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more details. Now, onto

1:01

this episode's guest, Phil Suttel. Phil

1:03

is the founder of Suttel Economics,

1:05

a leading research consultancy. Before that,

1:07

he held senior roles at the

1:10

Hedge Fund Tudor, the Institutes of

1:12

International Finance, the IIF, JP Morgan,

1:14

Barclays, the New York Fed, and

1:16

the World Bank. He's one of

1:18

the best global economists out there,

1:20

so I'm sure you'll enjoy this

1:22

podcast. Greetings and welcome, Phil. It's always

1:24

great to have you on the podcast

1:27

show. And to you as well, I

1:29

guess, you know, we're going to do

1:31

a run around the entire world on

1:33

your economic and macro views. But before

1:35

we do that, obviously, one thing that,

1:38

you know, will seems to color everything

1:40

is Trump. You know, we obviously have

1:42

the second term, his inauguration's coming up,

1:44

so we're actually going to see him

1:46

in action very soon. You know, a

1:49

big question we all have is we

1:51

had Trump 1.0, and so we had

1:53

that as one sample. Now there's Trump

1:55

2. 2. 2. 2. 2. 2. from everything you've

1:57

seen or the noises you've had from

2:00

the incoming administration, how

2:02

are you interpreting and predicting front policies

2:04

in front to your own? Yes, I

2:06

think, you know, you're dead right. This

2:08

is sort of a big, big unknown,

2:10

big uncertainty and, you know, I don't

2:12

want to be too definitive. So I,

2:14

you know, from... since the election or

2:16

even before that I've sort of

2:18

sketched out what I think of

2:20

as a plausible distribution of policies

2:22

and therefore outcomes and I've kind

2:24

of put them into three buckets.

2:27

I call the one you know

2:29

the Trump mile, one the Trump

2:31

aggressive, those are the two tails

2:33

and then the one in the

2:35

middle which I would put something

2:37

like a 50% weight on. you

2:39

know, maybe 20 on the on

2:41

the aggressive and 30 on the

2:43

mild. The one in the middle

2:45

is what I'm calling trumpet phase value.

2:47

And I actually think, you know, he's

2:49

the sort of, you know, love him

2:51

or hate him. He's the sort of

2:54

politician that says what he thinks and

2:56

tends to do what he says. So

2:58

the trumpet phase value scenario in some

3:00

sense, I think is, is the modal

3:02

one and the one that we should

3:04

probably be kind of gearing, views, views

3:07

upon. And so at that face value

3:09

one, so there's a number of policies

3:11

that economists who investors are focused on.

3:13

One is tariffs, which, you know, a

3:15

lot of people are focusing on for

3:17

the inaugrations or period, executive orders, immediate

3:20

ones. So maybe we can start with

3:22

tariffs and then we can get some

3:24

of the other ones after that. I

3:26

think, you know, the most important aspect

3:29

of Trump at face value is

3:31

he's what we economists would love

3:33

to call, he's a more tarkic

3:36

politician, you know, you know, he

3:38

believes in, he believes in... protectionism

3:40

in isolationism, in American First, you

3:42

know, that's his selling point. So

3:45

I think you need to recognize

3:47

that some form of dramatically stepped

3:49

up protectionism is very likely. Now

3:52

because there's an extra angle to

3:54

this, which is he's been pitching

3:56

that this is actually a public

3:59

finance. narrative as well.

4:01

In other words, we can

4:03

rotate the nature of our

4:05

tax system towards excise duties

4:07

or customs away from income

4:09

taxes. That's completely implausible. We

4:11

can talk about the fiscal

4:13

aspects of his program in

4:15

a moment. him and many

4:17

people in his movement make

4:19

reference to the 1800s you

4:21

know like let's go back

4:23

to those days before income

4:25

tax the US grew rapidly

4:27

on tariffs and so on

4:29

yes so you know you're a

4:31

very experienced economist I mean what

4:34

would you say to that you

4:36

know that historical reference point? Oh

4:38

it's an interesting it's actually you

4:40

know it shows a complete ignorance

4:42

to be honest but it's an

4:45

interesting point to make because at

4:47

that point you know federal expenditures

4:49

were several three four percentage points

4:51

of GDP so yes you could

4:53

run the federal by maybe not

4:56

even that much to be honest

4:58

you could run the federal government

5:00

on indirect taxes collected at the border

5:02

without running a deficit. too much for

5:04

deficit at least, apart from during war

5:06

times. So, of course, during war times

5:09

in the 19th century, the US did

5:11

default, but we won't. We won't say

5:13

too much about that issue. But seriously,

5:15

the issue here is that, you know,

5:17

we now have a federal government that

5:19

everyone likes to spend money at the

5:22

order of 20% of GDP. So you

5:24

can't fund that without, with indirect taxation.

5:26

You could find it actually interesting, and

5:28

you could probably fund it if you

5:30

put in a very aggressive VAT system,

5:32

you know, similar to Europe. that would

5:35

help raise decent chunk of revenue. But

5:37

you certainly couldn't fund it through very

5:39

steep border taxes. Not the least of

5:41

which, and this is quite an important

5:43

point, you know, if you could argue

5:45

pretty obvious, but quite an important point

5:47

is that, you know, there's this thing,

5:49

darned old thing, called the Lafourf, which

5:52

means that, you know, when you put

5:54

tax rates very high, you also click

5:56

zero. Somewhere in the middle, there's a

5:58

sweet spot. And on tariffs. that sweet

6:00

spot is probably below where

6:02

we are now. You know,

6:04

we're already seeing tax revenue

6:06

from terrorists from his first

6:08

set of hikes decline. And

6:10

I think that just reflects

6:12

the fact that people respond

6:14

to tariff hikes, you know,

6:17

they change their behavior, trading

6:19

partners, change their patterns of

6:21

shipping goods and the like.

6:23

So if you put, you

6:25

know, tariffs on China of

6:27

60% probably wouldn't claim much

6:29

revenue because the Chinese would find

6:31

alternative means of getting goods into

6:33

this country through other channels. So

6:35

that's a very important constraint on

6:37

the use of this tool. But

6:40

I think the most important point

6:42

is coming back to the bigger

6:44

picture, he will raise taxes on

6:46

imports and that will raise US

6:48

goods prices. It's not a very

6:50

complicated message. Then the discussion is

6:52

what effect does that have on

6:55

the broader... inflation picture. Okay and

6:57

you know one difference it seems compared

6:59

to Trump 1.0 was that Trump 1.0

7:01

you had what I guess we could

7:03

call like narrow tariffs, certain sectors, certain

7:05

countries, this time he's talked about universal

7:07

tariffs like 20% on every country in

7:09

the world. So you know do you

7:11

think that's plausible or not? Or is

7:13

that? Well yeah, as I said... Trump

7:16

at face value, you know, to take

7:18

him, he's going to try and do

7:20

it. I mean, there's an issue, how

7:22

sustainable it is. You know, he might

7:24

be talked out of it, but I

7:26

doubt it. You know, then it might

7:28

not all happen at once. You know,

7:31

there's all these variants. You know, we're

7:33

not sure if... any tariffs will be

7:35

levied on Mexico and Canada but after

7:37

some of the initial comments you'd say

7:39

yes they will be so you know

7:41

it's it's a very much a moving

7:44

target here I would say but my

7:46

point would be that the increase in

7:48

tariffs is likely to be substantial and

7:50

far more substantial than it was in

7:52

the first time because going back to

7:54

the first time is an important point

7:57

to make that that was really a tale

7:59

of two halves. There was a sort

8:01

of conventional Republican president in the first

8:03

two years who did the same stuff

8:05

that George Bush had done, or Ronald

8:08

Reagan, or, you know, predecessors. And then

8:10

there was the populist Trump in the

8:12

second two years. And the second two

8:15

years were a disaster. The first two

8:17

years were kind of okay. They blew

8:19

the deficit steadily apart, but they didn't

8:22

cause much of many other problems. You

8:24

know, inflation might up in the Fed

8:26

tightened. Second two years were a big

8:29

problem. And that's the narrative that

8:31

I like to extrapolate into the

8:33

next four years. And just remind

8:35

us what happened in those second

8:37

two years? Well, primarily, you know,

8:39

we're actually in a fairly weak

8:42

global goods pricing environment. That's an

8:44

important contrast to where we are

8:46

now. We've had goods price inflation.

8:48

Goods producers, I think, are much

8:50

more used to raising prices than

8:53

cutting them. So we've had almost

8:55

20 years of goods price deflation.

8:57

by the time he imposed these

8:59

tariffs. But they still went on

9:01

to final prices. And we did

9:04

see some acceleration in Corcote pricing,

9:06

and that was one of the

9:09

reasons the Fed was tightening in

9:11

2018-19, into early 19. But the

9:13

big effect that the tariffs had,

9:16

which I think is possibly slightly

9:18

different this time, is that they

9:20

had a much more negative effect

9:23

on global activity, including on the

9:25

US. So, you know, we had

9:27

a lot of weakness developing in

9:30

global goods markets quite quickly.

9:32

And real fears, growing

9:34

fears of a manufacturing-led

9:36

downturn in the global

9:38

economy. And that's one reason

9:41

why, you know, we kind of forget

9:43

it just on the edge of

9:45

the COVID outbreak. That's why he sued

9:47

for peace against China. In December

9:50

1990, or maybe it was

9:52

January 2020. There's a pretty

9:54

humiliating press conference that he

9:56

held in the White House

9:58

where he announced this. program, this

10:00

new agreement that he had with China,

10:02

and how wonderful a fair trading partner

10:05

China had now become. You know, I

10:07

kind of think at some point someone's

10:09

going to bring that tape out and

10:12

kind of remind him that, you know,

10:14

the world isn't quite as he's been

10:16

characterizing it. You said that back then

10:18

it had a negative impact on global

10:21

activity and you said it maybe this

10:23

time. Well, I think this time it

10:25

will be equally negative. So in a

10:27

sense the outlook that I see developing

10:30

condition along Trump terrorist being

10:32

imposed is for an edging

10:34

up in the US inflation

10:37

rate from where we are,

10:39

particularly led by goods inflation,

10:41

a weakening in US growth as

10:44

we go through the year, but

10:46

a much sharper weakening in global

10:48

growth once the tariffs are

10:50

clarified and implemented. So in

10:52

a sense the The shock to global

10:55

growth is somewhat asymmetric is somewhat

10:57

not even the distributed, it's more

10:59

of a burden on the non-U.S.

11:01

economies than it is on the

11:03

U.S. at least initially. Okay, understood. Now

11:05

another part of the Trump policy

11:07

that could impact growth is start

11:09

on immigration or illegal immigrants and

11:11

so on kicking millions, 20 million,

11:13

I can't remember who the last

11:15

number he had over the campaign.

11:17

How do you see that? Well,

11:19

in a funny sense, why we

11:21

love, I love to talk about

11:23

tariffs and talk people through the,

11:25

how the price effects feed through

11:27

and all the assumptions you have

11:29

to make. Reality is it's a

11:31

significant set of effects, but... in

11:34

order of magnitude, especially on the growth

11:36

side and possibly even on the inflation

11:38

side, it isn't probably as important as

11:40

some of the looming changes in labour

11:43

supply. And I say looming is probably

11:45

that's not, they're actually already happening. You

11:47

know, one of the features of the

11:49

US growth for the last couple of

11:52

years, or particularly 2023, was that we

11:54

had this big surge in the labour

11:56

supply and that gave us an ability

11:58

to grow more rapidly. to add many

12:00

more jobs than might have been

12:02

expected, especially given the development and

12:05

the unemployment rate. So we kind

12:07

of have a very nice outcome

12:09

where we had a rising unemployment

12:11

rate diminishing price pressures through that

12:13

channel, but also strong employment growth

12:15

and solid growth. And the big

12:17

driver of that was an increased

12:19

labor supply. The big driver of

12:21

that was migration. Now that has

12:23

already tailed off, you know, whether

12:25

you credit Biden by this or

12:27

say it was just a... you

12:29

know, a reflection of the supply

12:31

side on the migrant from, in

12:33

other words, people were rushing into

12:35

the US after COVID and then

12:37

that rush faded, which I think

12:39

is actually what's been happening. But

12:41

as we go into the Trump

12:43

era, he's going to take aggressive

12:45

action to turn that tap off

12:47

and begin to reverse it. Now

12:50

I'd be skeptical that he'll be

12:52

going around, you know, rounding up

12:54

10, 15 million illegal immigrants.

12:56

That's not... Who knows? That's

12:58

part of the Trump-aggressive scenario.

13:00

But I think what's going

13:02

to happen is that we

13:04

will see a massive tailing

13:06

off in net immigration to

13:09

the US. It's already happened,

13:11

but it will continue. Probably

13:13

enough to put US labor supply

13:15

growth close to zero in 25

13:17

and 26. So if you think

13:19

of him from a supply side

13:21

perspective, that's a big negative for

13:23

growth. relative to say 22, 23

13:26

and early 24. Okay. And by

13:28

the way, it's a, because it's supply

13:30

side, a leftward shift as it

13:32

were in the supply curve for

13:34

the economy, it's probably going to

13:36

raise wage pressures, especially at the

13:38

lower-ended spectrum. Yeah, you know, I

13:40

guess one offset there is this

13:42

rise in productivity, so we lose

13:44

on the supply, labor supply, but

13:46

we gain on productivity. I mean

13:48

there's a lot of big narrative

13:50

on the productivity side that people

13:52

have. I mean the Fed wrote

13:54

paper about it recently and such

13:56

and what do you think on that? I mean there

13:58

are facts and the facts are that... U.S. productivity

14:00

growth has been impressive. In

14:02

other words, it's accelerated slightly

14:05

relative to the pre-pandemic trend,

14:07

but it's still below where

14:09

it was, you know, in

14:11

the 90s and in previous

14:14

periods. The stunning development of

14:16

course is that everywhere else

14:18

productivity has fallen. Not just

14:20

growth fallen, but it's fallen. So it's

14:23

the relative U.S. performance that is so

14:25

stunning, not an a... time series basis

14:27

to be honest, but on a cross-sectional

14:29

basis. So in some sense the productivity

14:32

riddle is more about what's been going

14:34

on abroad than it is, what's been

14:36

going on in the US. I'm not

14:39

a massive optimist on sort of the

14:41

AI coming AI boom. I think there's

14:43

a lot of hype there to say

14:46

the least. It reminds me quite a

14:48

lot of sort of late 90s, early

14:50

2000s, sort of tech optimism.

14:52

My takeaway actually from the

14:54

tech boom of the last

14:57

20 years is it's actually

14:59

been quite disappointing in terms

15:01

of its growth payoff. It

15:03

hasn't been disappointing in terms

15:05

of its payoff. to the

15:07

owners of that technology and

15:09

their ability to generate returns.

15:11

But for the broader economy,

15:13

I'm a bit skeptical of

15:15

the result. And how about

15:17

deregulation and that side, whether

15:19

that would unleash the supply

15:21

side, boost productivity, and so

15:23

on? Well, for the problem

15:25

of deregulation is most of it

15:27

is, again, a transfer from one sector

15:30

to another, you know, certain sectors

15:32

that were being suppressed in the

15:34

last four years are going to

15:36

again. and certain sectors that were

15:39

gayers probably lose a bit. I'm

15:41

very skeptical that, I mean this

15:43

deregulation thing is a massive myth

15:45

in my view. It's all about,

15:48

I mean take Linda Carr as

15:50

the FTC, her job was to

15:52

try and get on top of

15:54

monopolists. Yeah. Now the theory I

15:57

grew up with was that the

15:59

fuel monopoly. you have, the more

16:01

efficient economy you have, broadly

16:03

put. So in principle, that policy

16:05

was probably good for economic efficiency.

16:07

But of course, anyone whose merger

16:09

was quashed or whose monopoly powers

16:11

were investigated called this outrageous regulation.

16:14

And this needs to be, you

16:16

know, needs to be unwound. And

16:18

so I think it's all about,

16:20

you know, frankly, the growing rise

16:22

to the growing rise of crony

16:24

capitalism in the United States. This

16:26

is a problem. I mean, it's

16:28

a problem that we'll come back

16:30

to talk to in decades time

16:32

when we look back at this

16:34

era. And while we're on the

16:37

topic of regulation, let me throw

16:39

another idea out there, which is

16:41

that, you know, I'm a very

16:43

keen student of financial regulation and

16:45

was very critical of what was

16:47

done in the aftermath of the

16:49

financial crisis, when we overloaded regulation

16:51

on the financial sector and inhibited

16:53

its ability to let the economy

16:55

rebound. Now the big risk I

16:58

think is we're about to do

17:00

all we're doing the opposite. We're

17:02

relaxing financial regulation and encouraging the

17:04

financial excesses that I worry will

17:06

be a major problem in coming

17:09

years. Yep, point well taken. So

17:11

the myth of deregulation that I can

17:13

see your points there. Now the other

17:15

plan that Trump has is on the

17:18

fiscal side. It's confusing, I have to

17:20

say in terms of what the fiscal

17:22

plan is, because on the one hand

17:25

he has talked about... fiscal prudence, balancing

17:27

the budget and so on. But on

17:29

the other hand, he seems to ring-fenced

17:32

all the big spending programs, and he

17:34

wants to cut taxes. So when you

17:36

do the math, he either has to

17:38

cut Medicaid massively or he'll have to

17:40

cut defense massively, you know, which aren't

17:43

very popular. And then you have the

17:45

Doge, Elon Musk, Doge thing, but federal

17:47

workforce is relatively small in

17:49

the grand scheme of things. I mean,

17:51

it's been declining over the years. So...

17:53

There's not much stuff out there. So I mean,

17:55

how'd you square the circle here on the physical

17:57

side? I think the best approach is to do

17:59

us. sort of as I keep saying Trump

18:02

at face value and just take all

18:04

the statements and fit them into a

18:06

set of government accounts and say well this

18:08

piece is going to do this this is

18:10

going to do that and then when you

18:13

put it all together and you sort of

18:15

summarized it quite nicely is that there'll be

18:17

more fewer tax revenues and higher spending

18:19

pretty much. You say, well, okay, the

18:22

doge is going to come in and,

18:24

you know, half the federal workforce. Well,

18:26

first of all, they won't. And second,

18:28

as you point out, even if they

18:31

did that, it wouldn't have a material

18:33

effect on spending. What you really need

18:35

to do to cut spending is to

18:38

affect the mandatory pieces of

18:40

the equation. Obviously, interest payments, hard

18:42

to touch those, although. don't rule

18:44

out Trump, trying to, we can

18:46

come back to that in a

18:48

minute when we talk about the

18:50

Fed, but don't try and rule

18:53

out, you know, Trump had to

18:55

do something there. But, you know,

18:57

I don't see it politically feasible

18:59

for the Republicans to make big

19:01

cuts in what you might call

19:03

the welfare programs, because unlike the

19:06

popular narrative, most of them go

19:08

to people like me. You know,

19:10

I'm now on Medicare. It's great.

19:12

And it's very expensive. And it's

19:14

ridiculously expensive and it will get

19:16

more and more expensive as people

19:19

get older and older. The average

19:21

population gets older and older. So

19:23

there's no way we can address

19:25

our budget problems in the

19:27

United States without raising taxes

19:30

in some form. And that is the nut.

19:32

We had a choice in the election. We

19:34

could have gone through a party that was

19:36

going to raise taxes or one that's going

19:38

to cut them. and the choice that the

19:40

country made was to cut taxes at least

19:42

relative to the sort of ongoing profile that

19:45

we're following. And that has public finance

19:47

implications and by the way of course

19:49

that's something the bond market has long

19:51

since woken up to since the election.

19:53

Yeah and from a growth perspective then

19:55

do we end up with a positive

19:57

fiscal impulse for this year or not?

20:00

Not really because you know the

20:02

real event here is that the

20:04

tightening that was heading our way

20:07

in 20, well actually in 26

20:09

is not going to happen. There

20:11

will be some... modest spending restraint.

20:14

We talked about cutting government workers

20:16

and some things like that. There'll

20:18

probably be some modest tax cuts,

20:21

you know, around the edges to

20:23

try and, you know, he talked

20:25

about cutting taxes on tips and,

20:28

you know, I feel like gratuitous

20:30

measures. So net, net, I would just

20:32

look for the budget. the fiscal thrust

20:34

impact to be quite flat over the

20:37

next couple of years. And that's a

20:39

difference to what would have happened if

20:41

Harris had won, because there would have

20:43

been net tightening in that period. Yeah.

20:45

And then we'll come back to Trump

20:48

and the Fed when we talk about the

20:50

Fed, but on the economy more generally, on

20:52

the growth picture, you know, one of the

20:54

sources of strength of the US economy

20:56

has been a consumer. You know, how do

20:59

you see the consumer right now? What's the

21:01

state of the consumer? Yeah, I mean,

21:03

to be honest, I've probably been

21:05

consistently surprised since we've gone through

21:07

this year about how robust consumer

21:09

spending has been, then you back

21:12

out the numbers and you realize,

21:14

well, income growth's been okay, but

21:16

we've also had very healthy balance

21:18

sheet developments, you know, wealth effects,

21:21

which have helped push the saving rate,

21:23

at least as currently measured, down slightly.

21:25

So that's been the backbone of resilience.

21:27

Looking ahead, I'd say if I was

21:30

trying to, you know, keep a robust

21:32

consumer, the last thing I do is

21:34

to raise sales taxes, if you see

21:37

what I mean, and that seems to

21:39

be the first thing he wants to

21:41

do. So, you know, I think one

21:43

of the things that will dawn on

21:46

the administration once the tariffs come in

21:48

is that consumer spending will be weaker

21:50

than previously been the case. You know,

21:53

that creates this tension, I think, as

21:55

25 evolves into 26 of, you know,

21:57

how sustainable is this policy that

21:59

he's... putting in place, you know, will you

22:01

do what he did in 2019, early, 2020,

22:03

and kind of back away from it. So

22:06

what's your growth profile for this year?

22:08

Because I've noticed over the past a

22:10

month or six weeks, you know, everyone's

22:12

been revising up their US growth forecast.

22:15

So there seems to be this sort

22:17

of US exceptionalism view, fairly positive view

22:19

on the US economy for this year.

22:21

Where do you fit into that? I

22:23

suppose I too have been revising up

22:26

my near-term forecast because I expected. two

22:28

and a half growth to slow to

22:30

below two at the end of the

22:32

year, but it hasn't. But I still

22:34

somewhat doggedly retain the view that

22:37

we'll be slowing closer to the

22:39

one by the end of the

22:41

year and add a weak point

22:43

in the early part of 26.

22:45

And that really goes to this

22:47

idea that the tariff and autaki

22:49

policies are negative for growth. I mean,

22:51

including the labor supply

22:53

point we talked about earlier. Yep,

22:56

understood. And so where does

22:58

that leave inflation? Well, it leaves

23:00

it with a hump ahead. So, at

23:02

least in my scenario, I mean, again,

23:04

one of the things that's happened, if

23:07

I go back, look at my inflation

23:09

forecast, I've actually changed it a lot

23:11

less than my growth forecast through the

23:14

past year, but the decline that I'd

23:16

been penciling in for the last part

23:18

of last year just didn't happen. if

23:21

anything we hope, we've hooked back up,

23:23

you know, from sort of two and

23:25

a half to two and three quarters

23:28

percent, let's say, something like that, you

23:30

know, including today's numbers. So as we

23:32

look into next year, sorry, this year

23:34

now, you know, I think there's this

23:37

optimism that we'll get these very powerful

23:39

base effects because you know the big

23:41

increases a year ago and we're sure

23:44

not to get this time. Well I'd

23:46

be a little careful about that one

23:48

because I don't think the CPI and

23:51

PC seasonal is fully account for the

23:53

fact that as producers are now more

23:55

in a price raising mode than a

23:57

price stability road mode you see more

24:00

in increases at the start of

24:02

the year. People raised their list

24:04

prices on January the first. So

24:06

I would expect another chunky January

24:08

increase and some February carryover in

24:11

the inflation numbers. So, you know,

24:13

and I wouldn't panic at that

24:15

in the sense of saying, oh

24:17

my God, this is definitive evidence

24:19

of a re-acceleration. It's just possibly

24:22

some quirkiness in some of the

24:24

seasonal adjustment in a world where

24:26

we now have more price increases

24:28

going on. you know that's giving

24:30

us inflation trend inflation closer to

24:32

three than one and a half

24:35

let's say so that's that's a

24:37

big difference from where we work four

24:39

or five years anyway that's one point

24:41

but much more important is I'm assuming

24:43

that the tariffs get implemented in the

24:46

second quarter or at least by mid-year

24:48

and that gives us a bump in

24:50

inflation and I mean I don't want

24:53

to bore everyone with my math and

24:55

my arithmetic in pushing this all

24:57

through but I have the core BCE deflate

24:59

a rise into about three and

25:02

a half percent by the end

25:04

of the year on a year

25:06

on year basis. And that's really

25:08

just tracing through the trumpet face

25:10

value tariff increases and feeding them

25:12

through into the goods market environment

25:14

and the broader CPI. It would

25:17

be very analogous to, you know,

25:19

when Japan raises its sales tax,

25:21

it adds to the headline inflation.

25:23

You know, when the UK raises

25:25

its VAT, it adds to the

25:27

inflation. It's a one-off price level

25:30

adjustment, but if I'm sitting in the

25:32

FOMC in July or August, September, you

25:34

know, July or September, and I'm seeing

25:36

these numbers, and I'm seeing wages pick

25:39

that up again, I'm not sure I

25:41

can sit there and do nothing. So

25:43

I probably, my most extreme difference

25:46

between my view and, you know,

25:48

the consensus is I actually have

25:50

the Fed hiking in September. I

25:52

don't have the not cutting at

25:54

all between now and then. and

25:56

I have them hiking in September.

25:58

And that isn't... It's not a

26:01

mad dog view, it's a tailor-rule

26:03

view, that may be a bad

26:05

dog, but it's tailor-all based on

26:08

the evolution of the inflation development

26:10

specifically. Growth will be tailing off

26:12

a little bit, but the problem

26:15

here is that if the labour

26:17

supply is so weak, the unemployment

26:19

rate won't be going up. So

26:22

many numbers will be going down

26:24

in some fashion and, you know,

26:27

arithmetically. And that gives you, I

26:29

think. the requirement by the Fed to

26:31

hike rates. So the Fed on hold,

26:33

then hiking September, one hike for

26:35

this year then? At that point,

26:37

I think all hell breaks loose.

26:39

That's when Powell's, if he hasn't

26:41

already been replaced, that's when Powell's

26:43

replacement gets named and Trump starts

26:45

saying he should take over straight

26:47

away. And I think could things

26:49

get quite messy at that point.

26:51

So you think there's a high

26:53

risk there could be some Trump

26:55

interference in that sense? I think,

26:57

you know, like you say, well

26:59

it won't be meaningful because he'll

27:01

just stomp and shout, won't be able

27:03

to do anything. And I think that will

27:06

be the outcome, but it will produce some

27:08

market mess, I think. Yeah. I mean, when

27:10

you say this Fed profile, it reminds me

27:12

of a bit of the 1990s, you know,

27:14

where they had that big hiking in 94,

27:16

then between like 95 to say like 2000,

27:19

there was these like mini easing, mini hiking

27:21

cycles that we had sort of back then.

27:23

I mean, is there a parallel to that

27:25

period, we just say, or is that just

27:27

aside from that mini easing of hikes,

27:29

that's a couple different regime to

27:31

today? Yeah, I mean the problem with all

27:34

these parallels is so many other

27:36

things, you know, of suddenly other

27:38

moving parts in that period. The

27:40

US monetary policy at that point

27:42

was increasingly moving from being purely

27:44

US driven or US determined to

27:46

being more globally determined. A lot

27:48

of the easings in the late

27:50

90s or the easing in the

27:52

in 98 specifically was driven by

27:54

the Asian crisis and external crises.

27:56

I think what's different, this period

27:58

versus then is back then we

28:01

were having debt cycles driven

28:03

by private credit both domestic

28:05

and external. Now I think

28:07

the problem is public debt

28:09

and the issues of sustainability

28:11

of not just US Treasury

28:13

debt but broader public debt

28:15

in the DM economist and

28:18

beyond. Yeah. You mentioned beyond and

28:20

there seems to be this pessimism

28:22

towards Europe. Do you think the

28:24

picture is that bad in Europe

28:26

or do you think it's warranted?

28:28

Well, I think depends where you

28:30

sit. If you're in Spain or

28:32

even Italy these days, Greece, you

28:35

know, a great example, things look

28:37

pretty good, better than they've looked

28:39

since the first five years of

28:41

the euro. Or so, if you're

28:43

sitting in Germany, it's the exact

28:45

opposite of Austria, you know, maybe

28:47

the Netherlands. So I think this

28:49

is a case of intra-European rotation

28:52

against the backdrop of an average

28:54

poor performance, if you see what

28:56

I mean. So there's no getting

28:58

away from that average poor performance.

29:01

And because it's hard to scale

29:03

the shock from Russia, broadly put,

29:05

not just Ukraine's invasion, but the

29:08

whole, you know, Russia, Germany made

29:10

a huge bet on Russia, starting

29:12

in the late, mid to late 90s.

29:14

And it effectively said, the way

29:16

we could become the United States

29:18

is by kind of bringing in

29:21

the Russian farm belt and the

29:23

Russian resources belt that kind of

29:25

will make us feel like the

29:27

US. You know, the US has

29:29

got the Midwest and the resources

29:31

and we can mimic that by

29:33

becoming brothers with Russia. You know,

29:35

and that bet was bilateral across

29:37

the parties in Germany, and it

29:40

just worked out really, really, really

29:42

badly. And so I think what

29:44

we're seeing is, you know, the

29:46

long downside of that. And on

29:48

top of that, you know, Germany

29:50

in some fashion benefited from everyone

29:52

else's profligacy in the euro area

29:54

because it kept German industry competitive

29:56

and strong demand for German industry

29:59

within the world. region. Now everyone

30:01

else has sort of got German

30:03

religion on competitiveness. You know, it

30:05

puts the, let's call it the

30:07

Deutschmark area at a disadvantage. You know,

30:09

effectively Germany needs a devaluation within Europe

30:12

and it can't have one. So I

30:14

think that's the biggest problem that Europe

30:16

has, at least for now. One argument

30:18

would be that Trump's one of the

30:20

best things Trump could do is actually

30:23

help resolve the UK crisis in some

30:25

fashion. It may not be good for

30:27

Ukraine, but it might actually be good

30:29

for Europe if somehow peace breaks out

30:31

in the region. That can be a

30:34

big lift. In terms of policy for

30:36

Europe, I mean, is there something the

30:38

ECB can do, you know, obviously the

30:40

market, most people expect them to do

30:42

three maybe four cuts this year? Is there

30:44

some kind of big fiscal thing after the

30:46

elections in Germany? I now get back

30:48

to neutral. So the ECB in some fashion

30:51

will be, well, you know, we've already

30:53

seen Sweden and a couple of a couple

30:55

of other. you know, countries move ahead of

30:57

them, but the ECB will be the

31:00

most aggressive, well one of the most,

31:02

you know, not as aggressive as Switzerland,

31:04

but will be the most aggressive of

31:06

the easers amongst the major DM economies

31:09

and rates will get to 2% probably

31:11

not below, but 2% because this is

31:13

a region, you know, if you're going

31:16

back to sort of tailor all type

31:18

discussions where, you know, the unemployment rate

31:20

is still a record low. So paradoxically,

31:23

although we've got all this pessimism on

31:25

growth growth, we actually have the

31:27

best performing labor market that Europe's

31:29

ever had. You know, maybe not

31:31

saying much, but it's kind of

31:33

impressive. And it's genuine, I think.

31:35

You know, we're seeing in countries

31:37

like Spain a real rebound in

31:39

the employment picture. Yeah, okay, no, it's

31:41

great. And then the UK, I mean,

31:44

your former country residence. The poor

31:46

old UK suffers from, you know, it

31:48

seems like it has everyone's negatives and

31:51

no one's positive if you serve them.

31:53

So, you know, I think the UK

31:55

in the same way that Euro area,

31:58

specifically Germany, is suffering from this. sort

32:00

of dislocations from Russia, I think

32:02

the UK continues to suffer from

32:04

the dislocations from Brexit on the

32:06

growth side, without any sort of

32:08

offsetting benefit from broader global integration.

32:11

Although I'm a little more optimistic

32:13

than maybe the Labour government will

32:15

go down that route than the

32:17

Conservatives were able to. The problem

32:19

is that, you know, it, dare

32:21

I say, it reminds me of

32:24

my hometown soccer team, loot and

32:26

town. where we've got our big

32:28

emphasis on long-term investment to improve

32:30

the sustainability of the club. But

32:32

meanwhile, we don't spend any money

32:34

on players, so we're sinking in

32:36

the current period. So the UK

32:39

kind of has that same broader

32:41

development going on. There's an effort

32:43

to try and bolster long-term investment

32:45

and create conditions to do that.

32:47

But in the near term, aggregate

32:49

demand is soft and likely to

32:51

weaken further. So the outlet I

32:53

think for the UK, not to

32:56

detail, but the outlet for the

32:58

UK is the Bank of England

33:00

is probably going to ease a

33:02

bit more than, at least as

33:04

until we got to today, but

33:06

things have changed a bit with

33:08

the inflation number, but I think

33:10

the Bank of England is going

33:12

to ease more than the markets

33:14

been thinking. Yeah. Twenty-five. There were

33:16

some countries that did all their easing

33:18

in 24 and we'll step back in 25

33:20

and there are others that kind of

33:22

waited. and we'll ease more in 25

33:25

and the Bank of England's one of

33:27

those I think. Yeah and then we

33:29

have Japan which is the one that's

33:31

on the other end they're likely to

33:33

hike possibly in at the end of

33:36

January is their story kind of

33:38

positive still like in you know or

33:40

not? Well I think you got a

33:42

sort of okay say what what's my

33:45

criteria for saying the story is positive

33:47

okay you know is Japan going to

33:49

have a strong growth phase it

33:52

no Japan and a lot

33:54

of that is demographic and structural.

33:56

Is Japan's surge in the

33:58

equity market done? yes because

34:00

of the rate story and also

34:02

because the first 10 years of

34:05

Abinomics were all about a massive

34:07

redistribution to profits. Now that's beginning

34:09

to be unwound and the wage

34:11

share of GDP will get restored.

34:13

So that's probably better for consumption,

34:15

but it's not great for the

34:18

nickel and for the equity market.

34:20

What I think is happening in

34:22

Japan, which is kind of, you

34:24

could say the implicit message of

34:26

the implicit target. of all these

34:29

policies is that the public finances

34:31

have actually improved quite a lot

34:33

compared to what people thought they

34:35

were going to be, including myself.

34:37

And the Japanese public finances are

34:39

a big kind of cloudy, you

34:41

know, the data are timely and

34:44

they're not well-presented. But their budget

34:46

deficits really come down quite sharply

34:48

over the last couple of years.

34:50

And a lot of that has

34:52

to do with the buoyancy of

34:54

nominal GDP. So if you define

34:57

success as putting public financing on

34:59

a more sustainable footing, then yes,

35:01

there is more success. But this

35:03

idea that you ate a has that

35:05

now we've restored 2% inflation, everything will

35:07

be great again. And we can get

35:10

back to solid growth. That's just not

35:12

the way the world works as far

35:14

as I can see. And how much will

35:16

we hike by in the end,

35:18

do you think, or too? I

35:20

think so it really comes back

35:22

to a discussion of where do

35:24

you think Japanese new Japanese neutral.

35:26

is. And I suppose what I

35:28

did, again, somewhat rationally perhaps a

35:30

month or two ago, is I

35:32

raised my estimate of Japanese neutral

35:34

to 2% because I said, well,

35:36

look, you know, potential is close

35:38

to zero and they seem convinced

35:40

2% is the inflation number that

35:43

they're going to achieve. So

35:45

QED, that's probably a reasonable

35:47

neutral number. Maybe we should

35:49

shade it a little bit.

35:51

But I guess in my

35:53

own forecasting I've got them

35:55

raising rates to one and

35:57

a half percent as we go

35:59

into 2026. sticking there, but you could

36:01

definitely convince me that they would go

36:03

higher than that. You can also convince

36:05

me they'll go lower if there's a

36:07

massive problem in the global trading system

36:09

and or, as I alluded to earlier,

36:12

some kind of global financial crisis as

36:14

some of this sort of optimism on

36:16

crypto and AI begins to on why.

36:18

Okay, no, that makes sense. And then

36:20

of course there's China, which you're supposed

36:22

to be... the other part of the

36:24

twin engines of global growth, but it

36:26

seems to be spluttering for the last

36:28

few years. I mean, the way people

36:30

characterize China is, it's like Japan of

36:32

the 1990s, you know, so incumbent with

36:34

balance sheet problem, lost decade, they can't

36:36

do anything about it, poor demographics, and

36:38

so on. The picture doesn't look very

36:40

optimistic, and then you have Trump in

36:42

power as well, that's probably not going

36:45

to help China, which has relied on

36:47

export, so it's really easy to paint

36:49

a very gloomy picture around China. you

36:51

know I'll be too negative or is

36:53

that something? I suppose the answer is

36:55

probably no but it's all relative if

36:57

you saw what I mean in some

36:59

fashion I think of all these East

37:01

Asian countries as having gone through

37:03

the same process you know and

37:05

including in that the demographic transition

37:07

so if you look at sort

37:09

of some of like career it's

37:11

also you know it's not had

37:14

the extreme problems that Japan, at

37:16

least so far, the extreme problems

37:18

that Japan has had, but it's

37:20

transitioning from, you know, 8% growth

37:22

to 3 to 4, now down

37:24

to sort of 2, or more

37:26

like 1. And I think that's

37:28

sort of where China is headed.

37:30

I mean, I've been sitting with

37:32

a, you know, 3 to 4%

37:34

growth forecast for the out years

37:37

for a while for China and

37:39

see no reason to change that.

37:41

got a little bit more action

37:43

in my 25 forecast than I

37:45

had six months ago because I

37:47

think they are really doing something

37:49

significant about their property problems.

37:52

They're not. You can't, you can't

37:54

go back and re-write them out

37:56

and restart again. But what you

37:58

can do is... As you've mentioned,

38:00

some balance sheet operations to effectively

38:03

take a lot of the bad

38:05

assets in the property sector off

38:07

private sector balance sheets and effectively

38:09

turn them into public housing. And

38:11

one of the benefits that China

38:14

has relative, I was going to

38:16

say to Japan, but I'm not

38:18

even sure that's true, is that

38:20

it's housing stock because of its

38:23

developing country nature in some fashion,

38:25

it's housing stock is still... underbuilt

38:27

and under, you know, it doesn't

38:29

have enough good quality housing. So

38:32

there's still the need for people

38:34

to move from poor housing to

38:36

better housing if you see what

38:38

I mean. You know, that need

38:41

isn't there in developed countries, so

38:43

it's harder to sometimes work these

38:45

excesses off. But on the other

38:47

hand, I don't see... you know,

38:49

once you clean up this property

38:51

problem, I think it'll lift property

38:53

prices. So one of my bets

38:56

in 2025 would be that Chinese

38:58

house prices will begin to turn

39:00

back up again. And that's an

39:02

important factor. But I don't think

39:04

it's going to suddenly change the

39:06

Chinese growth outlook. You know, as

39:08

I say, we'll still be stuck

39:10

in this sort of three to

39:12

four percent ruts with a consumer

39:14

that is quite soft. And of

39:16

course... Globally, that's a problem because

39:18

we were counting on the Chinese

39:20

consumer, as you said, to kind

39:23

of pick up the slack where maybe

39:25

the US consumer left off. Yeah. And so

39:27

we've done this big run around

39:29

the world. How does this translate

39:31

to markets? in your eyes? Well

39:33

I suppose fundamentally I'm you know

39:35

I think the market's got itself

39:37

correctly positioned in terms of you

39:40

know we're still in a rate

39:42

cutting cycle the nature of that

39:44

cycle will rotate less in the

39:46

United States none in my view

39:49

in the United States and probably

39:51

more in some other economies you

39:53

know I mentioned the UK also

39:55

Australia you know we'll begin in earnest

39:57

as we go through this year

39:59

other countries that are already adjusted

40:02

like Canada and Sweden will tail

40:04

off. So I think the short

40:06

end of curves, I see the

40:08

biggest mispricing in the Fed where

40:10

there's still a bit of optimism

40:12

we're going to get cuts and

40:14

I've got my hike, and probably

40:16

not enough optimism in some of

40:18

like the UK, probably Australia as

40:20

well, where the rate cutting cycle

40:22

will be more pronounced. Having said

40:24

that, the longer end of the curve

40:26

in most countries I think has up

40:29

the pressure. you know, in countries

40:31

that are cutting, the potential for

40:33

bonds to rally is constrained by

40:36

the, you know, by the fact

40:38

that you've got inflation worries, secular

40:40

inflation worries, I'd characterize them. You've

40:43

got bond issuance worries from the

40:45

fiscal picture, I alluded to earlier.

40:47

And then I think another factor

40:50

is this sort of growing recognition

40:52

that term premier all got so

40:54

suppressed by QE over the last decade.

40:57

you know, there's a warranted

40:59

unwinding in those relationships. And

41:01

in a sense, the market's been

41:03

slow to do that. And I

41:06

think it's kind of doing it

41:08

more recently as a catch-up to

41:10

some of these changes. Yeah. And

41:12

then equities? I mean, I have

41:14

a skewed bias. I have to

41:17

admit to be, I always miss

41:19

out on equity rallies. you know,

41:21

that's the economist in you. But

41:24

I mean, I'm too old-fashioned, like

41:26

I look at, you know, fundamentals,

41:28

valuations and silly things like that.

41:30

But I am concerned about the

41:33

relationship between bond deals and equity

41:35

deals. I mean, that me is

41:37

an aggregate overhang. And then I'm

41:40

even more concerned by the what

41:42

I view as a speculative

41:44

excesses in you know, what

41:46

that's called in the magnificent

41:48

seven of these in the

41:50

areas of sort of AI

41:52

euphoria. And you know, crypto

41:54

to me is just an

41:56

expression of pure financial excess,

41:58

pure financial speculation. excess and it's

42:01

an accident waiting to happen in

42:03

my view. And the dollar, presumably

42:05

from your view, it sounds like

42:07

you'll be positive on the US

42:09

dollar. Positive on the US dollar in

42:11

the next year, much more cautious in

42:14

26. Yeah. And that's got a lot

42:16

to do with the sort of rotating

42:18

interest rate and probably also growth picture.

42:20

Because I would see some economies doing better

42:22

in 26 they do in 25, whereas I

42:25

see the US doing worse in 26 and

42:27

25. Okay great okay we'd want a

42:29

big run around markets and the economy

42:31

I did want to round off with

42:33

a couple of personal well one personal

42:36

question I always like to get some

42:38

cultural input from you have you been

42:40

reading any good books or watching any

42:42

fun TV shows or films? I'm not

42:44

much of a TV watch it to

42:47

be honest but I'm a big reader

42:49

and I it's quite a few sort

42:51

of interesting things have piqued my interest

42:53

I mean there's this one book that

42:56

I just finished reading called AI Snake

42:58

Oil which is definitely worth a read

43:00

because and if I can advertise it

43:02

here a couple of Princeton academics who

43:05

like this is the best

43:07

book I've read recently to

43:09

put the whole AI boom

43:11

into context and it's not

43:13

saying AIs like that's not

43:15

the point of the book

43:17

it's to say there is

43:19

some magnificent fantastic aspects to

43:21

this and then there are

43:23

some very negative. aspects. And

43:25

it sort of comes down

43:27

to generative AI being very

43:29

positive and predictive AI being

43:31

worryingly negative, worryingly bad. So,

43:33

you know, I'll leave it

43:35

at that point. I'm also

43:37

very much into biographies and

43:39

I've been fascinated by my

43:41

graduate school at Oxford was

43:43

Nuffield College and I've become

43:46

very obsessed with Lord Nuffield

43:48

who is better known perhaps

43:50

to most people as William

43:52

Morris. who was the founder

43:54

of Morris Motors. And if you're

43:56

looking at Britain and you know

43:59

what went... wrong with Britain, it's

44:01

sort of, okay, why don't we

44:03

have the William Morrises anymore? Who

44:06

were these kind of tinkerers? He

44:08

started off mending bikes on Oxford

44:10

High Street, and within 15 or

44:13

20 years, he'd built one of

44:15

the biggest car companies in the

44:17

world, pretty much single-handedly. No education.

44:20

I mean, I'm not a meaningful

44:22

education. And, you know, went on

44:24

to become a... a tremendous benefactor

44:27

and you know a donor of

44:29

funding to medical institutions in particular.

44:31

It's a kind of, you know, I'm

44:33

fascinated by like what when, you know,

44:36

why don't, why don't, why don't we

44:38

have these people anymore in Britain, you

44:40

know, we sort of have them in,

44:42

we have them in the US, and

44:44

in fact what's happening in some fashion

44:47

is in the US, we're attracting them

44:49

from abroad. So the US,

44:51

when people talk about US

44:53

exceptionalism, I don't think it's

44:55

necessarily the US population that's

44:57

producing that exceptionalism is the

44:59

atmosphere of the US that's

45:02

creating that exceptionalism. And some

45:04

of it is the capital market

45:06

story, as Draggy has been pointing

45:08

out with his report. But I

45:10

think a lot of it is

45:12

a sort of entrepreneurial atmosphere that

45:14

is very different. So some like

45:16

Elon Musk's biography by Walter Isaacson,

45:18

also on my must read list.

45:20

Because if you want to understand

45:22

this guy. you know his early

45:24

years are very you know to

45:26

say the least they were very

45:28

formative okay so I'll leave my

45:31

my recommendations at that point

45:33

okay great that's fantastic and

45:35

then finally what's the best

45:38

way for listeners and viewers

45:40

to get in touch with

45:42

you or get access to

45:44

your research or subscribe Well,

45:47

we're easily found at subtle

45:49

economics.com. S-U-T-T-L-E-Eeconomics, all one word,

45:51

dot com. And if you

45:53

want to reach out to

45:55

me personally, I'm mainly, Phil

45:58

at subtle economics.com, so P-H-I. at

46:00

Sudden Economics.com. Or if you can't

46:02

find me either way, go through

46:04

Bilal because he's such a nice

46:06

guy. Very fine, Phil. Yeah, and

46:09

I'll make sure to connect them

46:11

to you. Fantastic, Phil. As usual,

46:13

very comprehensive, very thoughtful, very thorough,

46:15

and I really do enjoy your

46:18

daily that you're right. I think

46:20

it's by far the best day

46:22

on the economy out there. So

46:24

I do urge everyone. who is

46:27

interested in macro and markets to

46:29

get in touch with Phil. Perfect. And

46:31

good luck with everything. You're doing a

46:33

great job and keep that job going.

46:35

Great. Thanks a lot Phil. Thanks for

46:37

a lot. Thanks for listening to the

46:40

episode. Please subscribe to the podcast on

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46:44

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46:47

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