or entitlement.
(08:36):
They can't.
They can't do the real budgetin a reconciliation bill.
So so in a way it's kind oftrue, but at the same time
majority majority leader Thunein the Senate comes out and says
this is the biggest spendingcut in history and it's.
It's easy for people to likewait a minute, I thought it
wasn't a spending bill, nowyou're telling me it and so what
(08:59):
.
But what they can make changesin is things like Medicaid.
So what they've done is they'veput a work requirement in.
If you're on Medicaid becauseof your income level, then you
have to have, you have to work.
It's kind of like the workrequirement that Bill Clinton
put in for welfare and thenPresident Obama took it out and
we need to put that back in.
(09:20):
It actually led to moreemployment and it's a good thing
, because these programs aren'tdesigned just to let you not
work, but that will save somemoney relative to the baseline.
This is the problem with doingall this.
The Congressional Budget Officeforecasts spending in the next
(09:40):
10 years, 20 years, and thenthey compare the new bill to
what they forecast and then,even though spending's going up
every year, they call it aspending cut if it's less than
the baseline.
And so they did make someMedicaid changes.
They also rolled back some ofthe Green New Deal which was in
(10:04):
the Inflation Reduction Act, butat the same time they increased
spending on the military and onimmigration.
So they want to build a wall,they need to pay for all these
deportations and more ICEofficers to round people up, and
so they've increased spendingwith one hand, reduced the
growth of Medicaid in the futurewith another hand, and net, net
(10:27):
, net.
The budget will grow everysingle year.
We're going to keep spendingmore every year for the next 10
years.
The level of spending relativeto GDP comes down a little bit,
and that's what I focus on.
How much of our GDP isgovernment spending?
And we peaked at 25%, 26%, 27%during COVID and it
(10:50):
automatically came back down to23%, 24% and by the end of this
10-year period, this currentbill the one big beautiful bill
gets spending down to about 22%of GDP.
Gets spending down to about 22%of GDP.
To put that in perspective,when Bill Clinton left office,
(11:13):
it was 18% of GDP.
So the two crises the 08 crisis, the financial panic and then
COVID have permanently boostedspending.
It looks like, even withRepublicans in control, about
five or six percentage points ofGDP, and that, to me, is that's
what will create problems inthe future.
(11:33):
Here's where the rubber meetsthe road.
So this bill it only needs 51votes, but then they will go to
the budget and that's when youpass the 12 appropriations bills
.
There's 12 parts of government,if you will, and every
committee has a different billthat they push through and then
(11:54):
they put it all together andthat's the budget.
That's where they can affectdiscretionary spending.
How much do we spend on defense?
How much do we spend on foodstamps?
How much do we spend on defense?
How much do we spend on foodstamps?
How much do we spend on healthcare and all of those?
By the way, congress hasn'tpassed a real budget, like
(12:14):
literally got the Excelspreadsheet out, put the numbers
in, everybody voted on it andthat's our budget in over 20
years and they call it regularorder.
So they don't follow regularorder anymore.
We don't pass budgets anymore,and that'll come in September of
this year, and that's whenwe'll find out whether they're
(12:36):
really interested in cuttingspending.
So is that back in the Bushadministration?
Ryan (12:40):
Oh yeah.
Brian (12:40):
It goes all the way back to the 90s, the last time we had
a true regular order thing.
You know it has to.
Goes all the way back to the90s, the last time we had a true
regular order thing.
It has to pass all thecommittees.
Then you put the 12appropriation bills in front of
the full House and Senate.
Then they pass them, then theyput it together and they have a
budget.
Every company, in everydivision of every company, comes
(13:04):
up with a budget and then theyaggregate them and they have to
send them to the CFO of everycompany.
In every division of everycompany, comes up with a budget
and then they aggregate them andthey have to send them to the
CFO of every company.
And they have to do that everyyear.
And if they don't do it, youget fired.
Well, congress hasn't done itfor over 20 years.
In my view, they should all befired, but they're not doing
their job.
And that to answer.
(13:24):
The tail end of your questionis do they have the will to
actually cut spending?
Apparently not, because theywon't even pass a real budget.
They pass continuingresolutions, they go.
Basically what they're sayingis ah, whatever they did last
year, we'll do again this year.
And then they add to thatspending with emergencies, and
(13:47):
so I become massively cynical.
And that's, by the way, thisgoes to Musk.
I mean, there's a big debateWas their fight fake?
Was it real?
I don't even care about allthis.
Ryan (13:59):
There's also the debate about where the black eye came
from from Musk and the OvalOffice.
Brian (14:05):
Besant, not his kid.
Yeah, I heard that Besant andMusk got physical, but where I
was going to go with this isthat I truly believe Musk was
massively frustrated Becausewhen you run into the buzzsaw of
the bureaucracy and of Congressand none of them want to cut
(14:28):
spending, I mean it's not like acompany, like he's CEO he says,
do this.
And somebody either does it orthey get fired.
Well, you know he's right, weshould cut this, we should cut
this.
He found fraud, he found wasteand nobody cares and they'll
push back and try to force it tobe.
(14:48):
So I get why he was frustrated.
Ryan (14:57):
Yeah, one of the forms of potential spending cuts that I
just heard about and I don'tknow if you saw this on CNBC or
not, but Ted Cruz was just onCNBC within the last couple of
weeks talking about somethingthat you've talked about for
years and that is payinginterest the US government
paying interest on excessreserves sitting on the balance
sheets of banks, and he saidsomething like we could save a
trillion dollars if we stoppaying interest on excess
(15:17):
reserves.
Brian (15:20):
So maybe it sounds like you did see that.
Oh, I've been on the phone withTed Cruz, okay.
Ryan (15:24):
so my question is is that actually something that could
happen?
Because my fear would be that,okay, they stopped paying
interest on excess reserves andthe banks decide that they're
going to lend all that money out, and then you've got all that
money in the wild.
Brian (15:39):
Well, that's the big fear of going back to where we were
in 2007.
But I said this at the verybeginning Ben Bernanke did
quantitative easing and wedidn't have inflation.
So if they stop paying it's?
There's three reasons banksaren't taking all of this money
(16:01):
that the Fed printed and lendingit out.
Three reasons.
Number one we raised capitalrequirements on banks, so they
can't.
They have a limit on the sizeof the balance sheet that they
can hold with their currentcapital.
The second thing is we haveliquidity rules on banks their
(16:23):
current capital.
The second thing is we haveliquidity rules on banks, so
they have to have a certainamount of cash and they get to
count reserves as part of thatcash.
So if we raise liquidityrequirements, they would have to
hold more cash and make fewerloans.
The third reason is we'repaying them to hold those
reserves and that's the intereston reserves.
So there's three tools.
If you got rid of one, you canmake it up with the other two,
(16:46):
and so what I would argue is itdidn't cause inflation with
Bernanke and it doesn't have tocause inflation today.
And it's interesting, if we stoppaying interest to banks, the
Fed still earns $100 billion.
See, right now we're payingbanks about $200 billion a year
(17:06):
roughly and these are all roughnumbers, I'm not trying to be
exact and they earn about $100billion a year on the bonds that
they hold, which means the Fedis losing $100 billion a year.
If we stop paying banks, theywould now be making $100 billion
a year.
If we stop paying banks, theywould now be making $100 billion
a year and that money wouldflow into the Treasury, and
(17:29):
that's a trillion dollars ofmoney that goes to the Treasury.
Now banks would lose $200billion.
I still don't understand howElizabeth Warren isn't having a
cow over this, because she hatesbanks and I don't think that's
too overstated Private banks, Imean, she wants a national bank,
(17:52):
and here we are paying privatebanks $200 billion a year and
seemingly nobody cares, and sothat's where Ted Cruz is getting
the trillion dollars.
Over a 10-year period, if theFed was making $ because of this
(18:24):
new system of managing itsmonetary policy abundant reserve
policy they have lost $225billion over the last few years,
and what they call that is adeferred asset.
I don't know how you call aloss an asset, but nonetheless
(18:47):
they do, and the whole idea isthat at some point we plan on
making a profit again Soundslike a private equity deal,
right.
Like at some point we're goingto make a profit again, so we're
going to call this a deferredasset and when we make a profit
again we'll pay this down.
And that's their promise.
(19:08):
Like so yeah, we've lost money,treasury, and we've had to
borrow from you to pay oursalaries and keep our lights on,
but eventually we're going tomake a profit again and we'll
pay you back.
And I want to know.
The question I want asked is howare you paying salaries?
Because if it was a privateequity firm, let's say it's a
(19:29):
private investment and you're afinancer of it, and you give
this company and they have aburn money and they have a burn
and they burn through all themoney you gave them.
They have nothing in the bank.
They have a law.
Actually, they, they, they havea loss because they borrowed
money from somebody else andspent it and and and.
(19:50):
Then what do they do?
They either have to raise moremoney or they have to shut down.
Well, the fed just keeps going.
They either print the money topay their people or they borrow
it from the Treasury, like underthe table, and call it a
deferred asset, but nobody willask them these questions and
hopefully, with Senator Cruzdoing this, those questions
(20:13):
start to get asked.
And the reason he's doing this,what makes sense is if we can
save a trillion dollars, then wecan cut taxes a trillion
dollars.
So why is the taxpayer payingthe Fed to pay private banks?
Ryan (20:29):
Yeah, it seems like that would have to gather some
momentum pretty quickly to getthat discussion going.
Yeah, well, I think it is.
Brian (20:36):
I've done Charlie Kirk on this issue, steve Bannon on
this issue, that's how it cameup to Senator Cruz and now he's
jumped aboard and I think we'regoing to get a few other members
that start talking about this.
And it's about time that theFed faced some questioning,
because what they did in 2008 is, in my opinion, did in 2008, is
(21:08):
, in my opinion, one of the mostimportant changes in monetary
policy, economic policy, in UShistory.
I mean, if you look at the Fed,the first one was we invented
it in 1913, and then Nixonclosed the gold window in 1971.
And those are massive events,huge historical economic events
in the history of the UnitedStates.
I would put this 2008 change,when we started paying interest
(21:29):
on reserves and started doing QE, right up there with either of
those two.
Ryan (21:35):
Since we last spoke on the podcast, another thing that's
happened has been thedowngrading of US debt by the
final of the three major ratingagencies.
I'm curious of your take onthat.
You know, does that matter?
And you know, is the US stillthe?
I mean, will we still be theglobal reserve currency?
(21:57):
And you know all the otherissues attached to that.
So is it important?
Brian (22:01):
first off, yeah, moody's just downgraded us from AAA to
AA or I think that's the.
I don't even follow that kindof stuff that closely.
I need to talk to the bondpeople about that.
That's right, but all theratings, but by one notch.
All right, we're one notchbelow perfect, but S&P and Fitch
were already there, right, sookay, what's new?
(22:23):
And I would argue Moody's is,of the three rating agencies, is
the most political.
So why didn't they do it whenwe were running $2 trillion
deficits over the last two years, with a 4% unemployment rate?
That?
Ryan (22:39):
is an interesting question .
Brian (22:40):
They waited until Trump was in office, right, and it's
all because of a guy named MarkZandi, and so it's political.
But having said that, it's aserious question Are we at risk
of losing Americanexceptionalism?
You know, and I hear two.
I mean, there's a million viewsamongst people, right, but two
(23:04):
real divergent kind of pods.
One is Trump is wreckingAmerica, all our relationships
with everybody, everywhere.
Europe hates us, china hates us, everybody hates us.
Everybody's selling the dollar.
Nobody will buy US stocksanymore.
American exceptionalism is done.
Trump is killing it.
The other one is he's playing3D chess.
(23:26):
Actually, I read on Twitter theother day he's playing 5D chess
.
Wow, yeah, I don't know whatthe other Ds are yes.
I don't know what the other.
Ds are A lot of dimensions, yes,but he's playing 5D chess and
nobody understands it and it'sso brilliant.
America is going to be tripleexceptional, you know, and I
think both of these are wrong.
And so we're somewhere in themiddle.
(23:49):
The big beautiful bill keepstax rates from going up, that's
positive.
We're actually going to pass inthat big beautiful bill
expensing for all businessinvestment, which is fantastic.
We need that.
That's a positive change intaxes.
And so we're not making policyany worse.
(24:15):
And we're also at the margin.
Slowing spending a little bitDoesn't mean deficits won't be
big, but they're not going tokeep growing, so that's good.
And so all this idea that seeMoody's, actually, the reason
they downgraded is because ofthe tax, like keeping the tax
(24:36):
rate the same.
It's not the spending part thatthey're concerned with.
No, they don.
No, they want tax rates to goup.
That's the craziest thing InIllinois, for example, when
Illinois or Chicago raises taxeson people, moody's raises the
rating because that's good,we're going to get more revenue,
(24:58):
we can afford more debt.
Well, the problem is they raisetax rates and more people leave
and they get less revenue.
But that's the way Moody's doesit.
And so what they're comparingit to is what the Congressional
Budget Office CBO baseline saidhey, at the end of this year tax
rates are going to go up andthat means we're going to get
(25:18):
more revenue.
And so if we're going to keepthose tax rates where they are,
that means we're going to getless.
And so it's all compared tothis future baseline which
they're always wrong about, bythe way those forecasts are
terrible.
But because if we keep taxrates low, in my opinion we're
more likely to get afaster-growing economy.
(25:39):
And so, anyway, to come back tothis, who's going to replace the
dollar?
Like what do you need?
The key thing here is I need tofind a better way to say this
but America is not strongeconomically or in any way
because we're the world'sreserve currency or in any way
(26:02):
because we're the world'sreserve currency.
We're the world's reservecurrency because we're strong.
Now I don't mean that doesn'tmean we're booming in the
economy.
Strong means a bunch of things.
We have a constitution.
We have accounting rules thatare the best in the world.
You can trust our data.
(26:23):
We have respect rules that arethe best in the world.
You can trust our data.
We have respect for propertyrights.
We enforce contracts.
You make a contract in the US.
I mean, I'm sure people can findyou know you go back to the
auto bailouts and thebondholders were, you know, I
think, abused in that situation.
You can find a few things, butwhat other country in the world
(26:43):
has better legal and financialstructures than we do?
And that's what you need.
To be the world's reservecurrency.
You also need to be big, a bigeconomy.
So maybe India, maybe China,but they don't have the same
financial infrastructure.
I would argue Switzerland couldbe a reserve currency.
(27:08):
The problem is they're not bigenough.
So what other currency in theworld could take it over?
And then when you look at our,yeah, we have $36, $37 trillion
in debt, but we also have $350trillion in assets in America
and our GDP is $25 trillion.
So I mean, yeah, debt's high,but are we going to go broke,
(27:33):
like, no, like.
So I'm not opposed to havingthe rating of our bonds
downgraded a notch because we'reout of control $2 trillion
deficits and seemingly aninability of even Republicans to
cut spending.
Yeah, down the road, that's anissue.
(27:55):
But is it an issue today?
No, and actually bond yields, Ithink, are lower today than
when that rating got changed.
Ryan (28:04):
Interesting.
There's definitely that gapbetween, say, the German boond
yields and what we're paying onour debt here, and so maybe that
reflects.
You know, the differentialbetween those is the difference
between AAA and whatever notchwe're at now, yeah, Germany has.
Brian (28:24):
I just looked at this the other day and forgive me if I'm
off by a few percentage points,but it's like I think their
debt to GDP is 63%, 64%,something like that.
Ours is over 100, 125,something like that.
So those are don't quote those,look them up before you use
them but it's a significantdifference.
(28:46):
But I still wouldn't argue thatGermany is a better investment
than the United States.
Neither one of us are going todefault and the US is not going
to default.
So the reason I think our bondyields are as high as they are
is because the Fed's holdingrates up and won't cut them.
(29:09):
The short-term interest rate inthe United States is too high.
Today.
We have about 2.5% inflation atthe most.
Most if you have one, one oneand a half percent real yield on
top of that would give youthree and a half to four percent
on interest rates and the Fed'sholding the Fed funds rate at
(29:30):
four and a half.
I think the Fed should cut.
Given where inflation is today,it's not like imperative that
they cut, but but interest rates, real yields today are high
relative to history.
They're actually higher thanthey have been since 2006, 2007.
Ryan (29:49):
So there's room to cut by the Fed, but it seems like
they've been somewhat reluctantto give in and I can understand
some of the reasons why they'reafraid that they're going to cut
and then inflation is going tocome roaring back Right.
Do you think that by the end ofthe year I think there's one or
two cuts that are priced in, Isit?
Do you think that the Fed willhave sort of the will to make
(30:12):
cuts by the end of the year?
Brian (30:13):
I think.
I think inflation data is goingto going to continue to be good
we talked about four months ina row and if it stays good,
they're going to be forced tocut.
Okay, I mean, they don't liketo look.
If Trump wants lower rates, heneeds to stop yelling at the Fed
, because they don't want toappear as if they're cutting
because he yelled at them, right?
(30:34):
So that politics is funky.
Sometimes it's backwards, youknow, and so the more he yells
at them, the more unlike theythey are.
Not just I don't think Powelllikes Trump, but but it's not
just because of that, it'sbecause they want to appear
independent.
They don't want.
They don't want to appear likethey're their taco you know
(30:55):
that's what I was gonna do.
Ryan (30:57):
It's like the opposite of the taco tree yes, exactly the
taco trade for people, isn't it?
Trump always chickens out, andand he hears about that and I
suspect that he's like oh, I'mnot gonna chicken out now and
yeah, and you know, if you wanttrump to raise tariffs, you call
him.
You know, you invent the tacotree, right?
Brian (31:14):
exactly, exactly and so so it would be the opposite of
that.
But it's like, yeah, and soit's paco.
Powell always chickens out Likeno, but the Can we coin the
Paco?
Trade we might have the Pacotrade, that's great.
So they should probably cutrates.
They should let the moneysupply increase faster too,
(31:36):
because I think it's been tooslow over the last three years.
But anyway, that's why I thinkour yields are high, and Germany
I mean the US is neither one ofus are going to default on our
debt, and so this idea thattheir yields are lower because
(31:56):
they're a better risk, I justdon't buy it.
We have the ability to printmoney to pay off our bonds, and
so if it's fear about futureinflation because that's what
we're going to do well, I thinkGermany should have that too.
By the way, germany is.
If you go back to Liz Trussremember she was prime minister
(32:17):
of Britain for like two and ahalf weeks Because she proposed
a tax cut and at the same time,I think she was set up, the Bank
of England raised rates and itkind of blew up their pension
funds because rates went up andthey weren't expecting it and
they had all this leverage, andthen they blamed it on trusts
and then they drummed her out ofoffice.
(32:38):
Well, I want somebody to lookat German pension funds, because
these pension funds were buyingbonds the German Bund at
negative 60 basis points, andthose yields are now 270.
And if you run that throughyour Monroe trader I think it
might break it.
(32:58):
It's such a huge loss on thosebonds and nobody's talking about
it.
And I believe those Germanpension funds.
They're better funded than oursbut they've got huge losses on
their bond portfolios todaybecause they were buying rates
when yields were negative.
Ryan (33:16):
Yeah, so the dollar, relative to the euro and other
currencies as well, has weakenedlately.
Do you think that that issomething that is desirable?
From the perspective of theTrump administration especially?
That's a positive.
Brian (33:32):
It helps our exports, no doubt about it.
But here's, I believe, one ofthe reasons that the dollar
weakened.
So when we buy imports, we senddollars overseas.
There's this argument that whenyou're the world's reserve
currency, you have to run atrade deficit with the rest of
(33:54):
the world.
Because they need your currency, they buy oil in that currency,
they use it to back theircurrencies.
It's the world's reservecurrency, so they need dollars.
So, basically, we have to run atrade deficit.
Any country would if you're theworld's reserve currency.
Because they need your currency, the whole world does.
(34:15):
Well, if you think of it thatway, what it really means is the
way they get dollars is theysell stuff to us, Then we pay
them in dollars, and then theyhave those dollars and they buy
bonds or farmland or whatever itis, and then they and or they
use it to back their currency.
And and, and and and and.
So the front running of tariffs.
(34:37):
See, I actually added all thisup If you look at January,
february, march of of this yearcompared to last year.
So last year's average tradedeficit was $70 billion a month
roughly.
We went $120, $138, $148,something like that.
(34:58):
January, february, march,january, february, march.
If you add all those up andsubtract 70, 70, 70, we sent
$200 billion more in threemonths overseas, and so the
world was flooded in dollars.
Now, if you assume they wantdollars, they need them.
There's some demand for dollars.
(35:18):
It was about $70 billion amonth last year.
If you think that the tradedeficit comes from the need to
have dollars, it was about $70billion a month last year.
If you think that the tradedeficit comes from the need to
have dollars, it was about $70billion a month.
Well, all of a sudden, in thefirst quarter, we sent $200
billion extra.
So the world was if supply anddemand.
What that means is we had extradollars overseas.
No wonder the dollar fell,because the demand didn't change
(35:42):
.
Ryan (35:42):
We pulled forward all those imports pre-tariffs.
Brian (35:45):
Yep, and I believe now, with the front running over I
think it's over April, we wentfrom $140 billion trade deficit
to $60 billion.
It was the biggest monthlychange ever in the history of
the United States, and it wasall because of the front running
.
It's not underlyingfundamentals that are causing
(36:06):
any of this, and so what'shappened is now we're sending
fewer dollars, but we increasedthe supply of global circulating
dollars so massively relativeto their demand that no wonder
the dollar fell.
So everybody's telling me thedollar fell because Trump's
(36:28):
wrecking it and nobody wantsdollars anymore.
Well, let's just assume thatwould be true.
People want fewer dollars.
Well, we just sent them 200billion extra, so I don't even
have to use a falling demand toget a weak dollar.
It just stayed the same and wejust flooded the system, flooded
(36:50):
the zone, and that's why thedollar fell.
So I actually expect it tostrengthen here in the next few
months.
Ryan (36:56):
Okay.
So my final question for you wehad a negative GDP print in the
first quarter.
It sounds like you think that'sgoing to maybe reverse in the
second quarter.
Kind of the inverse side ofthat coin, maybe we have less
imports and therefore thatpositively contributes to GDP.
What about the rest of the year?
You know quarters three andfour.
(37:17):
Are you still thinking we'llhave a recession this year or
have you kind of changed thatbase case a bit?
Nope, I do?
Brian (37:24):
I mean ADP employment was 37,000.
If you look at the lastemployment report, it was pretty
weak on a bunch of fronts.
Initial unemployment claims arepicking up, Like auto sales,
and home sales haven't gone upfor five years.
Real retail sales are flat forthe last four.
I think we're finally going tohave that slowdown that we
(37:46):
should have seen right afterCOVID, but it was hidden because
of these massive budgetdeficits that we ran.
But to come back to the firstand second quarter, I think most
everybody understands this.
But if you go and buy a quarterzip at JCPenney's and it was
(38:06):
made in that means consumptiongoes up and that's part of GDP.
But if it came from China,that's not domestic product,
gross domestic product.
So what we do is you buy thequarter zip, consumption goes up
, but because we imported, wesubtract it, and what happened
(38:27):
is we brought all the quarterzips in for the whole year in
three months and so, even thoughpeople weren't buying that many
quarter zips, we had a biggernegative from the trade and
that's why we had a negativepoint two percent growth in
first quarter.
Well, when that reverses it,you get the opposite.
(38:47):
So right now, yeah, we're gonnahave four percent, it looks
like four percent or higher realgrowth in the second quarter.
And I see all these people goingon TV and telling me that's the
Trump boom.
And I laugh because this is all.
It's this trade disruptionwhich caused the negative number
(39:08):
and now it's going to causethis boom.
And neither one of them weretrue.
And if you average both of themtogether it's about 2% growth,
which is the average growth rateof the past 20 years.
So nothing's changed.
But I think in the second halfof the year the past 20 years so
nothing's changed.
But I think in the second halfof the year, as long as we don't
have some of these crazy movesin trade or something like that
(39:29):
we're going to see GDP growthslow.
Part of that is Doge.
Government employment wasgrowing twice as fast as private
sector employment in the lasttwo years Not anymore and
private sector hasn'taccelerated.
It's actually slowed down alittle too.
So you have government comingdown sharply and the private
(39:52):
sector not accelerating, whichmeans GDP growth is going to be
weaker in the next year and weneed to ignore these massive
swings in GDP in just the firsttwo quarters.
Ryan (40:06):
Interesting.
It'll be interesting to see howthat impacts profits in the
private sector if a lot of it'scaused by government employment
going down Right.
Brian (40:16):
Yeah, and it won't change .
Yeah, I mean, that is a greatpoint and that would be an
argument against my bearishnessabout the market.
I do think the slowdown in theeconomy is going to affect
profits.
They're not going to grow asfast as people think.
But, even more importantly, ifyou look at our models and I'll
kind of conclude on this we useprofits discounted by the
(40:37):
10-year.
Profits need to go up 30% thisyear where, if profits need to
go up 30% this year like I thinkthe bottom-up analysts have
them at 7 or 8 or 9 right now,but they need to go up 30% with
interest rates where they are tojustify the current valuation
of the S&P 500.
And I would argue that the oddsof GDP slowing down mean that's
(41:02):
virtually impossible.
Ryan (41:03):
Yeah.
Brian (41:04):
I actually look for earnings to grow less than the
consensus for this year becauseI see the economy growing more
slowly in the second half.
Ryan (41:13):
All right, well, we'll leave it there.
Thank you once again forjoining us on the podcast.
Look forward to maybe doing itagain later this summer,
absolutely, or early September,late August, something like that
.
Brian (41:23):
Perfect, always great to have you on.
Yeah, let's get here and bringBob Stein on and me on to talk
about when they do the realbudget.
Let's see if they actually do areal budget this year.
Ryan (41:32):
That sounds amazing.
Yeah, all right.
Thanks, brian, and thanks toall of you for joining us on
this episode of the First TrustROI Podcast.
We'll
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etsstrategist at First Trust.
Today, I'm joined by BrianWestbury, chief economist at
First Trust.
Brian and I discuss his outlookfor the US economy.
We talk about the budget andwhether the federal government
is capable of cutting spending.
We talk about the tax billthat's weaving its way through
(00:32):
Congress.
All that and more on thisepisode of the First Trust ROI
Podcast.
There's a lot of ways I want totake this conversation, but
we've got limited time and Ithink a good place to start is.
We talked about tariffs alittle bit last time, right, yep
, and you still hear thenarrative that tariffs are going
to cause inflation.
We've just recently had someinflationary prints that were
(00:56):
below the expectation.
Brian (00:58):
Four of them so what's your take there?
Ryan (01:01):
Let's revisit that for a second Explain.
Does that surprise you?
First of all, and why are weseeing the opposite of what
people expected?
Brian (01:09):
Yeah.
So, before we jump into tariffs, the number one thing, number
one way that I forecastinflation in fact, the only way,
is to look at the money supply.
And so, if we go back to 2008,that's when they started
quantitative easing.
Why didn't that QE turn intoinflation?
(01:32):
And it was because the Fed wasbuying all these bonds, printing
money, flooding the bankingsystem with deposits, but at the
same time, they jacked upcapital requirements and
liquidity rules and wouldn't letthe banks lend it out and, as a
result, m2, which is the moneysupply number that I look at and
(01:53):
the reason I do is becauseMilton Friedman told me to it
grew about 6% a year.
It was volatile, but about 6% ayear in the five, six, seven
years after COVID or after,excuse me, 2008 QE, and so
that's why we never gotinflation.
It was the same money supplygrowth as before 2008.
(02:17):
Then, along comes COVID.
We do QE again.
Many people said, ah well, itdidn't cause inflation the first
time, it won't cause inflationthis time.
But this time we actuallyreduced the liquidity rules, and
the reason we did is we wantedbanks to make the PPP loans and
(02:38):
also to take direct deposits forthe pandemic unemployment
benefits.
So what happened is the moneysupply exploded Between 2020 and
2022, m2 went up 40%.
It was literally one of theeasiest forecasts I ever made in
my career.
Inflation is coming and all youhad to do was look at M2.
(03:02):
Well, since then?
So M2 peaked in 2022.
It went down it actually wentnegative and we could talk that
gets a little like arcane, ifyou will but it went down and
then it went up and today the M2money supply is a half a
(03:24):
percent above where it was threeyears ago.
So I would call that flat.
I mean, the money supply hasn'tbeen flat, but technically,
from the peak to where we aretoday, it's flat and that's why
I think we're seeing better thanexpected inflation numbers.
Now, I would never use onemonth like one month of CPI at 0
(03:50):
or 0.1, or one month of PPI atnegative, 0.2, and everybody's
declaring victory or somethinglike that.
But no, but now we have fourmonths in a row of better than
expected inflation data on theCPI and the producer price index
, consumer and producer and, asa result, what I would argue is
(04:16):
yes, it's coming from thatslowdown in the money supply and
I expect inflation to continueto be better than people expect.
We've had a big bounce in oilprices, so maybe we'll have a
month where it jumps up, but thebottom line is inflation is in
a much better place todaybecause the money supply has
(04:38):
slowed so much so the tie-inwith the money supply.
Ryan (04:41):
The way I understand it, and mainly because of the way
that you've explained it, isthat the reason why that's more
important than, say, tariffs interms of influencing inflation
is because, let's say, as aresult of tariffs, I pay $10,000
more to buy a car, right, I'vegot $10,000 less to go and spend
on other goods and services.
Brian (05:08):
Therefore, it's going to put a downward pressure on the
price of those other goods andservices where there's less
demand, even though I'm paying ahigher price for the car, is
that pretty much Exactly right?
So, yeah, and all I talkedabout was inflation.
I forgot the tariff part of thequestion.
Sorry about that.
But yeah, tariffs will raisethe price of the things that are
tariffed.
But if we don't increase theamount of money in the economy
overall, then what that means isif everybody buys the same
(05:28):
amount of imported goods andpays higher prices for them,
then they have less money tospend on other things and those
prices, the demand for thatstuff falls and those prices go
down.
So it doesn't mean that in acertain month the CPI or the PPI
won't jump because we tariffeda whole bunch of things.
(05:52):
We have to remember that theCPI and the PPI are just
measures of prices.
They're not actually inflation,they're just our estimate of
inflation.
And so, even though they might,you know, when oil, like we
have a hurricane and they shutdown all the Gulf drilling, you
(06:14):
know, and they move everybodyoff the platforms, well, oil
prices go up and then the CPIwill go up that month, but then
the next month it'll come backdown.
So I'm not saying we won't seea month or two of measured
prices looking a little bithigher.
But overall, if the Fed doesn'taccommodate it by printing more
(06:36):
money, then that will allrecover and inflation itself
won't change.
Inflation is, by definition,money printing.
It's not tariffs, it's notwages, it's not hurricanes, it's
not drought causing crop pricesto go up.
It's printing money.
(06:57):
You print more money, you getinflation.
That's what inflation is.
Ryan (07:02):
Okay, there's another nuance there and something that
you've talked about on ourpodcast before, involving
government spending and a lot ofpeople kind of equate well, the
government's spending more,therefore it's going to cause
inflation.
But you have told me thatthat's not the case, Right?
Brian (07:16):
Only if the Fed prints the money to pay for the
government spending.
Ryan (07:20):
Okay, so that is a good segue to my next topic for you,
and that is government spending.
Okay, so that is a good segueto my next topic for you, and
that is government spending.
Yep, you know there's, there'sbills that are in process that
you know pass the Senate goingto the house and involving the
reconciliation bill, the taxbill and the spending associated
with that.
Were you surprised, or are yousurprised, to see the level of
(07:41):
spending that's kind of embeddedin that bill?
And I guess the bigger questionis is it possible for the
government to slow down spendingor to cut spending?
Brian (07:50):
Yeah, I guess I'm not surprised I've become more
cynical lately.
And just, I don't mean tocorrect you in public, but it
passed the House and it's now inthe corrections, don't worry.
It passed the House and it's nowin the Senate.
So it's a reconciliation bill.
And the craziest thing has goneon because in the
(08:12):
reconciliation bill so SpeakerJohnson, the Speaker of the
House, said, look people.
He actually used the wordpeople, look people, people,
look people.
It's not a.
This isn't a spending bill,it's a reconciliation bill.
And what that means is they.
They can only do things thatlike taxes or entitlement.
(08:36):
They can't.
They can't do the real budgetin a reconciliation bill.
So so in a way it's kind oftrue, but at the same time
majority majority leader Thunein the Senate comes out and says
this is the biggest spendingcut in history and it's.
It's easy for people to likewait a minute, I thought it
wasn't a spending bill, nowyou're telling me it and so what
(08:59):
.
But what they can make changesin is things like Medicaid.
So what they've done is they'veput a work requirement in.
If you're on Medicaid becauseof your income level, then you
have to have, you have to work.
It's kind of like the workrequirement that Bill Clinton
put in for welfare and thenPresident Obama took it out and
we need to put that back in.
(09:20):
It actually led to moreemployment and it's a good thing
, because these programs aren'tdesigned just to let you not
work, but that will save somemoney relative to the baseline.
This is the problem with doingall this.
The Congressional Budget Officeforecasts spending in the next
(09:40):
10 years, 20 years, and thenthey compare the new bill to
what they forecast and then,even though spending's going up
every year, they call it aspending cut if it's less than
the baseline.
And so they did make someMedicaid changes.
They also rolled back some ofthe Green New Deal which was in
(10:04):
the Inflation Reduction Act, butat the same time they increased
spending on the military and onimmigration.
So they want to build a wall,they need to pay for all these
deportations and more ICEofficers to round people up, and
so they've increased spendingwith one hand, reduced the
growth of Medicaid in the futurewith another hand, and net, net
(10:27):
, net.
The budget will grow everysingle year.
We're going to keep spendingmore every year for the next 10
years.
The level of spending relativeto GDP comes down a little bit,
and that's what I focus on.
How much of our GDP isgovernment spending?
And we peaked at 25%, 26%, 27%during COVID and it
(10:50):
automatically came back down to23%, 24% and by the end of this
10-year period, this currentbill the one big beautiful bill
gets spending down to about 22%of GDP.
Gets spending down to about 22%of GDP.
To put that in perspective,when Bill Clinton left office,
(11:13):
it was 18% of GDP.
So the two crises the 08 crisis, the financial panic and then
COVID have permanently boostedspending.
It looks like, even withRepublicans in control, about
five or six percentage points ofGDP, and that, to me, is that's
what will create problems inthe future.
(11:33):
Here's where the rubber meetsthe road.
So this bill it only needs 51votes, but then they will go to
the budget and that's when youpass the 12 appropriations bills
.
There's 12 parts of government,if you will, and every
committee has a different billthat they push through and then
(11:54):
they put it all together andthat's the budget.
That's where they can affectdiscretionary spending.
How much do we spend on defense?
How much do we spend on foodstamps?
How much do we spend on defense?
How much do we spend on foodstamps?
How much do we spend on healthcare and all of those?
By the way, congress hasn'tpassed a real budget, like
(12:14):
literally got the Excelspreadsheet out, put the numbers
in, everybody voted on it andthat's our budget in over 20
years and they call it regularorder.
So they don't follow regularorder anymore.
We don't pass budgets anymore,and that'll come in September of
this year, and that's whenwe'll find out whether they're
(12:36):
really interested in cuttingspending.
So is that back in the Bushadministration?
Ryan (12:40):
Oh yeah.
Brian (12:40):
It goes all the way back to the 90s, the last time we had
a true regular order thing.
You know it has to.
Goes all the way back to the90s, the last time we had a true
regular order thing.
It has to pass all thecommittees.
Then you put the 12appropriation bills in front of
the full House and Senate.
Then they pass them, then theyput it together and they have a
budget.
Every company, in everydivision of every company, comes
(13:04):
up with a budget and then theyaggregate them and they have to
send them to the CFO of everycompany.
In every division of everycompany, comes up with a budget
and then they aggregate them andthey have to send them to the
CFO of every company.
And they have to do that everyyear.
And if they don't do it, youget fired.
Well, congress hasn't done itfor over 20 years.
In my view, they should all befired, but they're not doing
their job.
And that to answer.
(13:24):
The tail end of your questionis do they have the will to
actually cut spending?
Apparently not, because theywon't even pass a real budget.
They pass continuingresolutions, they go.
Basically what they're sayingis ah, whatever they did last
year, we'll do again this year.
And then they add to thatspending with emergencies, and
(13:47):
so I become massively cynical.
And that's, by the way, thisgoes to Musk.
I mean, there's a big debateWas their fight fake?
Was it real?
I don't even care about allthis.
Ryan (13:59):
There's also the debate about where the black eye came
from from Musk and the OvalOffice.
Brian (14:05):
Besant, not his kid.
Yeah, I heard that Besant andMusk got physical, but where I
was going to go with this isthat I truly believe Musk was
massively frustrated Becausewhen you run into the buzzsaw of
the bureaucracy and of Congressand none of them want to cut
(14:28):
spending, I mean it's not like acompany, like he's CEO he says,
do this.
And somebody either does it orthey get fired.
Well, you know he's right, weshould cut this, we should cut
this.
He found fraud, he found wasteand nobody cares and they'll
push back and try to force it tobe.
(14:48):
So I get why he was frustrated.
Ryan (14:57):
Yeah, one of the forms of potential spending cuts that I
just heard about and I don'tknow if you saw this on CNBC or
not, but Ted Cruz was just onCNBC within the last couple of
weeks talking about somethingthat you've talked about for
years and that is payinginterest the US government
paying interest on excessreserves sitting on the balance
sheets of banks, and he saidsomething like we could save a
trillion dollars if we stoppaying interest on excess
(15:17):
reserves.
Brian (15:20):
So maybe it sounds like you did see that.
Oh, I've been on the phone withTed Cruz, okay.
Ryan (15:24):
so my question is is that actually something that could
happen?
Because my fear would be that,okay, they stopped paying
interest on excess reserves andthe banks decide that they're
going to lend all that money out, and then you've got all that
money in the wild.
Brian (15:39):
Well, that's the big fear of going back to where we were
in 2007.
But I said this at the verybeginning Ben Bernanke did
quantitative easing and wedidn't have inflation.
So if they stop paying it's?
There's three reasons banksaren't taking all of this money
(16:01):
that the Fed printed and lendingit out.
Three reasons.
Number one we raised capitalrequirements on banks, so they
can't.
They have a limit on the sizeof the balance sheet that they
can hold with their currentcapital.
The second thing is we haveliquidity rules on banks their
(16:23):
current capital.
The second thing is we haveliquidity rules on banks, so
they have to have a certainamount of cash and they get to
count reserves as part of thatcash.
So if we raise liquidityrequirements, they would have to
hold more cash and make fewerloans.
The third reason is we'repaying them to hold those
reserves and that's the intereston reserves.
So there's three tools.
If you got rid of one, you canmake it up with the other two,
(16:46):
and so what I would argue is itdidn't cause inflation with
Bernanke and it doesn't have tocause inflation today.
And it's interesting, if we stoppaying interest to banks, the
Fed still earns $100 billion.
See, right now we're payingbanks about $200 billion a year
(17:06):
roughly and these are all roughnumbers, I'm not trying to be
exact and they earn about $100billion a year on the bonds that
they hold, which means the Fedis losing $100 billion a year.
If we stop paying banks, theywould now be making $100 billion
a year.
If we stop paying banks, theywould now be making $100 billion
a year and that money wouldflow into the Treasury, and
(17:29):
that's a trillion dollars ofmoney that goes to the Treasury.
Now banks would lose $200billion.
I still don't understand howElizabeth Warren isn't having a
cow over this, because she hatesbanks and I don't think that's
too overstated Private banks, Imean, she wants a national bank,
(17:52):
and here we are paying privatebanks $200 billion a year and
seemingly nobody cares, and sothat's where Ted Cruz is getting
the trillion dollars.
Over a 10-year period, if theFed was making $ because of this
(18:24):
new system of managing itsmonetary policy abundant reserve
policy they have lost $225billion over the last few years,
and what they call that is adeferred asset.
I don't know how you call aloss an asset, but nonetheless
(18:47):
they do, and the whole idea isthat at some point we plan on
making a profit again Soundslike a private equity deal,
right.
Like at some point we're goingto make a profit again, so we're
going to call this a deferredasset and when we make a profit
again we'll pay this down.
And that's their promise.
(19:08):
Like so yeah, we've lost money,treasury, and we've had to
borrow from you to pay oursalaries and keep our lights on,
but eventually we're going tomake a profit again and we'll
pay you back.
And I want to know.
The question I want asked is howare you paying salaries?
Because if it was a privateequity firm, let's say it's a
(19:29):
private investment and you're afinancer of it, and you give
this company and they have aburn money and they have a burn
and they burn through all themoney you gave them.
They have nothing in the bank.
They have a law.
Actually, they, they, they havea loss because they borrowed
money from somebody else andspent it and and and.
(19:50):
Then what do they do?
They either have to raise moremoney or they have to shut down.
Well, the fed just keeps going.
They either print the money topay their people or they borrow
it from the Treasury, like underthe table, and call it a
deferred asset, but nobody willask them these questions and
hopefully, with Senator Cruzdoing this, those questions
(20:13):
start to get asked.
And the reason he's doing this,what makes sense is if we can
save a trillion dollars, then wecan cut taxes a trillion
dollars.
So why is the taxpayer payingthe Fed to pay private banks?
Ryan (20:29):
Yeah, it seems like that would have to gather some
momentum pretty quickly to getthat discussion going.
Yeah, well, I think it is.
Brian (20:36):
I've done Charlie Kirk on this issue, steve Bannon on
this issue, that's how it cameup to Senator Cruz and now he's
jumped aboard and I think we'regoing to get a few other members
that start talking about this.
And it's about time that theFed faced some questioning,
because what they did in 2008 is, in my opinion, did in 2008, is
(21:08):
, in my opinion, one of the mostimportant changes in monetary
policy, economic policy, in UShistory.
I mean, if you look at the Fed,the first one was we invented
it in 1913, and then Nixonclosed the gold window in 1971.
And those are massive events,huge historical economic events
in the history of the UnitedStates.
I would put this 2008 change,when we started paying interest
(21:29):
on reserves and started doing QE, right up there with either of
those two.
Ryan (21:35):
Since we last spoke on the podcast, another thing that's
happened has been thedowngrading of US debt by the
final of the three major ratingagencies.
I'm curious of your take onthat.
You know, does that matter?
And you know, is the US stillthe?
I mean, will we still be theglobal reserve currency?
(21:57):
And you know all the otherissues attached to that.
So is it important?
Brian (22:01):
first off, yeah, moody's just downgraded us from AAA to
AA or I think that's the.
I don't even follow that kindof stuff that closely.
I need to talk to the bondpeople about that.
That's right, but all theratings, but by one notch.
All right, we're one notchbelow perfect, but S&P and Fitch
were already there, right, sookay, what's new?
(22:23):
And I would argue Moody's is,of the three rating agencies, is
the most political.
So why didn't they do it whenwe were running $2 trillion
deficits over the last two years, with a 4% unemployment rate?
That?
Ryan (22:39):
is an interesting question .
Brian (22:40):
They waited until Trump was in office, right, and it's
all because of a guy named MarkZandi, and so it's political.
But having said that, it's aserious question Are we at risk
of losing Americanexceptionalism?
You know, and I hear two.
I mean, there's a million viewsamongst people, right, but two
(23:04):
real divergent kind of pods.
One is Trump is wreckingAmerica, all our relationships
with everybody, everywhere.
Europe hates us, china hates us, everybody hates us.
Everybody's selling the dollar.
Nobody will buy US stocksanymore.
American exceptionalism is done.
Trump is killing it.
The other one is he's playing3D chess.
(23:26):
Actually, I read on Twitter theother day he's playing 5D chess
.
Wow, yeah, I don't know whatthe other Ds are yes.
I don't know what the other.
Ds are A lot of dimensions, yes,but he's playing 5D chess and
nobody understands it and it'sso brilliant.
America is going to be tripleexceptional, you know, and I
think both of these are wrong.
And so we're somewhere in themiddle.
(23:49):
The big beautiful bill keepstax rates from going up, that's
positive.
We're actually going to pass inthat big beautiful bill
expensing for all businessinvestment, which is fantastic.
We need that.
That's a positive change intaxes.
And so we're not making policyany worse.
(24:15):
And we're also at the margin.
Slowing spending a little bitDoesn't mean deficits won't be
big, but they're not going tokeep growing, so that's good.
And so all this idea that seeMoody's, actually, the reason
they downgraded is because ofthe tax, like keeping the tax
(24:36):
rate the same.
It's not the spending part thatthey're concerned with.
No, they don.
No, they want tax rates to goup.
That's the craziest thing InIllinois, for example, when
Illinois or Chicago raises taxeson people, moody's raises the
rating because that's good,we're going to get more revenue,
(24:58):
we can afford more debt.
Well, the problem is they raisetax rates and more people leave
and they get less revenue.
But that's the way Moody's doesit.
And so what they're comparingit to is what the Congressional
Budget Office CBO baseline saidhey, at the end of this year tax
rates are going to go up andthat means we're going to get
(25:18):
more revenue.
And so if we're going to keepthose tax rates where they are,
that means we're going to getless.
And so it's all compared tothis future baseline which
they're always wrong about, bythe way those forecasts are
terrible.
But because if we keep taxrates low, in my opinion we're
more likely to get afaster-growing economy.
(25:39):
And so, anyway, to come back tothis, who's going to replace the
dollar?
Like what do you need?
The key thing here is I need tofind a better way to say this
but America is not strongeconomically or in any way
because we're the world'sreserve currency or in any way
(26:02):
because we're the world'sreserve currency.
We're the world's reservecurrency because we're strong.
Now I don't mean that doesn'tmean we're booming in the
economy.
Strong means a bunch of things.
We have a constitution.
We have accounting rules thatare the best in the world.
You can trust our data.
(26:23):
We have respect rules that arethe best in the world.
You can trust our data.
We have respect for propertyrights.
We enforce contracts.
You make a contract in the US.
I mean, I'm sure people can findyou know you go back to the
auto bailouts and thebondholders were, you know, I
think, abused in that situation.
You can find a few things, butwhat other country in the world
(26:43):
has better legal and financialstructures than we do?
And that's what you need.
To be the world's reservecurrency.
You also need to be big, a bigeconomy.
So maybe India, maybe China,but they don't have the same
financial infrastructure.
I would argue Switzerland couldbe a reserve currency.
(27:08):
The problem is they're not bigenough.
So what other currency in theworld could take it over?
And then when you look at our,yeah, we have $36, $37 trillion
in debt, but we also have $350trillion in assets in America
and our GDP is $25 trillion.
So I mean, yeah, debt's high,but are we going to go broke,
(27:33):
like, no, like.
So I'm not opposed to havingthe rating of our bonds
downgraded a notch because we'reout of control $2 trillion
deficits and seemingly aninability of even Republicans to
cut spending.
Yeah, down the road, that's anissue.
(27:55):
But is it an issue today?
No, and actually bond yields, Ithink, are lower today than
when that rating got changed.
Ryan (28:04):
Interesting.
There's definitely that gapbetween, say, the German boond
yields and what we're paying onour debt here, and so maybe that
reflects.
You know, the differentialbetween those is the difference
between AAA and whatever notchwe're at now, yeah, Germany has.
Brian (28:24):
I just looked at this the other day and forgive me if I'm
off by a few percentage points,but it's like I think their
debt to GDP is 63%, 64%,something like that.
Ours is over 100, 125,something like that.
So those are don't quote those,look them up before you use
them but it's a significantdifference.
(28:46):
But I still wouldn't argue thatGermany is a better investment
than the United States.
Neither one of us are going todefault and the US is not going
to default.
So the reason I think our bondyields are as high as they are
is because the Fed's holdingrates up and won't cut them.
(29:09):
The short-term interest rate inthe United States is too high.
Today.
We have about 2.5% inflation atthe most.
Most if you have one, one oneand a half percent real yield on
top of that would give youthree and a half to four percent
on interest rates and the Fed'sholding the Fed funds rate at
(29:30):
four and a half.
I think the Fed should cut.
Given where inflation is today,it's not like imperative that
they cut, but but interest rates, real yields today are high
relative to history.
They're actually higher thanthey have been since 2006, 2007.
Ryan (29:49):
So there's room to cut by the Fed, but it seems like
they've been somewhat reluctantto give in and I can understand
some of the reasons why they'reafraid that they're going to cut
and then inflation is going tocome roaring back Right.
Do you think that by the end ofthe year I think there's one or
two cuts that are priced in, Isit?
Do you think that the Fed willhave sort of the will to make
(30:12):
cuts by the end of the year?
Brian (30:13):
I think.
I think inflation data is goingto going to continue to be good
we talked about four months ina row and if it stays good,
they're going to be forced tocut.
Okay, I mean, they don't liketo look.
If Trump wants lower rates, heneeds to stop yelling at the Fed
, because they don't want toappear as if they're cutting
because he yelled at them, right?
(30:34):
So that politics is funky.
Sometimes it's backwards, youknow, and so the more he yells
at them, the more unlike theythey are.
Not just I don't think Powelllikes Trump, but but it's not
just because of that, it'sbecause they want to appear
independent.
They don't want.
They don't want to appear likethey're their taco you know
(30:55):
that's what I was gonna do.
Ryan (30:57):
It's like the opposite of the taco tree yes, exactly the
taco trade for people, isn't it?
Trump always chickens out, andand he hears about that and I
suspect that he's like oh, I'mnot gonna chicken out now and
yeah, and you know, if you wanttrump to raise tariffs, you call
him.
You know, you invent the tacotree, right?
Brian (31:14):
exactly, exactly and so so it would be the opposite of
that.
But it's like, yeah, and soit's paco.
Powell always chickens out Likeno, but the Can we coin the
Paco?
Trade we might have the Pacotrade, that's great.
So they should probably cutrates.
They should let the moneysupply increase faster too,
(31:36):
because I think it's been tooslow over the last three years.
But anyway, that's why I thinkour yields are high, and Germany
I mean the US is neither one ofus are going to default on our
debt, and so this idea thattheir yields are lower because
(31:56):
they're a better risk, I justdon't buy it.
We have the ability to printmoney to pay off our bonds, and
so if it's fear about futureinflation because that's what
we're going to do well, I thinkGermany should have that too.
By the way, germany is.
If you go back to Liz Trussremember she was prime minister
(32:17):
of Britain for like two and ahalf weeks Because she proposed
a tax cut and at the same time,I think she was set up, the Bank
of England raised rates and itkind of blew up their pension
funds because rates went up andthey weren't expecting it and
they had all this leverage, andthen they blamed it on trusts
and then they drummed her out ofoffice.
(32:38):
Well, I want somebody to lookat German pension funds, because
these pension funds were buyingbonds the German Bund at
negative 60 basis points, andthose yields are now 270.
And if you run that throughyour Monroe trader I think it
might break it.
(32:58):
It's such a huge loss on thosebonds and nobody's talking about
it.
And I believe those Germanpension funds.
They're better funded than oursbut they've got huge losses on
their bond portfolios todaybecause they were buying rates
when yields were negative.
Ryan (33:16):
Yeah, so the dollar, relative to the euro and other
currencies as well, has weakenedlately.
Do you think that that issomething that is desirable?
From the perspective of theTrump administration especially?
That's a positive.
Brian (33:32):
It helps our exports, no doubt about it.
But here's, I believe, one ofthe reasons that the dollar
weakened.
So when we buy imports, we senddollars overseas.
There's this argument that whenyou're the world's reserve
currency, you have to run atrade deficit with the rest of
(33:54):
the world.
Because they need your currency, they buy oil in that currency,
they use it to back theircurrencies.
It's the world's reservecurrency, so they need dollars.
So, basically, we have to run atrade deficit.
Any country would if you're theworld's reserve currency.
Because they need your currency, the whole world does.
(34:15):
Well, if you think of it thatway, what it really means is the
way they get dollars is theysell stuff to us, Then we pay
them in dollars, and then theyhave those dollars and they buy
bonds or farmland or whatever itis, and then they and or they
use it to back their currency.
And and, and and and and.
So the front running of tariffs.
(34:37):
See, I actually added all thisup If you look at January,
february, march of of this yearcompared to last year.
So last year's average tradedeficit was $70 billion a month
roughly.
We went $120, $138, $148,something like that.
(34:58):
January, february, march,january, february, march.
If you add all those up andsubtract 70, 70, 70, we sent
$200 billion more in threemonths overseas, and so the
world was flooded in dollars.
Now, if you assume they wantdollars, they need them.
There's some demand for dollars.
(35:18):
It was about $70 billion amonth last year.
If you think that the tradedeficit comes from the need to
have dollars, it was about $70billion a month last year.
If you think that the tradedeficit comes from the need to
have dollars, it was about $70billion a month.
Well, all of a sudden, in thefirst quarter, we sent $200
billion extra.
So the world was if supply anddemand.
What that means is we had extradollars overseas.
No wonder the dollar fell,because the demand didn't change
(35:42):
.
Ryan (35:42):
We pulled forward all those imports pre-tariffs.
Brian (35:45):
Yep, and I believe now, with the front running over I
think it's over April, we wentfrom $140 billion trade deficit
to $60 billion.
It was the biggest monthlychange ever in the history of
the United States, and it wasall because of the front running
.
It's not underlyingfundamentals that are causing
(36:06):
any of this, and so what'shappened is now we're sending
fewer dollars, but we increasedthe supply of global circulating
dollars so massively relativeto their demand that no wonder
the dollar fell.
So everybody's telling me thedollar fell because Trump's
(36:28):
wrecking it and nobody wantsdollars anymore.
Well, let's just assume thatwould be true.
People want fewer dollars.
Well, we just sent them 200billion extra, so I don't even
have to use a falling demand toget a weak dollar.
It just stayed the same and wejust flooded the system, flooded
(36:50):
the zone, and that's why thedollar fell.
So I actually expect it tostrengthen here in the next few
months.
Ryan (36:56):
Okay.
So my final question for you wehad a negative GDP print in the
first quarter.
It sounds like you think that'sgoing to maybe reverse in the
second quarter.
Kind of the inverse side ofthat coin, maybe we have less
imports and therefore thatpositively contributes to GDP.
What about the rest of the year?
You know quarters three andfour.
(37:17):
Are you still thinking we'llhave a recession this year or
have you kind of changed thatbase case a bit?
Nope, I do?
Brian (37:24):
I mean ADP employment was 37,000.
If you look at the lastemployment report, it was pretty
weak on a bunch of fronts.
Initial unemployment claims arepicking up, Like auto sales,
and home sales haven't gone upfor five years.
Real retail sales are flat forthe last four.
I think we're finally going tohave that slowdown that we
(37:46):
should have seen right afterCOVID, but it was hidden because
of these massive budgetdeficits that we ran.
But to come back to the firstand second quarter, I think most
everybody understands this.
But if you go and buy a quarterzip at JCPenney's and it was
(38:06):
made in that means consumptiongoes up and that's part of GDP.
But if it came from China,that's not domestic product,
gross domestic product.
So what we do is you buy thequarter zip, consumption goes up
, but because we imported, wesubtract it, and what happened
(38:27):
is we brought all the quarterzips in for the whole year in
three months and so, even thoughpeople weren't buying that many
quarter zips, we had a biggernegative from the trade and
that's why we had a negativepoint two percent growth in
first quarter.
Well, when that reverses it,you get the opposite.
(38:47):
So right now, yeah, we're gonnahave four percent, it looks
like four percent or higher realgrowth in the second quarter.
And I see all these people goingon TV and telling me that's the
Trump boom.
And I laugh because this is all.
It's this trade disruptionwhich caused the negative number
(39:08):
and now it's going to causethis boom.
And neither one of them weretrue.
And if you average both of themtogether it's about 2% growth,
which is the average growth rateof the past 20 years.
So nothing's changed.
But I think in the second halfof the year the past 20 years so
nothing's changed.
But I think in the second halfof the year, as long as we don't
have some of these crazy movesin trade or something like that
(39:29):
we're going to see GDP growthslow.
Part of that is Doge.
Government employment wasgrowing twice as fast as private
sector employment in the lasttwo years Not anymore and
private sector hasn'taccelerated.
It's actually slowed down alittle too.
So you have government comingdown sharply and the private
(39:52):
sector not accelerating, whichmeans GDP growth is going to be
weaker in the next year and weneed to ignore these massive
swings in GDP in just the firsttwo quarters.
Ryan (40:06):
Interesting.
It'll be interesting to see howthat impacts profits in the
private sector if a lot of it'scaused by government employment
going down Right.
Brian (40:16):
Yeah, and it won't change .
Yeah, I mean, that is a greatpoint and that would be an
argument against my bearishnessabout the market.
I do think the slowdown in theeconomy is going to affect
profits.
They're not going to grow asfast as people think.
But, even more importantly, ifyou look at our models and I'll
kind of conclude on this we useprofits discounted by the
(40:37):
10-year.
Profits need to go up 30% thisyear where, if profits need to
go up 30% this year like I thinkthe bottom-up analysts have
them at 7 or 8 or 9 right now,but they need to go up 30% with
interest rates where they are tojustify the current valuation
of the S&P 500.
And I would argue that the oddsof GDP slowing down mean that's
(41:02):
virtually impossible.
Ryan (41:03):
Yeah.
Brian (41:04):
I actually look for earnings to grow less than the
consensus for this year becauseI see the economy growing more
slowly in the second half.
Ryan (41:13):
All right, well, we'll leave it there.
Thank you once again forjoining us on the podcast.
Look forward to maybe doing itagain later this summer,
absolutely, or early September,late August, something like that
.
Brian (41:23):
Perfect, always great to have you on.
Yeah, let's get here and bringBob Stein on and me on to talk
about when they do the realbudget.
Let's see if they actually do areal budget this year.
Ryan (41:32):
That sounds amazing.
Yeah, all right.
Thanks, brian, and thanks toall of you for joining us on
this episode of the First TrustROI Podcast.
We'll
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