Latest / Merryn Talks Money / Why Recessions Aren’t What They Used to Be

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Why Recessions Aren’t What They Used to Be · Merryn Talks Money

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Speaker 2: and seven hundred journalists worldwide. Right now onto this week's show,
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Speaker 2: Welcome to Merron Took's Money the podcast image. People who
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Speaker 2: know the markets explain the markets. I'm Maren Zumseert Web.
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Speaker 2: This week, Vincent Deloa, director of Global macro Strategy at
1:12
Speaker 2: stone X Financial, joins us now. If you're a regular reader,
1:15
Speaker 2: of Bloomberg. You're likely to have come across his name before.
1:18
Speaker 2: He's often cited in news letters written by John authors,
1:21
Speaker 2: and earlier this month, John Stepic dedicated an entire money
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Speaker 2: to Telder Vincent's Peace, looking at where the global cancel
1:27
Speaker 2: culture movement has come for recessions. So we thought it'd
1:30
Speaker 2: be a good idea to get him on the show
1:31
Speaker 2: with us to talk through some of his research pieces
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Speaker 2: and to hear what he is currently thinking about stock markets. Vincent,
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Speaker 2: Welcome to Merrin Talks Money.
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Speaker 1: Thank you very much for having me, Very happy to
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Speaker 1: be here.
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Speaker 2: Okay, now there's so much to talk about, but I
1:45
Speaker 2: want to start with a piece she wrote recently that
1:48
Speaker 2: John wrote about about how recessions have been canceled. So
1:51
Speaker 2: many things have been canceled recently, but you think that
1:53
Speaker 2: recessions themselves are no longer what they used to be.
1:58
Speaker 2: Will you talk us through that?
2:00
Speaker 1: Well, mean, part of it is just a statistic observation.
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Speaker 1: Really here to get the nineteenth century, who will spent
2:06
Speaker 1: almost half of that century in recession, and then the
2:09
Speaker 1: frequency of recession started to decline, especially after the Great Depression,
2:13
Speaker 1: when we had a new deal and progressively we increased
2:17
Speaker 1: the arsenal that governments can deploy against recession with the
2:21
Speaker 1: triumph of Canasians ideas the addition of the second mandate
2:25
Speaker 1: to the FED. And it seems like every recession we
2:28
Speaker 1: build new tools who fight them, and that takes us
2:31
Speaker 1: all the way to the eighties, which were almost a
2:34
Speaker 1: recession three decade. Same story for the nineties, one big
2:38
Speaker 1: reception in two thousand and nine. But for the past
2:40
Speaker 1: sixteen years, I mean, if we stud COVID, which we
2:42
Speaker 1: can all agree was exceptional, we haven't had a recession
2:45
Speaker 1: in the past sixteen years. So it does seem that
2:48
Speaker 1: my theory is at least empirically verified. As far as
2:53
Speaker 1: why that may be happening, I would suggest three many explanations.
2:56
Speaker 1: One is technology. We'll moved from the gricotia to industreet,
3:00
Speaker 1: industry to services, tangible asset to intangible assets. If you
3:04
Speaker 1: wear to buy the nestlac in dex today, you pay
3:07
Speaker 1: a dollar and you get about three cents in tangible assets.
3:10
Speaker 1: Tangible assets are things that you can touch, things like plant,
3:13
Speaker 1: things like machines, think that you have to finance, and
3:16
Speaker 1: things that you have to depreciate over time. While we
3:20
Speaker 1: no longer have this physical economy. Intangible assets behave very
3:23
Speaker 1: differently and they remove a lot of that ciflicuility. Then
3:26
Speaker 1: there is the policy explanation. As I was hinting, we
3:29
Speaker 1: have hyperactive policy which seems determined to do everything it
3:34
Speaker 1: can to avoid recession, even if that means infeeshion. And
3:37
Speaker 1: then the third one I'm sure we'll talk about about
3:39
Speaker 1: a little bit more is the explosion of fiscal spending,
3:42
Speaker 1: which means that the US economy at least is in
3:45
Speaker 1: a constant state of physical stimulus.
3:48
Speaker 2: Okay, can I ask for my thing? Is very obvious question,
3:50
Speaker 2: why is it that intangible assets are so much less
3:54
Speaker 2: cyclical than tangible.
3:56
Speaker 1: Because they are a different breed. Quite often they're just
3:59
Speaker 1: a raw spontaneously out of the business process. I mean,
4:02
Speaker 1: if you think about a network effect, you don't really
4:04
Speaker 1: have to pay it. Just more people use your platform,
4:08
Speaker 1: and certainly you become the biggest platform, and that gives
4:10
Speaker 1: you a huge intangible asset. You didn't pay for that,
4:12
Speaker 1: It just happened, so you didn't have to take a
4:14
Speaker 1: loan for it. You don't use it over time, if anything.
4:19
Speaker 1: Instead of you have these economies of scale in economics, right,
4:23
Speaker 1: the bigger you get, the less efficient you become. It's
4:26
Speaker 1: almost the opposite with intangible assets. I mean you can
4:29
Speaker 1: think also about brand, about name recognition, about out of IP.
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Speaker 1: It just behaves differently from the hard stuff that we
4:37
Speaker 1: use to put your stuff with. And in a way
4:39
Speaker 1: you can think of an international division of labor where
4:42
Speaker 1: the US keeps intangible assets in large part because we
4:45
Speaker 1: have better core, better IP, and then we outsource all
4:49
Speaker 1: the tangible stuff to China, to South Korea, to Germany,
4:53
Speaker 1: and in a way with kind of outsource recessions to
4:55
Speaker 1: our trade partners.
4:56
Speaker 2: So effectively, these intangible assets aren't no longer hostage to
5:01
Speaker 2: a capital cycle.
5:02
Speaker 1: That's absolutely correct.
5:04
Speaker 2: So that's the way it works. We let other people
5:06
Speaker 2: take the head of the capital cycle, and Western economies
5:09
Speaker 2: who are very dependent on intangible assets ie the US,
5:11
Speaker 2: effectively no longer have to worry about it. It's fascinating.
5:14
Speaker 2: And then we have policymakers and the different things that
5:17
Speaker 2: they do. And then we have this idea of there
5:20
Speaker 2: being as a permanent stimulus from effectively the welfare state, entitlements,
5:25
Speaker 2: healthcare expenses. The problem there, of course is in I
5:28
Speaker 2: get that I completely see what you're saying, But it's
5:31
Speaker 2: not really sustainable, is it?
5:33
Speaker 1: Over time? Nothing is sustainable if you think about you know,
5:38
Speaker 1: a bicycle or a bicycle is always spoiling. It's only
5:41
Speaker 1: because you keep adding momentum to it that it doesn't fall.
5:44
Speaker 1: I would argue the US economy is in a similar situation.
5:47
Speaker 1: And yes, I agree that at some point there is
5:50
Speaker 1: a capacity issue crowding out debt crisis. We may be
5:54
Speaker 1: at the beginning of one. But I think if we
5:57
Speaker 1: are running it in the world hegemon at a time
6:00
Speaker 1: of high nominal growth, This process of constant stimulus leading
6:04
Speaker 1: to inflation growth can last longer than people think, and
6:08
Speaker 1: it only has. I mean, look, in the past five years,
6:11
Speaker 1: I've been on so many panels against so many distinguished
6:14
Speaker 1: economies who were so much more than me, who had
6:17
Speaker 1: already signed one hundred percent probably toy recessions. After the
6:20
Speaker 1: FED started hiking grade in twenty twenty two. Then in
6:23
Speaker 1: twenty twenty three, then we had the original banking crisis.
6:27
Speaker 1: Last tuner, we had a Samule panic. Yeah, there seems
6:31
Speaker 1: to be something that mainstream economists are missing key, and
6:34
Speaker 1: I think what they are missing is how long this
6:38
Speaker 1: process can take doesn't mean that it's it's sustainable in
6:41
Speaker 1: a long term. I would agree with you, But as
6:44
Speaker 1: so many A Caine said, in the long term, with all.
6:46
Speaker 2: That, yeah, so basically we can we can expect it.
6:50
Speaker 2: If you're right, we can expect to see a very
6:52
Speaker 2: long period we don't know how long, but a very
6:54
Speaker 2: long period the no recessions, of very mild recessions, followed
6:57
Speaker 2: by at some point, probably possibly far out in the
7:00
Speaker 2: distant future, a catastrophic collapse of the state.
7:04
Speaker 1: Correct, but I would trust that that collapse would happen
7:09
Speaker 1: by fire. You know, there are two ways you can dierect.
7:12
Speaker 1: You can die by ice or dies die by fire.
7:14
Speaker 1: And in the economy and dying by ice is pretty
7:17
Speaker 1: much the story of the European Union for the past
7:20
Speaker 1: one years, where you know, the economy slows, inflation is
7:23
Speaker 1: big or target like a kind of great depression like scenario.
7:27
Speaker 1: And then the death by fire is something that's more
7:30
Speaker 1: common in emerging markets, where the government spends too much,
7:34
Speaker 1: invasion takes off, the economy accelerates, capital leaves the country,
7:39
Speaker 1: and you have a very different recession experience. I mean,
7:42
Speaker 1: in one case, it feels like you know, slowly falling asleep,
7:45
Speaker 1: as if you were like dying from from cold. In
7:48
Speaker 1: the other end, in the other in the other one
7:50
Speaker 1: is kind of a frantic manic recession where the economy
7:54
Speaker 1: overheats into a recession.
7:57
Speaker 2: And then you would get an Argentina style renew well
8:00
Speaker 2: at some point, but that's far off. There is one
8:03
Speaker 2: thing that I wanted to ask you about, and John
8:05
Speaker 2: and I talk about, you know how you need recession
8:08
Speaker 2: to clear things out, you need a creative destruction and renewal, etcetera.
8:13
Speaker 2: But you arguing in your paper that that's not really
8:16
Speaker 2: necessary because we have new institutions that take on new organizations.
8:20
Speaker 2: Should I say that take the place of a recession
8:22
Speaker 2: to create renewal? Is that right? Yeah?
8:26
Speaker 1: I mean I'm a little comfortable with that argument because
8:29
Speaker 1: it's almost religious some moral rights. You can hear the
8:33
Speaker 1: Catholic schoolboy in that. Or you need the pain, you
8:36
Speaker 1: need to atone for the sin, and it's only for
8:39
Speaker 1: the pain that you shall be redeemed.
8:40
Speaker 2: Mmm.
8:41
Speaker 1: I mean, I think it's best to leave that to
8:43
Speaker 1: one's conscience. I think the idea is that here that
8:47
Speaker 1: recession would clear out inefficient businesses and favor innovative ones.
8:53
Speaker 1: I would argue that we have a huge portion of
8:55
Speaker 1: our economy that's now dedicated to that. I mean, fearing
8:58
Speaker 1: out the Caucuses is basically the drop of private equity, right,
9:00
Speaker 1: I mean they will go out and scout for like
9:03
Speaker 1: air conditioning businesses that are around that by boomers, and
9:07
Speaker 1: take on some debt and buy them so they can
9:10
Speaker 1: put their clients on salesforce and call that improved management.
9:14
Speaker 1: Then we have the VC industry, which constantly needs to
9:17
Speaker 1: justify fees and it's constantly looking for the next big idea.
9:20
Speaker 1: And I mean, I'm making fun of it, but empirically
9:24
Speaker 1: it has somewhat worked. I mean, I don't think innovation
9:26
Speaker 1: has slowed in the past sixteen years. I mean we
9:28
Speaker 1: had major you know, from the iPhone in two thousand
9:31
Speaker 1: and seven to a large language model, to advance mon
9:34
Speaker 1: in evs, batteries space. Despite the absence of recession, it
9:40
Speaker 1: seems that we are on the verge of a technological breakthrough.
9:43
Speaker 2: Okay, so let's take that. I think it's a very
9:47
Speaker 2: compelling argument. And you're right that empirically, recessions do appear
9:51
Speaker 2: to have almost disappeared. So if there will be no recession,
9:56
Speaker 2: will there then be no market correction? As we hear
10:00
Speaker 2: a lot about the only way that you will see
10:02
Speaker 2: a big market correction in the US being as a
10:05
Speaker 2: result for a recession, and most people are churning out
10:07
Speaker 2: papers showing us how much markets fall in different types
10:10
Speaker 2: of recession. But if that's not going to happen, is
10:13
Speaker 2: the US market just don't just go up forever?
10:18
Speaker 1: It's not that good, Marian. I'm sorry. No, we already
10:23
Speaker 1: had market corrections despite the lack of recession. I mean
10:26
Speaker 1: twenty twenty two.
10:27
Speaker 2: Oh, but I don't think we're really going to count that,
10:29
Speaker 2: and that we're pretty much back where we were.
10:32
Speaker 1: Well, okay, then maybe I mentioned it because I thought
10:37
Speaker 1: it was an interesting precedent, okay, in the sense that
10:40
Speaker 1: we had a large market correction affecting both stocks and
10:44
Speaker 1: bonds at the same time. I mean, if you look
10:46
Speaker 1: get total region number sixty forty portfolio, the losses of
10:49
Speaker 1: twenty twenty two was considerable because, okay, the stocks may
10:53
Speaker 1: have been down only twenty percent, but the bonds were
10:54
Speaker 1: also down, So in terms of a total dollar damage,
10:57
Speaker 1: it was almost as bad as as two thousand and eight,
11:01
Speaker 1: But it was also much shorter. Now, why was it
11:03
Speaker 1: much shorter and as we mentioned, much shallower. I mean
11:05
Speaker 1: we basically back at any all time high. I think
11:08
Speaker 1: it's it's because of that tale, that recetionary tale that's
11:12
Speaker 1: been removed. So if you think about a bear market
11:15
Speaker 1: in the equity market, you're really accomplishing two things. The
11:18
Speaker 1: first thing that you're accomplishing is correcting for over optimism.
11:22
Speaker 1: People get too excited about the future, too excited about
11:25
Speaker 1: future growth, and they pay too high and multiple for stocks,
11:28
Speaker 1: so you need to knock that down. And then in
11:30
Speaker 1: a recessionary bear market, there's a second thing that kicks in,
11:33
Speaker 1: which is the economy does slow EPs starts to fall,
11:36
Speaker 1: so the multiple drops, the earnings drop. There's an interaction
11:41
Speaker 1: effect that takes stock down from you by sometimes fifty percent,
11:45
Speaker 1: like we hadn't in two thousand and eight and two thousand.
11:47
Speaker 1: If I'm right and we don't have recessions, we only
11:50
Speaker 1: see the first part of this process, the valuation correction.
11:54
Speaker 1: The valuation correction typically takes multiple down by twenty percent.
11:58
Speaker 1: When that happens, it's earnings are still rowing. People are
12:02
Speaker 1: going back to stocks. So that lead me to this
12:04
Speaker 1: idea named after the famously wrong economists who in nineteen
12:08
Speaker 1: twenty nine mentioned a permanently high plateau for valuation. Yes,
12:13
Speaker 1: sometimes believe in that that we will see other corrections,
12:17
Speaker 1: for sure, But once multiples fall into the sixteen seventeen range,
12:21
Speaker 1: people will go back and buy stock, So we won't
12:24
Speaker 1: have the very deep bear markets where multiple fall into
12:27
Speaker 1: the law teams as we had in two thousand and
12:29
Speaker 1: eight and two thousand and one.
12:31
Speaker 2: Okay, and they will go back into equities much faster
12:33
Speaker 2: than they would have otherwise, because the lack of a
12:36
Speaker 2: real recession means that earnings per share either stay static
12:39
Speaker 2: or continue to rise. So the numbers that would previously
12:43
Speaker 2: have said to people, Jesus needs to be a lot
12:45
Speaker 2: cheaper before I'm going back in simply won't be.
12:47
Speaker 1: There, absolutely correct. Iferen things are going to grow by
12:50
Speaker 1: about six percent of a year, which is way below
12:53
Speaker 1: the post World War two average, by the way, and
12:55
Speaker 1: you compare that to bond yields. I mean, okay, you
12:58
Speaker 1: have what is the ma You know, you have bonds
13:00
Speaker 1: that yield around four point four percent tenure. Today. Let's
13:03
Speaker 1: say we have a big correction that brings you back
13:05
Speaker 1: down to four percent so you have one instrument that
13:08
Speaker 1: gives you four percent fixed, has a lot of duration risk,
13:11
Speaker 1: that's bonds treasures, and then you have another instrument. If
13:15
Speaker 1: we're looking at an eighteen P that converts into a
13:18
Speaker 1: four point five percent earnings yield and is growing up
13:23
Speaker 1: one at six percent, I mean you are going back
13:26
Speaker 1: into stocks because you no longer have the fear that
13:29
Speaker 1: you have these catastrophied dealins and earnings like we had
13:32
Speaker 1: in two thousand and nine.
13:34
Speaker 2: Okay, I want to stick with this for a minute,
13:36
Speaker 2: just because there is another piece that you've written about
13:39
Speaker 2: the Mega War on the corporation where you talk about
13:42
Speaker 2: how one of the probably so far misunderstood hearts of
13:46
Speaker 2: the Mega revolution is to be a rebalancing of returns
13:50
Speaker 2: to capital and returned to labor. So we would expect
13:54
Speaker 2: that kind of change, and I ask you to explain
13:57
Speaker 2: what you mean by that in a minute. But that
14:00
Speaker 2: would lead surely to falling earnings, which would mean that
14:05
Speaker 2: even if valuation stayed within this high platter range that
14:08
Speaker 2: you suggest, you could still get a long term band market.
14:12
Speaker 1: Yeah, or atis, let me walk through the idea if.
14:16
Speaker 2: You mind that for me, that would be great.
14:20
Speaker 1: In general, in the US, in the Western in general,
14:24
Speaker 1: we have a funding crisis. We have a lot of boomers.
14:29
Speaker 1: They voted themselves very nice benefits, and they are aging
14:33
Speaker 1: and they are getting to the period of life where
14:37
Speaker 1: you spend most of your health care expenses. So someone
14:41
Speaker 1: is going to have to pay for it. We don't
14:43
Speaker 1: have the private seetings to pay for it, so one
14:45
Speaker 1: or another is going to have It's going to have
14:48
Speaker 1: to come from the government budget. And you go back
14:50
Speaker 1: to government budget. You can inflate some of that. I
14:53
Speaker 1: believe we are doing that. You can increase their capacity,
14:56
Speaker 1: but at some point I think you're going to have
14:58
Speaker 1: to tax some of it. The question is who do
15:02
Speaker 1: we tax? And the answer is not foreigners. Uh Trump.
15:08
Speaker 1: Trump came in and basically promised that something that really
15:13
Speaker 1: crontovenes the concept of the state, that somehow the US
15:18
Speaker 1: would be able to tax foreigners. And that was the
15:20
Speaker 1: beautiful story, a story that got him elected in one
15:23
Speaker 1: way because it meant that we would not have to
15:26
Speaker 1: tax labor or capital, we could simply tax foreigners. The
15:29
Speaker 1: reality is that we don't tax foreigners. I mean, you know,
15:32
Speaker 1: if you are in the UK, I cannot send an
15:34
Speaker 1: IRS agent to take your money away from you. Not
15:38
Speaker 1: can I force the Bank of England to swap it's
15:41
Speaker 1: it's it's currency reserves for a bond that doesn't pay interest.
15:45
Speaker 1: That was another idea that was fully a few months back.
15:48
Speaker 1: So now we are back to squel one. We have
15:51
Speaker 1: this increase in liability and government expanse and we really
15:55
Speaker 1: only have two ways we can take the money from
15:57
Speaker 1: because we don't we don't tax sales in the US,
16:00
Speaker 1: so we can either take it from corporate income or
16:02
Speaker 1: dvidual income. That is the grand sum total of all
16:04
Speaker 1: income that there is in the US. It's either earned
16:07
Speaker 1: by corporations or individual And my impression is that trun
16:12
Speaker 1: and then the MAGA movement is protecting income individual income.
16:17
Speaker 1: We are seeing this with a big, beautiful bill. We
16:19
Speaker 1: have so many exemption right. We have the TCGIA, the
16:24
Speaker 1: tax cut of twenty seventeen that are extended. We have
16:27
Speaker 1: no tax on tips, no tax on social security, no
16:29
Speaker 1: tax on overtime, extension of the state and local deduction.
16:33
Speaker 1: All that is basically to protect individual income from the
16:36
Speaker 1: shock of tariffs. On the other side, we have some
16:40
Speaker 1: level of tariffs which are tax on corporation corporations are
16:44
Speaker 1: the one that pay tariffs. I mean again, it's not foreigners,
16:47
Speaker 1: it's the important So it's a tax on corporate income.
16:50
Speaker 1: And we also do not have any reduction in the
16:53
Speaker 1: corporate income tax rate. So if we look at the
16:56
Speaker 1: burden of taxation in the US, it's folding more corporations
17:00
Speaker 1: less and less on labor. And that means that over
17:04
Speaker 1: time profit margins are going to decline. Now, for the
17:09
Speaker 1: first part of your question, will that lead to falling earnings?
17:13
Speaker 1: The quick answer is I don't know. I am somewhat
17:16
Speaker 1: hoping that we can do it in what Radario would
17:18
Speaker 1: call it a beautyful deleveraging way, where what happens is
17:22
Speaker 1: nominal growth is very high, so the pie is growing
17:25
Speaker 1: so fast that we can reduce the share of capital
17:29
Speaker 1: without reducing its absolute number. In other words, nominal GDP
17:34
Speaker 1: grows at seven eight percent, which is where we've been
17:36
Speaker 1: since COVID, and maybe EPs grows at three four percent,
17:42
Speaker 1: So over time we are rebalancing from capital to labor
17:47
Speaker 1: without necessarily causing a contraction in EPs.
17:50
Speaker 2: Okay, I mean, but the whole thing makes sense. The
17:52
Speaker 2: idea that tax burdens should shift towards corporations to a degree.
17:56
Speaker 2: One of the numbers that you quote that John, I've
17:58
Speaker 2: talked about a love in the past, this idea that
18:01
Speaker 2: profits of an idea fact that profits account for much
18:04
Speaker 2: more GDP than they have over the long term. So
18:06
Speaker 2: ten point six percent of GDP at the the US
18:09
Speaker 2: accounted for by profits. Long term average is more like
18:12
Speaker 2: six percent, So you'd be looking for some kind of
18:14
Speaker 2: normalization there.
18:16
Speaker 1: Yeah, it's I thought that. I think it was a
18:18
Speaker 1: famous American bank robber who was asked, you know, why
18:20
Speaker 1: do you rob banks, and his answer, well, that's because
18:23
Speaker 1: that's where the money is. If I'm the US government
18:26
Speaker 1: and I'm looking for money, I'm going to take it
18:28
Speaker 1: where it is. And the money in the US is
18:30
Speaker 1: not in the bottom ninety nine percent of the income distribution.
18:35
Speaker 1: The money is in in corporate margins, which, as you
18:38
Speaker 1: pointed out, have exploded since since the mid nineties. So
18:43
Speaker 1: it only makes sense that we are seeing this kind
18:45
Speaker 1: of political pandem swing away from from the big ideas
18:50
Speaker 1: of the nineties of Blairism, of Cringtonism, of Okay, we're
18:53
Speaker 1: going to tax labor and we're going to be nice
18:55
Speaker 1: to capital because capital can move and we had basically
18:58
Speaker 1: four years of of that where we reduce corporate income
19:02
Speaker 1: tax rate, we added all these exemption the effective tax
19:05
Speaker 1: rate fall and even below the nominal tax rate, and
19:08
Speaker 1: at the same time we made our governments more reliant
19:12
Speaker 1: either ondish ones or on taxing income. This movement actually
19:16
Speaker 1: ended in the US in twenty eighteen with Trump cutting
19:19
Speaker 1: taxes on income and starting to raise revenue on corporations
19:23
Speaker 1: with the tariffs and Trump two, I think is even
19:26
Speaker 1: a clearer move in that direction. And if I may
19:29
Speaker 1: make some more podcasts, suspect that the mega movement, as
19:33
Speaker 1: Trump kind of goes away, we'll move further into that
19:36
Speaker 1: direction under the impulse of people like JD. Evans, that
19:39
Speaker 1: like Miller, like like Bannon, like Taker Cars and where
19:43
Speaker 1: you see very clearly that this is between a file
19:46
Speaker 1: between capital labor. I mean you can almost take you
19:49
Speaker 1: all the car Mark's book out there and then see
19:51
Speaker 1: this playout in real time in the Republican Party.
19:55
Speaker 2: Interesting. You know, when we use that joke about UK finances,
19:59
Speaker 2: why did you bank that's where the money is, we
20:01
Speaker 2: use it about pensions, why are you going for pensions?
20:04
Speaker 2: Because that's where the money is that's where all the
20:06
Speaker 2: spec capitalists in the UK. Some might not call us bare,
20:10
Speaker 2: but there you go. I wanted to just stick with
20:12
Speaker 2: the big, beautiful bill from it because one of the
20:14
Speaker 2: things you say in and I've written about recently is
20:17
Speaker 2: this idea that it may impose taxes on foreigners. You know,
20:21
Speaker 2: we recently had this talk about taxes on remittiences. And
20:24
Speaker 2: then there is an idea that foreign companies and individuals
20:28
Speaker 2: could be taxed differently inside the US with capital that
20:32
Speaker 2: they earn inside the US, which could end the flow
20:34
Speaker 2: of capital coming into the US. It in tern has
20:37
Speaker 2: been one of the big drivers of the US rally.
20:40
Speaker 1: Yeah, I think that is indeed to keep revisioning the bill.
20:43
Speaker 1: I think it was in it. So there are two
20:45
Speaker 1: parts when you mentioned is the remittancies, which would be
20:48
Speaker 1: a significant hit for you know, in small Central American
20:52
Speaker 1: economies like from Joas, Nicaragua, even Mexico. And then the
20:56
Speaker 1: second part is I think it's part of the trade negotiation.
21:01
Speaker 1: I mean, the U had threatened to put a digital
21:04
Speaker 1: service tax on the tech platforms, and basically Trump wanted
21:08
Speaker 1: to codify that act so that it can be part
21:10
Speaker 1: of the negotiation, and said no, I'm going to have
21:12
Speaker 1: in my bill. I'm going to reserve the right to
21:15
Speaker 1: tax the dividends and the interests and the coupon payments
21:18
Speaker 1: to foreigners who are taxing us. So yeah, it's an
21:23
Speaker 1: extraordinary change in the philosophy of taxation. I mean, there
21:27
Speaker 1: was this idea that, you know, we treat all capital
21:30
Speaker 1: holders the same. I mean that was parted that kind
21:32
Speaker 1: of globalization. We want to make ourselves open and attractive
21:35
Speaker 1: to the rest of the world, and taxing capital doesn't
21:38
Speaker 1: work because capital can move. Well, we are walking the
21:42
Speaker 1: way back. I think it's highly significant, and I think
21:44
Speaker 1: it would accelerate what we are seeing today, which is
21:47
Speaker 1: the repatriation of foreign capital from Europe, from Japan, from
21:52
Speaker 1: South Korea, which are massive investors in the ustack market
21:56
Speaker 1: and are now bringing their money back home because they
21:59
Speaker 1: are not treated fairly in the US.
22:02
Speaker 2: And that means that a reversal of flows that have
22:05
Speaker 2: any going one direction for a long time.
22:07
Speaker 1: I mean, yeah, let me if I'm interested that something.
22:11
Speaker 1: I think one thing that probably the Trump crowd did
22:14
Speaker 1: not quite understand, or maybe they understood that didn't say
22:16
Speaker 1: you did, is that the trade in the capital account
22:20
Speaker 1: balances are simple mirror of one another. If I have
22:24
Speaker 1: a trade deficity, add a capital account surplus and vicepra
22:26
Speaker 1: sites just the way accounting works. I mean, if you
22:29
Speaker 1: consume more than you and then you produce somehow, you
22:32
Speaker 1: must be financing this. See that you set assets or
22:34
Speaker 1: you borrow that, you have a surplus and the capital account.
22:37
Speaker 1: So if we are going to correct quote unquote trade balances,
22:42
Speaker 1: we need to correct capital account balances. And the age
22:47
Speaker 1: of protectionism on the trade side means that on the
22:50
Speaker 1: capital side we have what Russell Napier called the age
22:53
Speaker 1: of national capitalism. We're going to see barries to the
22:57
Speaker 1: movement of capital. We are going to see different treatment
22:59
Speaker 1: days on the nationality at the capitol all that, and
23:02
Speaker 1: we are going to see financial repression. And you can
23:04
Speaker 1: see all these ideas slowly making their way in the
23:08
Speaker 1: US discourse. Because again we're trying to close the trade,
23:11
Speaker 1: we're going to have to close the capital at the
23:13
Speaker 1: same time.
23:15
Speaker 2: Okay, so that does suggest that short term least things
23:21
Speaker 2: will be challenging for the US market, I believe.
23:24
Speaker 1: So I'm doing the thing that one should never do
23:28
Speaker 1: on a public podcast, which is a verifiable short term
23:32
Speaker 1: market core. So in the research we warn our client
23:36
Speaker 1: that we think the market is going to correct in July.
23:38
Speaker 1: Why did I pick a dly one. It's because the market,
23:43
Speaker 1: as you pointed out, as we bounded so much, we
23:46
Speaker 1: basically back at a newr time high. We have yields
23:49
Speaker 1: at a starting to get to the point where they
23:52
Speaker 1: start to hurt the equity market. I mean, I would
23:54
Speaker 1: say four point five four point six percent on the
23:56
Speaker 1: ten years is a pain point. We could be there
23:59
Speaker 1: in a couple weeks. And July, of course, we have
24:02
Speaker 1: massive partyy risk with the end of the ninety day
24:05
Speaker 1: pass for tariffs. I'm very skeptical that we can negotiate
24:08
Speaker 1: complex deals with two hundred countries in less than two weeks.
24:12
Speaker 1: I'm also very skeptical that Trump's great frenches in pin
24:16
Speaker 1: is really interested in a big, beautiful deal. So we
24:19
Speaker 1: have party series on the tariffs. We'll have a very
24:22
Speaker 1: important FED meeting where there's still some expectations of cuts,
24:25
Speaker 1: or certain expectations of forward guidance or that cut which
24:29
Speaker 1: we may not get. I also worry that the positive
24:33
Speaker 1: invation surprise that we had last month will be reversed
24:37
Speaker 1: in June as we see the impact of terarrorists and prices.
24:40
Speaker 1: The tarriffs really did not hit until the end of
24:43
Speaker 1: May when they were actually paid, so that's why they
24:44
Speaker 1: were not in the Maid number, but they might may
24:46
Speaker 1: may show up in the June number. And then I
24:48
Speaker 1: also worry that this would be earning season, so companies,
24:52
Speaker 1: I think we'll still have decent earnings, but they'll start
24:55
Speaker 1: to get lower. We have very high expectation for the
24:57
Speaker 1: second half of the year, so they might to stop
25:00
Speaker 1: warning that this is not going to be met. And
25:02
Speaker 1: then finally, as companies report earnings, they are not allowed
25:05
Speaker 1: to engage in buy thats so these first two weeks
25:08
Speaker 1: of July, when most companies are in the process of reporting,
25:11
Speaker 1: we won't have this buydack bid, which is I think
25:14
Speaker 1: what saved the market in April twenty twenty five.
25:17
Speaker 2: Fascinating. Thank you. One last question before I let you go,
25:21
Speaker 2: do you think that under these circumstances there is a
25:25
Speaker 2: chance of things defrosting a little in Europe? We talked
25:29
Speaker 2: about your dying advice, but there do seem to be
25:32
Speaker 2: significant changes and if we see flows of capital leaving
25:36
Speaker 2: the US and heading towards Europe, suit of the obvious
25:38
Speaker 2: place for the money to go. Might Europe defrosts just
25:42
Speaker 2: a little.
25:43
Speaker 1: I believe so, I mean against our own will and
25:45
Speaker 1: our better judgment, but we are somewhat forced into making
25:48
Speaker 1: the right podicy moves finally by the Trump administration. I mean,
25:53
Speaker 1: one thing that I find fascinating in Europe is the
25:55
Speaker 1: lack of investment. If you look at the trend in
25:58
Speaker 1: GDP between Germany and in the US, it starts to
26:01
Speaker 1: diverge in twenty eighteen. Whether the US really takes off
26:04
Speaker 1: and Germany starts to statmate. Now you can talk about
26:06
Speaker 1: the pipelines, the energy policy, digital revolution, and China, all
26:11
Speaker 1: the social things that we know about, but one thing
26:14
Speaker 1: that's very clear is different trajectories and deficits. I mean,
26:17
Speaker 1: since then, the US deficity to GDP has average five percent.
26:21
Speaker 1: Germany we've been under one percent. If we were just
26:24
Speaker 1: to add back the deficit to German growth and assume
26:27
Speaker 1: a forty percent pass through, which is tiny. Forty percent
26:31
Speaker 1: physical multiplier means a dollar club expanding increased growth by
26:34
Speaker 1: only forty cents, which I think is way too low,
26:37
Speaker 1: German GDP would have caught up with USGDP. So we
26:40
Speaker 1: have underinvested in ourselves for many, many years, and Trump
26:44
Speaker 1: is basically forcing us to invest back at home by
26:48
Speaker 1: telling us that our money is no good in the US.
26:50
Speaker 1: So just bringing that money back means that the currency appreciate,
26:55
Speaker 1: energy costs four, productivity picks up, yield cares deepen, and yeah,
27:00
Speaker 1: it's a pretty good outlook for actualy So relatively speaking,
27:03
Speaker 1: for Europe to cash up on what has been a
27:06
Speaker 1: twenty year crisis of confidence.
27:09
Speaker 2: Excellent, Thank you, Happy days for Europe. You're traveling at
27:13
Speaker 2: the moment, Vincent, I know what are you reading on
27:14
Speaker 2: the plane?
27:16
Speaker 1: Oh? I'm gonna have to give you the honest answer here.
27:21
Speaker 1: This is not what you expect. I am reading How
27:23
Speaker 1: to Change Your Mind, a book about the spite of
27:26
Speaker 1: psychedltics in the US in the sixties and early nineties.
27:30
Speaker 1: And it's a fascinating read. But it's not how I
27:34
Speaker 1: produce economic research. I keep the two activities separate.
27:39
Speaker 2: Thank you very much. Thanks for listening to this week's
27:47
Speaker 2: Marin Talk's Money. If you like us, a rate review
27:50
Speaker 2: and subscribe. Where have you listened to the podcasts? And
27:52
Speaker 2: keep sending questions or comments to Marry Money at Bloomberg
27:55
Speaker 2: dot net. You can also follow me and John on
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Speaker 2: Twitter or x I'm at Marinas w and John is
27:59
Speaker 2: John Underscores Epic. This episode was hosted by Me Maren
28:03
Speaker 2: Sumset Web. It was produced by some Asadi and Moses
28:06
Speaker 2: and sound design by Lake Maples and of course very
28:09
Speaker 2: special thanks to Vincent Deli up