July 8, 2025 • 38 mins
Chuck Zodda and Marc Fandetti discuss Trump's new tariff threats set off a global scramble to avoid tariffs. What if this time really is different for investors? The Trump administration wants lower rates but is going about it the wrong way.
Mark as Played
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Episode Transcript
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Speaker 1 (00:00):
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(01:06):
and Mark VANDETI.
Speaker 2 (01:09):
Chuck, Mark and Tucker with you here.
Speaker 3 (01:12):
And top story today is that yesterday afternoon, over the
course of a period of several hours, the Trump administration
sent out a number of letters to different countries telling
them the new tariff rates that they are going to
be facing on August first. And so Mark, I can't
(01:33):
help but be feeling a little bit of deja vu.
It's like we hopped in our time machine and went
back in time three months to April second, because well,
a couple things.
Speaker 2 (01:43):
First, the rates don't really differ.
Speaker 3 (01:46):
Very much from the announced rates that we saw on
April second, to begin with. In some cases they're the same,
in some cases they are a percentage or two higher
or lower. And the only difference, I guess is the medium.
It's a letter instead of a big poster board. But
markets sold off very modestly yesterday, less than a one
percent drop across all three major US indices. And so
(02:09):
I think, in my opinion, markets and my own personal
view at this point is hey, like, unless proven otherwise,
you kind of have to assume that this is like
an opening volley, and then things are going to move
down from there, because that's basically what we've seen over
the first six months of this Trump term.
Speaker 4 (02:30):
Surprised at how or maybe I shouldn't be at how
little markets are reacting today. We've gotten not much new
detail over the past twenty four hours. But you think
that because of the level and breadth of these things,
they're clearly going to have an economic impact on inflation,
(02:50):
short term, maybe long term, on output, maybe long term.
You think stocks would have reacted with more urgency, but
they don't seem to have. Do you. Would you chuck
that up to markets not taking him that seriously, or
the fact that there's an escape clause in these in
these letters.
Speaker 3 (03:08):
I do, and even the fact that I think it
was after hours it was around maybe six or six fifteen.
The President even said, look, August first is not a
hard deadline like that could even change. And so I
think that by and large, if you look at the
major tariff negotiations or announcements and things like that, the
(03:30):
trend in every single one has been, hey, we're starting
from this point, and then whether it's within a period
of hours in some cases days or weeks, you see
those levels, you know, come down, and they have not
stayed at the announced levels. I can't think of one
area of one country that has you know, actually ended
(03:53):
up paying the original you know, announced levels of tariff's.
The only place where you have I've seen that happen
is on the sector related tariffs. Those you have not
seen any significant movement on. The one place where you
have is in the auto sector, where they made some
changes based on you know, the imports of parts and
things like that. But by and large, the trend in
(04:17):
all of these other country based tariff announcements has been
initial number is high, and then they subsequently come down,
and so for better or for worse, I think that
is what the market is conditioned for, and so you're
not seeing the response on the announcement. I think ultimately
it's going to be is their implementation. And the other
(04:40):
thing that I think we're really just transitioning towards at
this point is Okay, there's you know, certain baseline level
of tariffs that are in place at the moment. Show
me how this is actually going to affect the US
economy because to this point, while we have started to
see some slowing, there has not been a meaningful significant
down shift that has happened in the US economic data.
(05:02):
Broadly at this point that you can point to tariff's
as being the main cause.
Speaker 4 (05:06):
Of Yeah, I just don't know how you model the
impact of these things, given how fluid it all is.
And I understand that's part of the negotiation. Negotiations usually
have an aim an objective. I still don't understand what
that is. Do we want them are our trading partners
(05:27):
to lower barriers to our imports? Do we want to
onshore manufacturing, in which case you need to keep the
tariffs in place and they need to be high, And
those two objectives are intentioned, you can't have both. I
don't understand what the objective is on top of not
knowing whether or not to take the threat seriously. And
(05:48):
I imagine our trading partners, well, it's been reported, so
I'm pretty sure our trading partners feel the same way.
They don't know what we want.
Speaker 3 (05:56):
So I think in looking at this, and again, there
have been a number of different items that have been discussed.
As far as you know the reasons for this, Uh,
it can be again, I'm just gonna throw these out
there as things that different people from the Trump administration
have mentioned. You have the idea of raising revenue. You
have the idea of bringing manufacturing jobs back. You have
(06:17):
the idea, you know, with the original Mexico and Canada ones. Hey,
we want to use this to you know, as a
as a you know, as you know, a stick to
get Canada and Mexico to stop fentanyl trafficking again. I'm
just kind of going through the list of things that
we've seen, the big ones that I think are apparent
(06:38):
right now, and I want to let's look at the
the Vietnam announcement from last week, because the Vietnam deal
came through and it was a twenty percent tariff on
Vietnamese imports with a forty tariff on transshipped goods meaning
(06:58):
goods that came from another entry through Vietnam in order
to you know, miss other tariffs to try to avoid them.
And so I think that this temple gives us a
few different insights into what is going on. Because I'm
a big believer, especially when it comes to like how
this is all played out publicly. Don't pay attention to
(07:19):
what people are saying, pay attention to what people are doing,
and this is something that is being executed now. So
the twenty percent tariff, the first thing that I look
at there is I say, okay, there is a clear
desire to raise revenue from that. I think that has
to be very very clear, because if the idea is, hey,
(07:39):
we don't want people to be buying as much stuff
from China, we want them to be buying from other places,
if you really wanted it to just be hey, buy
whatever you want from Vietnam, then you wouldn't have any
tariff in there. You'd have a free trade green where
you say, no, we're not gonna have any tariff barriers.
And that's that's just what it's going to be. The
trans meant peace in there gets it what I think
(08:02):
is ultimately a major goal of the Trump administration, which is, hey,
we don't just want to put a tariff on China
and then have a bunch of Chinese stuff ship through
other Southeast Asian countries that you know, they add one
bolt onto it and then they send it our way
and they say, oh, it's made in Vietnam, are made
in Thailand, and you pay a.
Speaker 2 (08:20):
Lower tariff rate.
Speaker 3 (08:21):
So I think that gets it A big piece there,
which is the Trump administration, I suspect is not just
asking for countries to buy more US stuff, but also
to buy less stuff and be less helpful to the
Chinese government in accomplishing Chinese economic games. And I think
that that is a big piece of what is being
(08:42):
talked about and negotiated here, and that's at least what
I gather from the Vietnam agreement. The other piece that
I guess I look at is, and that makes this challenging,
is you kind of look at the numbers and you're like,
let's say that I'm Japan right now, who just got
a letter saying, hey, you're gonna be paying you know,
(09:03):
companies that are importing from Japan are gonna be paying
a twenty five percent tariff on Japanese imports. If I
look at Vietnam at twenty percent and I'm Japan saying, okay,
my exports are gonna be you know, taxed at a
rate of you know, twenty.
Speaker 2 (09:17):
Five percent to the US, do I even.
Speaker 3 (09:20):
Really want to play ballg Is that enough of a
difference for me to upend my whole world and just
be like, oh, I need to bend over backwards to
do this and that and everything, and all I get
is a easingly like five percent lower rate, Like you
got to offer me more than that.
Speaker 2 (09:34):
I can't just be there.
Speaker 3 (09:36):
So part of me wonders, you know, hey, what's the
actual range of rates that the Trump administration is willing
to impose? And is there enough meat there for negotiation?
Because the lowest that we've seen and the lowest you're
gonna get is the ten percent that the UK has
if Vietnam's at twenty, Like, what what's the actual range?
Speaker 1 (09:54):
Like?
Speaker 3 (09:54):
What what incentive is there for me to negotiate if
I'm not really getting that much better of a deal?
Speaker 2 (10:00):
Well, I guess is one of the questions that I
do have out there. I threw a lot at you
mark your.
Speaker 4 (10:04):
Thoughts with respect to your first point. That's a laudable,
maybe at least to me, objective containing if you will
China economically? Are there better ways to do it than
pissing off the whole world and subjecting us all to
this helter skelter erratic stop go trade policy. Six months
into it, I'm exhausted, I imagine most Americans are, so
(10:26):
that my first question is are there better ways to
achieve that objective? If that is the objective? And by
the way, if that is the objective, why not just
say it. China is a threat to our national and
economic security. We'll find common ground deal with them when
we can when they're playing by the rules of Western civilization. Sorry,
that's a chauvinists way to think about it, but it's
(10:48):
the way things are. With respect to the second point,
optimal rate of tariffs, A lot of work's been done
on optimal tariffs, and not surprisingly, they depend on the
objective you're trying to achieve. Given what we've seen as
to how the present suite of tariffs that was rolled
out were derived that much mocked formula with a lot
(11:10):
of arcane Greek symbols in it that just kind of
cancel each other out, meaning they don't actually factor into
the ratio. I don't have a lot of confidence that
these tariffs were optimally arrived at based on what we've
seen so far.
Speaker 2 (11:24):
Just take a quick break.
Speaker 3 (11:24):
I want to dig in a little bit more to
how this may affect businesses as they go into the
second half of the year. So let's take a quick
break and then we'll discuss that when we return.
Speaker 1 (11:35):
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Speaker 2 (12:42):
So Mark.
Speaker 3 (12:44):
Continuing on with the discussion of the new country specific
tariffs that were unveiled yesterday, fourteen different countries set to
have tariff rates move up from the base ten percent
to higher rates as of August. First President also said
that that is not a hard deadline and that could change.
(13:05):
So what I'm what I'm trying to do right now
is put myself in the mind of someone who runs
a business where they import a bunch of stuff that
you either can't or won't make in the US just
because it's too expensive too. I've talked at length about
a buddy of mine who runs a board game company
as an example, and one of the things that he
(13:25):
spent the last couple of months doing was saying, Okay, like,
I'm going to get my stuff out of China. I'm
not going to make it there anymore. And He's done
this at you know, pretty significant expense to do so,
just because one of the things that he learned, not
just this time, but as he was trying to even
in the past move away from China is hey, if
(13:47):
you have a manufacturer in Vietnam says they can make stuff,
oftentimes they just say that they're going to make it,
and then they buy it from a factory in China. Anyways,
add a couple of things on and they say they're
making it like it's It's just kind of how it works.
So he spent a bunch of time over the last
few months looking into new production specifically in Vietnam, Thailand,
(14:12):
and think it might have been Malaysia, but maybe it
was Bangladesh. I can't remember offhand, and so I haven't
talked to him in the last couple of days, and
I'm just wondering now and I will chat with him
at some point. He spent all this time and effort
moving production out of China, and now we're sitting there saying,
(14:32):
in three weeks, instead of paying a ten percent tax
when I import these goods, I might have to pay
twenty five percent in the case of Malaysia, thirty five
percent in the case of Bangladesh, you know, thirty six
in the case of Thailand, and twenty in the case
of Vietnam. And I don't know where he eventually decided
to move his production too, I can't remember offhand, but
(14:55):
imagine spending all this money to move that production, and wow,
the terrif rates that you're paying maybe two to three
and a half times what you thought you were paying
when you started moving that production. All I know is
that if I were that person, my view at this
point would be I'm not doing anything else because I've
(15:16):
spent all this money, and I might have just gotten
hit with a higher tax than even what I would
be paying in China Chrya, remember moved up from moved,
it's thirty four percent. Now there's a baseline twenty on
some other stuff that was before, but it didn't include this.
So if you look at the rates, you're paying more
if you're importing from Thailand than you are from China.
(15:38):
Why did I just go through this whole? You know,
horse and pony show, Dog and pony show, whatever.
Speaker 2 (15:42):
Pony show.
Speaker 4 (15:44):
Yeah, I think the bigger lesson for me anyway, Just
backing up from all of the terror of I was
gonna say chaos, but that's cliche. The fluid terror of situation,
which nobody can get their arms fully around, is the
importance of certainty and economic policy. Imagine if tax rates
changed every week, your marginal income tax rate, and you
(16:05):
had to set your withholding accordingly, and you were penalized
if you under withheld, and penalized if you over withheld
too because your foregoing interest. Imagine them, the crazy machinations
and unproductive attention you'd have to devote to deciding how
much your withholding should because they were changing marginal tax
rates every week. You'd pull your hair out what's left
(16:26):
of it in my case. In my case, I wasn't
talking about you.
Speaker 2 (16:31):
No, mine's already gone. You have your head shave.
Speaker 4 (16:33):
Nobody can tell so uck. I always think about because
I can't relate to purchasers at companies who have to
buy a lot of inputs or whatever the example is,
I can't relate to that. But I can relate to
somebody changing my marginal tax rate every week, changing the
speed limit on my way into work. Sometimes it's thirty,
(16:55):
sometimes it's forty, sometimes it's twenty. I have no I'm
just gonna say screw it. I'm just gonna go thirty
every day and get ticketed half the time. My guess
is that's where a lot of these folks are gonna
end up. They're going to say, the heck with it.
I need what I need. I'm going to continue to
import it from vendors I know produce good stuff that
I can rely on, they ship on time, etc. And
I'll pass these prices along if I have to. This
(17:17):
is an act of God at this point. That's why
economists are worried about the impact on inflation.
Speaker 2 (17:23):
And beyond that.
Speaker 3 (17:24):
Beyond the inflation piece, the part that I start to
get nervous about is when you talk about economic growth.
One of the ways that by and large we generate
economic growth is through the use of leverage. We borrow
money to expand produce more stuff, and in doing so
we can achieve economies of scale and get costs down
and things like that.
Speaker 2 (17:43):
If you're a.
Speaker 3 (17:44):
Business right now that imports a lot of stuff, do
you have any confidence that the numbers that you put
into your spreadsheet are going to be accurate? And does
that make you just say, yeah, I'll continue to do
my business, but I'm not going to grow and expand
the way I was previously because I'm nervous about what
the tariff rate could be in the future and how
it could be different from what it is today. The
(18:07):
thing that I worry about is that you know, stuff
like CAPEX do you do you look at it and say, okay,
I'm trying to let's say I do want to build
a factory or a facility. It's some kind of facility
here in the United States. We know that all of
the stuff that goes into building, you know, a building
is not produced here. It's just not We don't make
(18:29):
all of that stuff here. We might have some of
the raw materials and this and that, but electric meters
often are not made in the United States, you know,
PVC piping not made in the United States. How much
extra cost do you have to add to your projections
And at some point you just say, hey, this doesn't
make sense. We're just not going to undertake the project
because there's too much uncertainty or the cost is too high.
(18:52):
And those are the things that I wonder about. And this,
by the way, is starting to show up again in
some of the soft data now, but when you look
at it. The nfib came out with a report this
morning's National Federation of Independent Businesses and one of the
things we saw is that capec's intentions for the next
(19:14):
twelve months fell to the lowest level since twenty twenty.
So we'll see how this actually ends up playing out.
But this is some of the stuff that you worry about,
as far as hey, could it slow the economy, will
inflation bumps?
Speaker 2 (19:29):
Maybe we haven't seen that yet.
Speaker 3 (19:30):
To this point, it's been fine, but we'll have to
see what the second half shows.
Speaker 2 (19:34):
Quick break, We've got Wall Street Watch next.
Speaker 1 (19:42):
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Watch a complete look at what's moving market so far
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Speaker 5 (20:01):
Following Monday's modest selloff, markets today are mostly quiet. Yesterday,
President Trump sent letters to several nations outlining terraff rates
they would pay if trade deals were not agreed upon,
and extended the tariff deadline from July ninth to August first.
Right now, Dow is off by seventy two points, SMP
(20:23):
five hundred is up only one point at the moment,
Nasdaq is up by only twenty six points, Russell two thousand,
up just over half a percent. Ten year Treasure reeled
up three basis points now at four point four to
two percent, and crude oil is flat, trading right around
sixty eight dollars a barrel. Several solar stocks, including Sun Run,
(20:45):
En Phase Energy, and First Solar, seeing losses on the
day after the White House said it would enforce the
halt to clean electricity tax credits faster than expected. Sun
runs sinking ten percent, while both in Phase Energy and
First Solar are down over three percent. Meanwhile, Amazon Prime
Day is officially begun and this year will extend to
(21:07):
four days instead of two. According to eMarketer, the sale
is expected to bring in a record twelve point nine
billion dollars in the US, up from fifty three percent
last year. Amazon stock is pulling back by one percent today. Elsewhere,
Meta continuing their aggressive artificial intelligence recruitment for its super
(21:28):
intelligence division, now hiring a top AI researcher from Apple.
Both Meta and Apple stocks are flat today. HSBC downgraded
major banks JP, Morgan Chase, Goldman, Sachs, and Bank of
America ahead of their second quarter earnings next week. Those
stocks are down by about two percent today. And Wendy's
(21:51):
CEO Kirk Tanner has been named the new chief executive
of the Hershey Company. Tanner joined Wendy's in twenty twenty
four after more than thirty years at Peta. See Hershey
is down by two percent today. I'm Tucker Silva and
that is Wall Street watch Mark.
Speaker 3 (22:06):
We got a piece in Bloomberg Opinion today. It's titled
what if this time really is different?
Speaker 2 (22:13):
For investors? What? What? What? What are they?
Speaker 3 (22:16):
What are they talking about here? When they're talking about
this time being different in this.
Speaker 4 (22:20):
Piece well to me, and this is something we've talked
about a lot. Uh Firstly, buying the dip, that is,
buying stocks when they've gone down has paid off over
the past roughly generation, maybe because the Federal Reserve has
become more energetic and trying to stabilize output as opposed
(22:40):
to focusing strictly on inflation as they did in earlier
in an earlier era in the in the eighties, specifically,
so buying when stock sell off has paid off, and
that buy the dip mentality, so to speak, is pretty
well documented and is not something investors felt the need
(23:00):
to sort of deviate from. Question is what if the
This is how I would phrase it. It's not how
Schreger puts it. This is how I would phrase it.
What if the regime is changed. We're trying to shift
from services to back to manufacturing. Most economists think the
shift from manufacturing to services resulted in more stable and
higher on average output. You can lament the loss of
manufacturing jobs, but there's been an effect on volatility of
(23:23):
output as measured by the ups and downs and GDP.
The path has been smoother since the nineteen eighties economists
even have a name for it, the great moderation. What
if you reverse that, well, great moderation might come undone.
FED policy making has been a little bit more predictable
since the nineteen eighties. FED policy makers became more aware
(23:43):
of the importance of inflation expectations. They became stricter inflation targeters,
not pure inflation targeters in an academic sense, but stricter
inflation targeters. After the experience of the nineteen seventies, What
if that sort of unravels because the FED becomes more
politically attentive less independent. Said differently, that too, could change
the policy regime. All these things could change the relationship
(24:07):
between stock draw downs and the length of those draw downs.
Said differently, we might be in for a rockier ride
both for output and a consequently for stocks. Not quite
the way Schreger puts it, but that's how I think
about it.
Speaker 3 (24:22):
Yeah, it's I think we are at a really unique
inflection point that if I'm being honest, I don't know
exactly how things are going to progress over you know,
a ten to fifteen year peer This is not something
when I say inflection point, I'm not talking about like
how the next couple months are going to go. I'm
talking in terms of, you know, bigger trends and bigger
(24:44):
shifts that we may see. There are paths where you
can easily map out, and we've talked about them quite
a bit. Hey, could the next ten to fifteen years
have you know, much higher inflation and lower growth because
of you know what you just talked about, you know,
less trade and more or you know, insular policies and
things like that, less overall immigration and things like that
(25:06):
leading to less population growth in the United States. There's
a lot that you can look at and say, oh, like,
this could be really concerning. And then on the other hand,
I look at some of the stuff that is potentially
happening with robotics over the next couple of years or so,
and look, I very much was a skeptic on this
until the last few months, and now I'm starting to
(25:27):
kind of get a little bit of a b under
my bonnet about it. But I look at some of
the things that could happen there, and I go, there's
some really interesting possibilities here, but also ones that could
dramatically upend industries and jobs that we previously said couldn't be.
And I think that those are things that then become
(25:50):
interesting considerations for you know, how what does society look
like by the time we get to you know, twenty
forty twenty forty five, and how different is it from today?
If these can in fact play out the way that
they potentially you could. So I have more questions than
answers right now about this stuff. I don't think it's
(26:12):
anything where I look at it and say this is
definitively how this is or is not going to go.
But it kind of brings you back then, Okay, if
you have all of this uncertainty from a portfolio construction standpoint,
what do you.
Speaker 2 (26:27):
Do with it?
Speaker 3 (26:28):
Not for next week, but like, how do you approach that?
And I think it's a real question mark is to
you know exactly what the best approach is going to be?
Other than hey, if you don't know what to do,
the best thing often is just to diversify so that
you don't have all your eggs in the wrong basket
by a mistake.
Speaker 2 (26:46):
Is that wrong? Oh yeah?
Speaker 4 (26:48):
I just point out that the so called equity risk premium,
the difference whether you're estimating it beforehand or looking backwards
The difference between the returns on risky stocks and theoretically
say have in bonds has always been positive. It's just
a question of how big. I would expect that gap
to continue to be positive. Again, it's a question of
(27:09):
how big. And that is a remarkably durable phenomenon, with
some notable exceptions stocks over long enough periods of time.
We all know this. If you've ever sat through a
four to one K education session, you've seen the charts,
the same charts we all use about the the wealth
generating and accumulating power of equities relative to other things.
(27:30):
That relationship should hold up through all the types of
shifts that you described, because it's held up through past
regime changes in policy. We didn't always have a FED.
FED wasn't always independent government, didn't always engage in active
fiscal policy. That's a ie. Spending more or taxing less
to goose the economy, for example. That's a post World
(27:52):
War two or post Great Depression phenomenon. So there's been
lots of different economic and consequence the market regimes over
the past couple of centuries, century and a half really
for which we have good data on capital markets. But
the one enduring factor is the equity risk premium, the
fact that stocks have paid off if you hold them
(28:14):
long enough, and unless the structure of the economy changes dramatically,
I would expect that premium to continue to be delivered
to investors.
Speaker 3 (28:22):
Is that something that is true throughout other major developed
markets as well, or is that just a US base?
Speaker 2 (28:29):
Now it is.
Speaker 4 (28:29):
There's a great book and paper, Triumph of the Optimists,
Triumph of the Optimists, written by a few researchers. They
publish a study based on it every year, And yeah,
you make a good point. Before you declare something to
be some sort of near law of finance or economics,
you better make sure that it prevails across time and
(28:53):
countries too. And indeed, again with some exceptions, and those
exceptions can be uncomfortably long, but they're weird exceptions that
arguably resulted from extreme geopolitical events or policy mistakes. So
I'm pretty comfortable with saying that a portfolio of stock
should beat a portfolio of bonds over a long enough
period of time. Otherwise why would somebody hold stocks. That's
(29:15):
a little bit circular, but that's the way the thinking goes.
Speaker 3 (29:18):
To take a quick break here when we come back,
we'll talk a little bit about interest rates and the President.
Obviously President Trump been pushing for j. Powell and the
Federal Reserve to lower interest rates. We'll talk a little
bit about whether that is the right approach to actually
get rates down on the things that matter to most Americans.
Speaker 1 (29:36):
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Speaker 2 (30:02):
Mark. One of the things that we have heard quite
a bit about.
Speaker 3 (30:06):
Is the Trump administration wanting the Federal Reserve to begin
lowering interest rates. In fact, Jay Powley even came out,
I think it was a couple of weeks ago and said, look,
if it weren't for these tariffs, we probably would be
in a position where we could be lowering interest rates,
but we need to, you know, see what the effect
is here. So I don't think that there's a huge
(30:26):
disagreement from the Fed that there's some stuff out there
that otherwise would be pushing the Fed to start, you know,
cutting interest rates. But a piece from Bill Dudley, who
used to run the New York Fed. It's in Bloomberg Opinion,
basically says, look, you need to be careful with what
(30:48):
you're doing based on, you know, all these different things
that you're trying to move at once, because if you
do too much too quickly, not just with interest rates,
but some of these plans about how you want to
issue more short term debt versus long term and this
and that, you could upset the balance of what makes
(31:08):
the financial system work the way that it does, and
that could actually end up leading to higher rates for
the stuff that actually matters to Americans.
Speaker 4 (31:16):
Yeah, the FED could, in theory, either through independent judgment
or as a result of political pressure or Trump putting
a puppet as FED chair. Although they'd have this puppet
would have to get the rest of the FMC to
go along. It's not clear that they could. At least initially,
they could push short term rates to zero or one
wherever the President said they should be based on his
(31:37):
I'm sure very rigorous and sophisticated analysis. That won't necessarily
result in lower mortgage rates, though they might go up
if investors expect future inflation to be higher or growth
to be stronger As a result of lower short term
rates absent an attempt to control rates at the so
called longer end of the YU curve, which the Fed
can do, but that might have inflationary consequences too. You
(31:59):
can control rates, but you won't be able to control inflation.
Speaker 2 (32:02):
Right, Let's can we can we talk about this a
little because I think that there's.
Speaker 3 (32:06):
A lot of meat here and I think it's something
that gets overlooked quite a bit.
Speaker 2 (32:10):
So let's do a couple thought experiments. Mark.
Speaker 3 (32:13):
Let's say that the FED comes out tomorrow and J.
Powell wakes up and says, you know what, I'm not
gonna be purple tie J.
Speaker 1 (32:20):
Powell.
Speaker 3 (32:21):
I'm gonna be green tie J. Powell because I just
want to print some money. And Powell says, you know what,
I'm cutting the FED funds rate down to two percent.
Speaker 2 (32:31):
I know he's not gonna do this, but let's say
that he does.
Speaker 3 (32:34):
What actually happens if he does that, Like, how does
the rest of the yield curve move, and what thoughts
go into why it moves the way it does?
Speaker 4 (32:45):
Well, The yield curve one theory, And when we say
the yel curve, we mean the interest rate on various
treasuries of different maturities, so six month, one year, three year,
five year. If you put a dot at each one
of those interest rates and you connect the dots, you
usually get a curve. Sometimes it slopes upward, that is,
(33:05):
longer term rates are higher than shorter term rates. Sometimes
it slopes downward. It's inverted. Investors expect future short term
rates to come down, which they did a couple of
years ago after the FEDI raise short term rates to
a very high level in terms of recent history. So
you get an inverted or downward slope yel curve. So
that's what we mean when we say yeal curve. I
(33:25):
give you that setup because you asked, what happens to
the yield curve if the short end, which the FED
can exert more or less perfect control over, if that
goes down. And the answer is really in what I
just said. Longer term rates are the sum of expected
shorter term rates. I'm not going to buy a ten
year treasury and get only four percent. If I expect
(33:45):
future short term rates to be five or six percent,
I will just buy a short term bond. When it matures,
I will buy another short term bond, and my average
rate over that ten year period through that strategy of
rolling over stuff when it matures is going to be
about five percent. That calculus forces longer term rates up.
They're a function of again, expected short term rates. So
(34:08):
if the FED decided to go pedal to the metal
today to play cad a politician, doesn't necessarily mean long
term rates would follow short term rates down. That depends
on expectations of future short term rates. Said differently, you're
gonna have to pay the piper at some point.
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Speaker 3 (35:25):
Now, Mark, let's say that the Federal Reserve does what
some other central banks generally and you know, less stable
monetary environments have done in other scenarios, and they say,
you know what, We're not just gonna take the short
term FED funds rate down. We want to go out
and we want to start buying that long into the
(35:45):
ILK curve. We want to we want to go out
and control. We want to target a three percent yield
for the ten year treasury. What happens in that scenario.
Speaker 4 (35:56):
Well, they can do it because they can print money
and buy them.
Speaker 2 (35:59):
And then what happens, I guess is my question.
Speaker 4 (36:01):
You know, maybe what happened in nineteen between when the
FED effectively financed the.
Speaker 2 (36:07):
Korean War War.
Speaker 4 (36:08):
Yeah, we had a lot of inflation after World War two,
not as much as other countries. We had a lot
of inflation, as you know. Here in the North after
the Civil War we had one hundred percent inflation roughly,
I think over that four year period, not as much
as the Confederacy they had four thousand percent inflation. They
financed it entirely by printing money, which of course became worthless.
So the short answer is, Chuck, sure, you can control
the long or the short end. I think you can
(36:30):
control both because you can print an unlimited amount of money.
What you can't control, though, is inflation. You lose control
of inflation. You also lose control of output volatility. If
you're targeting rates, you can't target output. It's there's no
succinct way to describe it, but basically there are trade offs,
and you can't have your cake and eat it too.
So I don't know exactly what would happen, Chuck. I'd
(36:52):
love to read about it as a non citizen of
the country that tried it, but I worry that we're
going to be living through it sometime in the next
few years.
Speaker 2 (36:59):
So I think the big thing is.
Speaker 3 (37:03):
Just because the FED lowers interest rates that it controls,
it doesn't necessarily mean that borrowing costs end up going
down for individuals. And by the way, we saw this
last year where I remember the FED was cutting interest
rates during the fall and mortgage rates were actually moving
up during the time, and it was because the long
(37:25):
end is a separate animal from what the FED controls.
So just something to keep in mind when we talk
about the Federal Reserve lowering interest rates, it doesn't necessarily
reflect in the instruments that you, me and the rest
of the world use on a daily basis, because the
FED only controls that short overnight rate directly there. So
(37:49):
that's something that I just again like to discuss because
I think it sometimes gets missed in the conversation here
or to take a quick break, but we got a
whole nother hour were coming up with more financial exchange.
H
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and Mark VANDETI.
Speaker 2 (01:09):
Chuck, Mark and Tucker with you here.
Speaker 3 (01:12):
And top story today is that yesterday afternoon, over the
course of a period of several hours, the Trump administration
sent out a number of letters to different countries telling
them the new tariff rates that they are going to
be facing on August first. And so Mark, I can't
(01:33):
help but be feeling a little bit of deja vu.
It's like we hopped in our time machine and went
back in time three months to April second, because well,
a couple things.
Speaker 2 (01:43):
First, the rates don't really differ.
Speaker 3 (01:46):
Very much from the announced rates that we saw on
April second, to begin with. In some cases they're the same,
in some cases they are a percentage or two higher
or lower. And the only difference, I guess is the medium.
It's a letter instead of a big poster board. But
markets sold off very modestly yesterday, less than a one
percent drop across all three major US indices. And so
(02:09):
I think, in my opinion, markets and my own personal
view at this point is hey, like, unless proven otherwise,
you kind of have to assume that this is like
an opening volley, and then things are going to move
down from there, because that's basically what we've seen over
the first six months of this Trump term.
Speaker 4 (02:30):
Surprised at how or maybe I shouldn't be at how
little markets are reacting today. We've gotten not much new
detail over the past twenty four hours. But you think
that because of the level and breadth of these things,
they're clearly going to have an economic impact on inflation,
(02:50):
short term, maybe long term, on output, maybe long term.
You think stocks would have reacted with more urgency, but
they don't seem to have. Do you. Would you chuck
that up to markets not taking him that seriously, or
the fact that there's an escape clause in these in
these letters.
Speaker 3 (03:08):
I do, and even the fact that I think it
was after hours it was around maybe six or six fifteen.
The President even said, look, August first is not a
hard deadline like that could even change. And so I
think that by and large, if you look at the
major tariff negotiations or announcements and things like that, the
(03:30):
trend in every single one has been, hey, we're starting
from this point, and then whether it's within a period
of hours in some cases days or weeks, you see
those levels, you know, come down, and they have not
stayed at the announced levels. I can't think of one
area of one country that has you know, actually ended
(03:53):
up paying the original you know, announced levels of tariff's.
The only place where you have I've seen that happen
is on the sector related tariffs. Those you have not
seen any significant movement on. The one place where you
have is in the auto sector, where they made some
changes based on you know, the imports of parts and
things like that. But by and large, the trend in
(04:17):
all of these other country based tariff announcements has been
initial number is high, and then they subsequently come down,
and so for better or for worse, I think that
is what the market is conditioned for, and so you're
not seeing the response on the announcement. I think ultimately
it's going to be is their implementation. And the other
(04:40):
thing that I think we're really just transitioning towards at
this point is Okay, there's you know, certain baseline level
of tariffs that are in place at the moment. Show
me how this is actually going to affect the US
economy because to this point, while we have started to
see some slowing, there has not been a meaningful significant
down shift that has happened in the US economic data.
(05:02):
Broadly at this point that you can point to tariff's
as being the main cause.
Speaker 4 (05:06):
Of Yeah, I just don't know how you model the
impact of these things, given how fluid it all is.
And I understand that's part of the negotiation. Negotiations usually
have an aim an objective. I still don't understand what
that is. Do we want them are our trading partners
(05:27):
to lower barriers to our imports? Do we want to
onshore manufacturing, in which case you need to keep the
tariffs in place and they need to be high, And
those two objectives are intentioned, you can't have both. I
don't understand what the objective is on top of not
knowing whether or not to take the threat seriously. And
(05:48):
I imagine our trading partners, well, it's been reported, so
I'm pretty sure our trading partners feel the same way.
They don't know what we want.
Speaker 3 (05:56):
So I think in looking at this, and again, there
have been a number of different items that have been discussed.
As far as you know the reasons for this, Uh,
it can be again, I'm just gonna throw these out
there as things that different people from the Trump administration
have mentioned. You have the idea of raising revenue. You
have the idea of bringing manufacturing jobs back. You have
(06:17):
the idea, you know, with the original Mexico and Canada ones. Hey,
we want to use this to you know, as a
as a you know, as you know, a stick to
get Canada and Mexico to stop fentanyl trafficking again. I'm
just kind of going through the list of things that
we've seen, the big ones that I think are apparent
(06:38):
right now, and I want to let's look at the
the Vietnam announcement from last week, because the Vietnam deal
came through and it was a twenty percent tariff on
Vietnamese imports with a forty tariff on transshipped goods meaning
(06:58):
goods that came from another entry through Vietnam in order
to you know, miss other tariffs to try to avoid them.
And so I think that this temple gives us a
few different insights into what is going on. Because I'm
a big believer, especially when it comes to like how
this is all played out publicly. Don't pay attention to
(07:19):
what people are saying, pay attention to what people are doing,
and this is something that is being executed now. So
the twenty percent tariff, the first thing that I look
at there is I say, okay, there is a clear
desire to raise revenue from that. I think that has
to be very very clear, because if the idea is, hey,
(07:39):
we don't want people to be buying as much stuff
from China, we want them to be buying from other places,
if you really wanted it to just be hey, buy
whatever you want from Vietnam, then you wouldn't have any
tariff in there. You'd have a free trade green where
you say, no, we're not gonna have any tariff barriers.
And that's that's just what it's going to be. The
trans meant peace in there gets it what I think
(08:02):
is ultimately a major goal of the Trump administration, which is, hey,
we don't just want to put a tariff on China
and then have a bunch of Chinese stuff ship through
other Southeast Asian countries that you know, they add one
bolt onto it and then they send it our way
and they say, oh, it's made in Vietnam, are made
in Thailand, and you pay a.
Speaker 2 (08:20):
Lower tariff rate.
Speaker 3 (08:21):
So I think that gets it A big piece there,
which is the Trump administration, I suspect is not just
asking for countries to buy more US stuff, but also
to buy less stuff and be less helpful to the
Chinese government in accomplishing Chinese economic games. And I think
that that is a big piece of what is being
(08:42):
talked about and negotiated here, and that's at least what
I gather from the Vietnam agreement. The other piece that
I guess I look at is, and that makes this challenging,
is you kind of look at the numbers and you're like,
let's say that I'm Japan right now, who just got
a letter saying, hey, you're gonna be paying you know,
(09:03):
companies that are importing from Japan are gonna be paying
a twenty five percent tariff on Japanese imports. If I
look at Vietnam at twenty percent and I'm Japan saying, okay,
my exports are gonna be you know, taxed at a
rate of you know, twenty.
Speaker 2 (09:17):
Five percent to the US, do I even.
Speaker 3 (09:20):
Really want to play ballg Is that enough of a
difference for me to upend my whole world and just
be like, oh, I need to bend over backwards to
do this and that and everything, and all I get
is a easingly like five percent lower rate, Like you
got to offer me more than that.
Speaker 2 (09:34):
I can't just be there.
Speaker 3 (09:36):
So part of me wonders, you know, hey, what's the
actual range of rates that the Trump administration is willing
to impose? And is there enough meat there for negotiation?
Because the lowest that we've seen and the lowest you're
gonna get is the ten percent that the UK has
if Vietnam's at twenty, Like, what what's the actual range?
Speaker 1 (09:54):
Like?
Speaker 3 (09:54):
What what incentive is there for me to negotiate if
I'm not really getting that much better of a deal?
Speaker 2 (10:00):
Well, I guess is one of the questions that I
do have out there. I threw a lot at you
mark your.
Speaker 4 (10:04):
Thoughts with respect to your first point. That's a laudable,
maybe at least to me, objective containing if you will
China economically? Are there better ways to do it than
pissing off the whole world and subjecting us all to
this helter skelter erratic stop go trade policy. Six months
into it, I'm exhausted, I imagine most Americans are, so
(10:26):
that my first question is are there better ways to
achieve that objective? If that is the objective? And by
the way, if that is the objective, why not just
say it. China is a threat to our national and
economic security. We'll find common ground deal with them when
we can when they're playing by the rules of Western civilization. Sorry,
that's a chauvinists way to think about it, but it's
(10:48):
the way things are. With respect to the second point,
optimal rate of tariffs, A lot of work's been done
on optimal tariffs, and not surprisingly, they depend on the
objective you're trying to achieve. Given what we've seen as
to how the present suite of tariffs that was rolled
out were derived that much mocked formula with a lot
(11:10):
of arcane Greek symbols in it that just kind of
cancel each other out, meaning they don't actually factor into
the ratio. I don't have a lot of confidence that
these tariffs were optimally arrived at based on what we've
seen so far.
Speaker 2 (11:24):
Just take a quick break.
Speaker 3 (11:24):
I want to dig in a little bit more to
how this may affect businesses as they go into the
second half of the year. So let's take a quick
break and then we'll discuss that when we return.
Speaker 1 (11:35):
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Speaker 2 (12:42):
So Mark.
Speaker 3 (12:44):
Continuing on with the discussion of the new country specific
tariffs that were unveiled yesterday, fourteen different countries set to
have tariff rates move up from the base ten percent
to higher rates as of August. First President also said
that that is not a hard deadline and that could change.
(13:05):
So what I'm what I'm trying to do right now
is put myself in the mind of someone who runs
a business where they import a bunch of stuff that
you either can't or won't make in the US just
because it's too expensive too. I've talked at length about
a buddy of mine who runs a board game company
as an example, and one of the things that he
(13:25):
spent the last couple of months doing was saying, Okay, like,
I'm going to get my stuff out of China. I'm
not going to make it there anymore. And He's done
this at you know, pretty significant expense to do so,
just because one of the things that he learned, not
just this time, but as he was trying to even
in the past move away from China is hey, if
(13:47):
you have a manufacturer in Vietnam says they can make stuff,
oftentimes they just say that they're going to make it,
and then they buy it from a factory in China. Anyways,
add a couple of things on and they say they're
making it like it's It's just kind of how it works.
So he spent a bunch of time over the last
few months looking into new production specifically in Vietnam, Thailand,
(14:12):
and think it might have been Malaysia, but maybe it
was Bangladesh. I can't remember offhand, and so I haven't
talked to him in the last couple of days, and
I'm just wondering now and I will chat with him
at some point. He spent all this time and effort
moving production out of China, and now we're sitting there saying,
(14:32):
in three weeks, instead of paying a ten percent tax
when I import these goods, I might have to pay
twenty five percent in the case of Malaysia, thirty five
percent in the case of Bangladesh, you know, thirty six
in the case of Thailand, and twenty in the case
of Vietnam. And I don't know where he eventually decided
to move his production too, I can't remember offhand, but
(14:55):
imagine spending all this money to move that production, and wow,
the terrif rates that you're paying maybe two to three
and a half times what you thought you were paying
when you started moving that production. All I know is
that if I were that person, my view at this
point would be I'm not doing anything else because I've
(15:16):
spent all this money, and I might have just gotten
hit with a higher tax than even what I would
be paying in China Chrya, remember moved up from moved,
it's thirty four percent. Now there's a baseline twenty on
some other stuff that was before, but it didn't include this.
So if you look at the rates, you're paying more
if you're importing from Thailand than you are from China.
(15:38):
Why did I just go through this whole? You know,
horse and pony show, Dog and pony show, whatever.
Speaker 2 (15:42):
Pony show.
Speaker 4 (15:44):
Yeah, I think the bigger lesson for me anyway, Just
backing up from all of the terror of I was
gonna say chaos, but that's cliche. The fluid terror of situation,
which nobody can get their arms fully around, is the
importance of certainty and economic policy. Imagine if tax rates
changed every week, your marginal income tax rate, and you
(16:05):
had to set your withholding accordingly, and you were penalized
if you under withheld, and penalized if you over withheld
too because your foregoing interest. Imagine them, the crazy machinations
and unproductive attention you'd have to devote to deciding how
much your withholding should because they were changing marginal tax
rates every week. You'd pull your hair out what's left
(16:26):
of it in my case. In my case, I wasn't
talking about you.
Speaker 2 (16:31):
No, mine's already gone. You have your head shave.
Speaker 4 (16:33):
Nobody can tell so uck. I always think about because
I can't relate to purchasers at companies who have to
buy a lot of inputs or whatever the example is,
I can't relate to that. But I can relate to
somebody changing my marginal tax rate every week, changing the
speed limit on my way into work. Sometimes it's thirty,
(16:55):
sometimes it's forty, sometimes it's twenty. I have no I'm
just gonna say screw it. I'm just gonna go thirty
every day and get ticketed half the time. My guess
is that's where a lot of these folks are gonna
end up. They're going to say, the heck with it.
I need what I need. I'm going to continue to
import it from vendors I know produce good stuff that
I can rely on, they ship on time, etc. And
I'll pass these prices along if I have to. This
(17:17):
is an act of God at this point. That's why
economists are worried about the impact on inflation.
Speaker 2 (17:23):
And beyond that.
Speaker 3 (17:24):
Beyond the inflation piece, the part that I start to
get nervous about is when you talk about economic growth.
One of the ways that by and large we generate
economic growth is through the use of leverage. We borrow
money to expand produce more stuff, and in doing so
we can achieve economies of scale and get costs down
and things like that.
Speaker 2 (17:43):
If you're a.
Speaker 3 (17:44):
Business right now that imports a lot of stuff, do
you have any confidence that the numbers that you put
into your spreadsheet are going to be accurate? And does
that make you just say, yeah, I'll continue to do
my business, but I'm not going to grow and expand
the way I was previously because I'm nervous about what
the tariff rate could be in the future and how
it could be different from what it is today. The
(18:07):
thing that I worry about is that you know, stuff
like CAPEX do you do you look at it and say, okay,
I'm trying to let's say I do want to build
a factory or a facility. It's some kind of facility
here in the United States. We know that all of
the stuff that goes into building, you know, a building
is not produced here. It's just not We don't make
(18:29):
all of that stuff here. We might have some of
the raw materials and this and that, but electric meters
often are not made in the United States, you know,
PVC piping not made in the United States. How much
extra cost do you have to add to your projections
And at some point you just say, hey, this doesn't
make sense. We're just not going to undertake the project
because there's too much uncertainty or the cost is too high.
(18:52):
And those are the things that I wonder about. And this,
by the way, is starting to show up again in
some of the soft data now, but when you look
at it. The nfib came out with a report this
morning's National Federation of Independent Businesses and one of the
things we saw is that capec's intentions for the next
(19:14):
twelve months fell to the lowest level since twenty twenty.
So we'll see how this actually ends up playing out.
But this is some of the stuff that you worry about,
as far as hey, could it slow the economy, will
inflation bumps?
Speaker 2 (19:29):
Maybe we haven't seen that yet.
Speaker 3 (19:30):
To this point, it's been fine, but we'll have to
see what the second half shows.
Speaker 2 (19:34):
Quick break, We've got Wall Street Watch next.
Speaker 1 (19:42):
Like us on Facebook and follow us on Twitter. At
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall Street.
Watch a complete look at what's moving market so far
today right here on the finale Inchel Exchange Radio Network.
Speaker 5 (20:01):
Following Monday's modest selloff, markets today are mostly quiet. Yesterday,
President Trump sent letters to several nations outlining terraff rates
they would pay if trade deals were not agreed upon,
and extended the tariff deadline from July ninth to August first.
Right now, Dow is off by seventy two points, SMP
(20:23):
five hundred is up only one point at the moment,
Nasdaq is up by only twenty six points, Russell two thousand,
up just over half a percent. Ten year Treasure reeled
up three basis points now at four point four to
two percent, and crude oil is flat, trading right around
sixty eight dollars a barrel. Several solar stocks, including Sun Run,
(20:45):
En Phase Energy, and First Solar, seeing losses on the
day after the White House said it would enforce the
halt to clean electricity tax credits faster than expected. Sun
runs sinking ten percent, while both in Phase Energy and
First Solar are down over three percent. Meanwhile, Amazon Prime
Day is officially begun and this year will extend to
(21:07):
four days instead of two. According to eMarketer, the sale
is expected to bring in a record twelve point nine
billion dollars in the US, up from fifty three percent
last year. Amazon stock is pulling back by one percent today. Elsewhere,
Meta continuing their aggressive artificial intelligence recruitment for its super
(21:28):
intelligence division, now hiring a top AI researcher from Apple.
Both Meta and Apple stocks are flat today. HSBC downgraded
major banks JP, Morgan Chase, Goldman, Sachs, and Bank of
America ahead of their second quarter earnings next week. Those
stocks are down by about two percent today. And Wendy's
(21:51):
CEO Kirk Tanner has been named the new chief executive
of the Hershey Company. Tanner joined Wendy's in twenty twenty
four after more than thirty years at Peta. See Hershey
is down by two percent today. I'm Tucker Silva and
that is Wall Street watch Mark.
Speaker 3 (22:06):
We got a piece in Bloomberg Opinion today. It's titled
what if this time really is different?
Speaker 2 (22:13):
For investors? What? What? What? What are they?
Speaker 3 (22:16):
What are they talking about here? When they're talking about
this time being different in this.
Speaker 4 (22:20):
Piece well to me, and this is something we've talked
about a lot. Uh Firstly, buying the dip, that is,
buying stocks when they've gone down has paid off over
the past roughly generation, maybe because the Federal Reserve has
become more energetic and trying to stabilize output as opposed
(22:40):
to focusing strictly on inflation as they did in earlier
in an earlier era in the in the eighties, specifically,
so buying when stock sell off has paid off, and
that buy the dip mentality, so to speak, is pretty
well documented and is not something investors felt the need
(23:00):
to sort of deviate from. Question is what if the
This is how I would phrase it. It's not how
Schreger puts it. This is how I would phrase it.
What if the regime is changed. We're trying to shift
from services to back to manufacturing. Most economists think the
shift from manufacturing to services resulted in more stable and
higher on average output. You can lament the loss of
manufacturing jobs, but there's been an effect on volatility of
(23:23):
output as measured by the ups and downs and GDP.
The path has been smoother since the nineteen eighties economists
even have a name for it, the great moderation. What
if you reverse that, well, great moderation might come undone.
FED policy making has been a little bit more predictable
since the nineteen eighties. FED policy makers became more aware
(23:43):
of the importance of inflation expectations. They became stricter inflation targeters,
not pure inflation targeters in an academic sense, but stricter
inflation targeters. After the experience of the nineteen seventies, What
if that sort of unravels because the FED becomes more
politically attentive less independent. Said differently, that too, could change
the policy regime. All these things could change the relationship
(24:07):
between stock draw downs and the length of those draw downs.
Said differently, we might be in for a rockier ride
both for output and a consequently for stocks. Not quite
the way Schreger puts it, but that's how I think
about it.
Speaker 3 (24:22):
Yeah, it's I think we are at a really unique
inflection point that if I'm being honest, I don't know
exactly how things are going to progress over you know,
a ten to fifteen year peer This is not something
when I say inflection point, I'm not talking about like
how the next couple months are going to go. I'm
talking in terms of, you know, bigger trends and bigger
(24:44):
shifts that we may see. There are paths where you
can easily map out, and we've talked about them quite
a bit. Hey, could the next ten to fifteen years
have you know, much higher inflation and lower growth because
of you know what you just talked about, you know,
less trade and more or you know, insular policies and
things like that, less overall immigration and things like that
(25:06):
leading to less population growth in the United States. There's
a lot that you can look at and say, oh, like,
this could be really concerning. And then on the other hand,
I look at some of the stuff that is potentially
happening with robotics over the next couple of years or so,
and look, I very much was a skeptic on this
until the last few months, and now I'm starting to
(25:27):
kind of get a little bit of a b under
my bonnet about it. But I look at some of
the things that could happen there, and I go, there's
some really interesting possibilities here, but also ones that could
dramatically upend industries and jobs that we previously said couldn't be.
And I think that those are things that then become
(25:50):
interesting considerations for you know, how what does society look
like by the time we get to you know, twenty
forty twenty forty five, and how different is it from today?
If these can in fact play out the way that
they potentially you could. So I have more questions than
answers right now about this stuff. I don't think it's
(26:12):
anything where I look at it and say this is
definitively how this is or is not going to go.
But it kind of brings you back then, Okay, if
you have all of this uncertainty from a portfolio construction standpoint,
what do you.
Speaker 2 (26:27):
Do with it?
Speaker 3 (26:28):
Not for next week, but like, how do you approach that?
And I think it's a real question mark is to
you know exactly what the best approach is going to be?
Other than hey, if you don't know what to do,
the best thing often is just to diversify so that
you don't have all your eggs in the wrong basket
by a mistake.
Speaker 2 (26:46):
Is that wrong? Oh yeah?
Speaker 4 (26:48):
I just point out that the so called equity risk premium,
the difference whether you're estimating it beforehand or looking backwards
The difference between the returns on risky stocks and theoretically
say have in bonds has always been positive. It's just
a question of how big. I would expect that gap
to continue to be positive. Again, it's a question of
(27:09):
how big. And that is a remarkably durable phenomenon, with
some notable exceptions stocks over long enough periods of time.
We all know this. If you've ever sat through a
four to one K education session, you've seen the charts,
the same charts we all use about the the wealth
generating and accumulating power of equities relative to other things.
(27:30):
That relationship should hold up through all the types of
shifts that you described, because it's held up through past
regime changes in policy. We didn't always have a FED.
FED wasn't always independent government, didn't always engage in active
fiscal policy. That's a ie. Spending more or taxing less
to goose the economy, for example. That's a post World
(27:52):
War two or post Great Depression phenomenon. So there's been
lots of different economic and consequence the market regimes over
the past couple of centuries, century and a half really
for which we have good data on capital markets. But
the one enduring factor is the equity risk premium, the
fact that stocks have paid off if you hold them
(28:14):
long enough, and unless the structure of the economy changes dramatically,
I would expect that premium to continue to be delivered
to investors.
Speaker 3 (28:22):
Is that something that is true throughout other major developed
markets as well, or is that just a US base?
Speaker 2 (28:29):
Now it is.
Speaker 4 (28:29):
There's a great book and paper, Triumph of the Optimists,
Triumph of the Optimists, written by a few researchers. They
publish a study based on it every year, And yeah,
you make a good point. Before you declare something to
be some sort of near law of finance or economics,
you better make sure that it prevails across time and
(28:53):
countries too. And indeed, again with some exceptions, and those
exceptions can be uncomfortably long, but they're weird exceptions that
arguably resulted from extreme geopolitical events or policy mistakes. So
I'm pretty comfortable with saying that a portfolio of stock
should beat a portfolio of bonds over a long enough
period of time. Otherwise why would somebody hold stocks. That's
(29:15):
a little bit circular, but that's the way the thinking goes.
Speaker 3 (29:18):
To take a quick break here when we come back,
we'll talk a little bit about interest rates and the President.
Obviously President Trump been pushing for j. Powell and the
Federal Reserve to lower interest rates. We'll talk a little
bit about whether that is the right approach to actually
get rates down on the things that matter to most Americans.
Speaker 1 (29:36):
Breaking business news as it happens only here on the
Financial Exchange Radio Network. The Financial Exchange streams live on YouTube.
Subscribe to our page and stay up to date on
breaking business news. All morning. Long Face is the Financial
Exchange Radio Network.
Speaker 2 (30:02):
Mark. One of the things that we have heard quite
a bit about.
Speaker 3 (30:06):
Is the Trump administration wanting the Federal Reserve to begin
lowering interest rates. In fact, Jay Powley even came out,
I think it was a couple of weeks ago and said, look,
if it weren't for these tariffs, we probably would be
in a position where we could be lowering interest rates,
but we need to, you know, see what the effect
is here. So I don't think that there's a huge
(30:26):
disagreement from the Fed that there's some stuff out there
that otherwise would be pushing the Fed to start, you know,
cutting interest rates. But a piece from Bill Dudley, who
used to run the New York Fed. It's in Bloomberg Opinion,
basically says, look, you need to be careful with what
(30:48):
you're doing based on, you know, all these different things
that you're trying to move at once, because if you
do too much too quickly, not just with interest rates,
but some of these plans about how you want to
issue more short term debt versus long term and this
and that, you could upset the balance of what makes
(31:08):
the financial system work the way that it does, and
that could actually end up leading to higher rates for
the stuff that actually matters to Americans.
Speaker 4 (31:16):
Yeah, the FED could, in theory, either through independent judgment
or as a result of political pressure or Trump putting
a puppet as FED chair. Although they'd have this puppet
would have to get the rest of the FMC to
go along. It's not clear that they could. At least initially,
they could push short term rates to zero or one
wherever the President said they should be based on his
(31:37):
I'm sure very rigorous and sophisticated analysis. That won't necessarily
result in lower mortgage rates, though they might go up
if investors expect future inflation to be higher or growth
to be stronger As a result of lower short term
rates absent an attempt to control rates at the so
called longer end of the YU curve, which the Fed
can do, but that might have inflationary consequences too. You
(31:59):
can control rates, but you won't be able to control inflation.
Speaker 2 (32:02):
Right, Let's can we can we talk about this a
little because I think that there's.
Speaker 3 (32:06):
A lot of meat here and I think it's something
that gets overlooked quite a bit.
Speaker 2 (32:10):
So let's do a couple thought experiments. Mark.
Speaker 3 (32:13):
Let's say that the FED comes out tomorrow and J.
Powell wakes up and says, you know what, I'm not
gonna be purple tie J.
Speaker 1 (32:20):
Powell.
Speaker 3 (32:21):
I'm gonna be green tie J. Powell because I just
want to print some money. And Powell says, you know what,
I'm cutting the FED funds rate down to two percent.
Speaker 2 (32:31):
I know he's not gonna do this, but let's say
that he does.
Speaker 3 (32:34):
What actually happens if he does that, Like, how does
the rest of the yield curve move, and what thoughts
go into why it moves the way it does?
Speaker 4 (32:45):
Well, The yield curve one theory, And when we say
the yel curve, we mean the interest rate on various
treasuries of different maturities, so six month, one year, three year,
five year. If you put a dot at each one
of those interest rates and you connect the dots, you
usually get a curve. Sometimes it slopes upward, that is,
(33:05):
longer term rates are higher than shorter term rates. Sometimes
it slopes downward. It's inverted. Investors expect future short term
rates to come down, which they did a couple of
years ago after the FEDI raise short term rates to
a very high level in terms of recent history. So
you get an inverted or downward slope yel curve. So
that's what we mean when we say yeal curve. I
(33:25):
give you that setup because you asked, what happens to
the yield curve if the short end, which the FED
can exert more or less perfect control over, if that
goes down. And the answer is really in what I
just said. Longer term rates are the sum of expected
shorter term rates. I'm not going to buy a ten
year treasury and get only four percent. If I expect
(33:45):
future short term rates to be five or six percent,
I will just buy a short term bond. When it matures,
I will buy another short term bond, and my average
rate over that ten year period through that strategy of
rolling over stuff when it matures is going to be
about five percent. That calculus forces longer term rates up.
They're a function of again, expected short term rates. So
(34:08):
if the FED decided to go pedal to the metal
today to play cad a politician, doesn't necessarily mean long
term rates would follow short term rates down. That depends
on expectations of future short term rates. Said differently, you're
gonna have to pay the piper at some point.
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Speaker 3 (35:25):
Now, Mark, let's say that the Federal Reserve does what
some other central banks generally and you know, less stable
monetary environments have done in other scenarios, and they say,
you know what, We're not just gonna take the short
term FED funds rate down. We want to go out
and we want to start buying that long into the
(35:45):
ILK curve. We want to we want to go out
and control. We want to target a three percent yield
for the ten year treasury. What happens in that scenario.
Speaker 4 (35:56):
Well, they can do it because they can print money
and buy them.
Speaker 2 (35:59):
And then what happens, I guess is my question.
Speaker 4 (36:01):
You know, maybe what happened in nineteen between when the
FED effectively financed the.
Speaker 2 (36:07):
Korean War War.
Speaker 4 (36:08):
Yeah, we had a lot of inflation after World War two,
not as much as other countries. We had a lot
of inflation, as you know. Here in the North after
the Civil War we had one hundred percent inflation roughly,
I think over that four year period, not as much
as the Confederacy they had four thousand percent inflation. They
financed it entirely by printing money, which of course became worthless.
So the short answer is, Chuck, sure, you can control
the long or the short end. I think you can
(36:30):
control both because you can print an unlimited amount of money.
What you can't control, though, is inflation. You lose control
of inflation. You also lose control of output volatility. If
you're targeting rates, you can't target output. It's there's no
succinct way to describe it, but basically there are trade offs,
and you can't have your cake and eat it too.
So I don't know exactly what would happen, Chuck. I'd
(36:52):
love to read about it as a non citizen of
the country that tried it, but I worry that we're
going to be living through it sometime in the next
few years.
Speaker 2 (36:59):
So I think the big thing is.
Speaker 3 (37:03):
Just because the FED lowers interest rates that it controls,
it doesn't necessarily mean that borrowing costs end up going
down for individuals. And by the way, we saw this
last year where I remember the FED was cutting interest
rates during the fall and mortgage rates were actually moving
up during the time, and it was because the long
(37:25):
end is a separate animal from what the FED controls.
So just something to keep in mind when we talk
about the Federal Reserve lowering interest rates, it doesn't necessarily
reflect in the instruments that you, me and the rest
of the world use on a daily basis, because the
FED only controls that short overnight rate directly there. So
(37:49):
that's something that I just again like to discuss because
I think it sometimes gets missed in the conversation here
or to take a quick break, but we got a
whole nother hour were coming up with more financial exchange.
H
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