Inflation Data amid Equity Push Higher

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This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. We start strong here with special coverage. Andrew Sizarowski joins us with Morgan Stanley. I mean, you got a nominal GDP, Andrew, but you got a new mix of lower GDP and persistent inflation. How does that change the application of new money? into the bond market.

Look, I think that when you look at what the bond market's pricing in for Fed and central bank policy, you see the bond market's actually doing some of the work for the Fed. They're tightening financial conditions a little bit. At the same time, obviously, the stock markets rallying and spreads are tightening in credit. But those two things are kind of offsetting each other. I think one of the reasons the Fed doesn't have to be too concerned with inflation is you talked about that personal income number, which was zero percent month over month. If you look at something like Atlanta Fed wage tracker,

wages are tracking 3.6% wage growth year over year. We have 3.8% PCE price inflation. So those are negative real wages. This is something that price increases aren't sustainable on a real basis if either the consumer is going to have to tap their savings or they're going to cut back on spending. And I think that's why the one thing the Fed has going for it right now. It beautifully frames it, folks.

I can't say enough about that analysis of the Atlanta wage tracker. Andrew Szeroski, thank you for joining us here with his key economic data with Morgan Stanley. Paul, on the data screen, what do you see? I'm just like, basically, it's true. Everybody's looking for Nick's tickets. Yeah, exactly, right, pricing those out. Two-year treasury, up a couple of basis points, 4.05%, and then 10-year up only about one basis point, 4.49%. This is a treat, folks. Ira Jersey, definitive with dominant constant and credit suites years ago, trying to get

guess out the interest rate tendency. He now holds court driving all of credit at Bloomberg Intelligence. Ira, if you were in the chair with Dominique like this morning, and you had to guess out those inflate, those guesstimates, those forecast tales of what yield would be. Is it a higher yield? Well, it's a higher yield because basically this is old data and old news. You know, the market this morning, at least,

is really concentrating on where is oil today? And it oils up a couple of bucks at the moment because of the strikes overnight by the U.S. So people are looking through this data. And obviously, there's also so much data to digest here that, you know, we're all, like, quite full right now. So we're trying to parse out what's the most important bits of this. And you noted, Tom, that the spending being flat a month on month is actually, excuse me, the income being flat month on month, actually is not very good. because now we have negative income in large part maybe it could drive the economy a little bit weaker. And, you know, along with the weaker than expected GDP number for the first quarter, you know, that's not necessarily a particularly good sign, even though the inflation data was a little bit better than expected.

So just the headline, I'm a headline kind of person, Ira, you're the one that digs 27 layers deep. but the headline annualized 3.8% PCE price index. I mean, that's got to get the attention to folks, not just at the Fed, but I don't know, around Washington and policy makers and things like that. How do you, what's a 3.8% number mean to you? Yeah, well, it means for one thing that it's going to be really difficult for Kevin Kevin Warsh to increase to lower interest rates, right? Like, how can you lower interest rates when, you know, not only are you running above

target in terms of your favorite inflation measure. So even if you trim out some of the details of this, and we haven't been able to do that yet because it's obviously the number just came out. But even if you trim it out, you're still going to be above the 2% target that the Fed set. So it's going to be hard for Kevin Warsh to convince other members of the Fed to even think about cutting interest rates. So I think for now when it comes to least interest rate policy, you're more likely to see the Fed on hold until and unless, one, the war ends. And then, too, if there's major changes to the employment situation, which, you know, obviously we'll get more of that next week. This wall of data, and as I said before, folks, I mean, there's a dynamic here to nominal GDP in its new territory. For Chairman Kevin Warsh, Ira Jersey, do you have an historic analog he can plug in?

Or is he a new territory? I think in many respects he's a new territory. Because even though, like you could argue, and some people have argued that we're, we're moving toward a stagflationary type environment because real growth should slow, given that you might have a lot more of people spending having to go to fuels and gasoline. But then people then talk about electrification. And then, you know, we're not talking about, you know, 10% inflation rates like we had back in the 1970s and early 80s. We're talking more about, you know, three or four percent inflation, right?

Which, historically speaking, when you go back even to, you know, earlier in my career, You go back 30 years when I started in this business, we were talking about, you know, 2.8%, 3% in a PC deflator. That was fine and that was normal, right? So that is more sustainable, right? Inflation like we have today is somewhat more sustainable than inflation at 9 or 10% like we had a few years ago. Just because, you know, at least over the last few years, you've seen wages growing at 4%. So that means you still had real wages going up, which is the reason why that personal income number, I think, is a little bit disturbing to me and I want to dig into that a little bit more because if we do

have negative real wages that's when you wind up seeing a pretty aggressive slowing in the economy on a forward basis and so so we want to see is this the start of a trend or is this just like a one-off measure because you know social security payments were delayed or something like that so so we have to dig into the details of some of this so unfortunately paul i do have to dig into those details to be able to get you more information again i'm not a details guy right on right on the surface, but I see personal income flat. I see my GDP number come in below expectations. Okay. This is brilliant. This is brilliant, Paul. Ira, all of us think like Paul. It's ugly out there. Does the bond market signal that? So, well, the bond market signaling that it's really

worried about inflation, right? So when you look at like that two-year yield, which we, you know, we talk about being very sensitive to policy rates, and of course it is, but when you look at what's sold off and why it sold off so much. It's also because inflation expectations in the short term have really gone up pretty significantly. They've gone up 40-ish basis points in terms of the two-year tips break even. So if we wind up getting a situation where oil gets back down sustainably to $80 a barrel, you can wind up seeing two-year yields get back to kind of where the Fed funds rate is right now. Will we get down below that? I doubt it because the market's still going to price for the Fed to be unholds probably.

for a pretty long period of time. But you can easily get a 30 basis point rally on just on inflation expectations going down. Now, the long end of the curve is not only worried about inflation, and in fact, inflation expectations longer term have barely moved. It's that what's going on with the fiscal situation will budgets globally wind up getting even worse because of either defense spending or social spending to kind of combat people's people's, having to spend more on energy. And that's one of the reasons why you've seen this global bond sell-off. So, you know, we talk about U.S. 30-year being over 5%. Sure, it is. But this really is a global phenomenon. You look at Japan with, you know, interest rates that haven't

been this high in decades. The U.K. is still having some of its own fiscal problems. So you wind up seeing all government bond yields go up. And one of the triggers for that, obviously, was the war in Iran. But I don't see what makes yields go down quickly over the next a couple of months in the long end of the curve in particular. Paul, is that too much detail? That was good. He's, that's what he's saying for. He's just killing me.

He's got a staff of 25 people down there. Ira Jersey with us, folks. And of course, all of his expertise in fixed income is noted, particularly unreadable documents on the short space, like the trust market commercial paper and LIBOR, OIS, or SOFER, S-O-F-R. We are pleased to announce that after negotiation. with Mr. Jersey's representatives, that Ira Jersey will join us in a new capacity. He will be the surveillance World Cup reporter.

Nice. This is good. We got a staggered at June 11th, Mexico City, South Africa as well. Ira, first, before we get to the World Cup, PSG Arsenal this weekend. Describe how big a game that is to the world, except Americans who don't care. Well, in many ways, it is the pinnacle of global soccer or football, if you want to call it that, which I do.

Because the club game is much better in terms of quality, actually, than the international game is. Even though you wind up having the biggest stars on these teams that go to the World Cup, they're only together for one month. You know, they literally, everyone just reported the camp except for the guys from PSC and Arsenal this week. So it's not like they have a lot of time together, whereas, you know, PSG and Arsenal, they've been training since last August for this very game. So it is going to be some of the best football. Now, it is a final, so that tends to be a little cagey. But PSG in particular, they just know how to attack.

Arsenal can be a little bit more tactical, I think. And I do suspect that Arsenal probably has the edge in this game, but it is going to be one to watch, for sure. Was that a good first bout with our World Cup correspondent? Irish Jersey, thank you so much, driving all a fixed income. Can't say enough about his commitment to New Jersey youth soccer. His team is rocking it this year. Irish, Jersey, and again, going out to June 11, Mexico City Stadium, Mexico and South Africa, I should say here.

Matt Gretchen Whitmer has been more than patient, portfolio manager, Allspring, and he joins us for too short a visit this morning. Matt, is the American economy sluggish that 1.6. percent GDP. Is that the new standard? Yeah, it's a great question. I mean, as bottom-up portfolio managed, I think we're really focused on what those fundamentals are doing right now. And I think that really helps kind of separate the noise from the signal. And if you look at what's happening within the the earning cycle right now, we've seen some really strong growth projected even for, you know, for this year and for next year. And so we really have a strong belief that that true long-term

value of a company is their future stream of cash flows and they still look really strong right now. So, Matt, we've seen, you know, the economic data today suggests maybe this economy is entering some form of stagflation here, but boy, we don't see that in the earnings, do we? What do you make of that? Yeah, look, I think that's important. We just came out of COVID with a strong monetary and fiscal response. And now you're throwing on top of that, this AI kind of cap-x boom. And I think that's really kind of elevating things right now.

And I think that's why the fundamentals continue to be strong right now. Matt, I know you guys, and we talk to Ann Melletti as well. You guys are Scott Bottoms up, folks. You really roll up the sleeves and do the work here. What sectors or what factors are screening well for you guys these days? Yeah, good question. I think a big part of what we're doing right now is just focusing on diversification. I think that's going to be important going forward.

I think concentration risk is real at this point. it's important to take a holistic approach, especially with the AI ecosystem. Cap X dollars are going to start spreading across the value chain. Look, it's important to stay involved in those big cap tech names like the Mag 7. They're going to continue to play an important part of the buildout of AI. But it's important to start allocating some of those investment dollars to other areas of the market. So we're kind of thinking about that AI ecosystem is having five layers. You know, that's something that Jensen Huang introduced back at Davos earlier this year.

We're incorporating that into our investment kind of exposure across the AI chain. And it's important to have exposure to all five layers. Matt, one final question. Is it tendency here, are you owning fewer items in an equity portfolio? Are you concentrating or are you going out to a more traditional 100, 200, even 300 holdings? Well, typically for our strategy, we tend to, to be a little bit more concentrated. It's usually in that 45 to 50 names. We think that's enough exposure and diversification to allocate across to make sure that you don't get whipsawed.

But it also gives you an opportunity to be intentful in your exposure and in your bets across the portfolio. Matt, thank you so much. Matt Gretchen Whitmer with us with Allspring this morning on the equity market. Stay with us. More from Bloomberg surveillance coming up after this. Cash flow crunch. OnDek's small business line of credit gives your business immediate access to funds up to $200,000 right when you need it. Cover seasonal dips, manage payroll, restock inventory, or tackle unexpected expenses without missing a beat with flexible draws, transparent pricing, and control over repayment.

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Subscribe to Bloomberg Daybreak for a precise, thoughtful take on the stories that matter. Listen to Bloomberg Daybreak each morning on Apple, Spotify, or anywhere you listen. You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android. with the Bloomberg business app or watch us live on YouTube. Nelson, you with us now, Head of Equity's Alliance, Bernstein. What are you publishing or what are you planning a tone into the weekend publishing?

What are you thinking about? I'm thinking about actually some of the things that you just talked about. So you've talked about these next prices. Why are they so high? It's because of scarcity. But if you think about this economy, it really is a scarcity economy. And so not only oil and the drivers of inflation there, but AI and this CAP-X build-out that we've seen could really be a driver for inflation going forward. And there's real scarcity there.

Anna Wong, I believe, is with us in this hour, would say the same thing. I mean, when you were at Pennsylvania and you take that econ course, the first chapter is scarcity. So if price is up and there's scarcity, new product comes in, do you anticipate that? that. I think there is a very strong demand right now. And I do see that, as we've seen over the last few years, what we've seen is layer upon layer of this AI supply chain getting bid up as we need to do this buildout. I think there are more layers to go. This supply chain is quite long. Does that supply chain? Does that include international and emerging markets? It does. And obviously, Korea and Taiwan have participated in that by quite a bit.

But I think, look, you also have producers of, like, say, print circuit boards. And those are places that just have been in the doldrums for decades because there are such commoditized products. But now they're very specialized because there's only so few of them left. Can emerging in international markets, particularly emerging markets, work with this energy? I'm not sure if it's a crisis, but challenge that we're seeing globally here within. energy. It certainly is going to put challenges on emerging markets and definitely some of these economies that are dependent on energy. But I think there are also a lot of other catalysts across

emerging markets that are beyond just the energy story. So if you think about emerging markets in Korea, in China, we've got a lot of governance reform and you've got regulatory reforms that are focused on improving corporate profitability. So it's not just the technology companies and the semiconductors and memory makers in Korea, but it's also the banks that are returning more capital to shareholders. You were at Penn in a hugely important engineering sequence. I remember walking in the classroom in aerospace going systems analysis. What a joke.

And you're like two weeks into it, and you're going, oh, this is really hard. Logic theory and all. Take your engineering classic systems analysis and put it into the process that's coming down the pipe. Yeah. You know, it's funny that you say, you thought about the gut course that was systems engineering. It actually has turned out to be some of the most important education. Exactly.

The most important course I took. That's right. Got a quality C, trust me. Continue. I do think actually in today's day and age, when information is so readily available, that information edge that portfolio managers used to have has just been compressed. I think the next edge that we have to have as active managers, is the process edge.

And I think of it as you have to have a very robust process for being able to create that durable and distinctive performance patterns that clients look for. That starts with a clear definition of research excellence. What is the differentiated research that we're doing? Tom, I'm going to use one of your favorite words. We're going to Bayesian updating to do a forecast. Really? We're going to a Bayesian theory.

Okay, this is such a nerd patrol. Five people just throw off the Garden State Parkway. But then we have to guardrail it with systematic processes. Make sure that we can repeat that process over and over again. And then we have to reinforce it with continuous learning. Yeah. Just tracking our data, keeping catalogs of decisions that we've made, and what can we learn from that?

Paul, when you're the word guardrail? Hold on to your wallet. Exactly. Save us. So how is the AI investment theme changed for you guys? It used to be, I don't know, we'll just throw money at Nvidia and the other chip companies. now it seems like the market's trying to look at different areas because it just feels like AI. If it hasn't already, it's going to touch every part of our lives. That's right.

There's a real broadening going on. And I'd say the broadening happens in two ways. The first one is just the CAPEX spend that's happening. So you think about the trillion dollars of CAPX that's coming on. That's going to affect so many different industries. So that's in industrials, that's in real estate, that's in utilities, that's in the energy grid. But then you also think about your beneficiaries. And that's in media, that's in health care.

So really, we're looking at a broad set of impacts for AI. We had 26, 27 percent earnings growth this past cycle. Was that AI? I mean, where did that come from? This is an economy that's good, but it's not that good, is it? That extra cap-x spend has a multiplier effect, and it is hitting many parts. the economy. And there was a lot of good that was already going on in the economy. We had the

tax reforms. So I think we came in with a lot of strength this year. Do you still handle earnings season the same way you used to or with your Bayesian process? Is there a new way to say, Nelson, you, Alliance Bernstein, great quarter. What we're looking for is really what are the most important parts of our thesis and how are we affirming and reaffirming or updating our thesis based off what's being released, not just looking at the top line or bottom line numbers. Nelson, brilliant. Thank you so much. You've got to come back. Bring some Bayesian. A dip with you when you can. Stay with us. More from Bloomberg surveillance coming up after this. Cashflow crunch. On-deck's small business line of credit gives your business immediate access

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All loans and amount subject to lender approval. Okay, not so fun fact. Autoimmune skin conditions are actually on the rise. Cases are climbing nearly 20% every year. I know. Terrible opener for a podcast ad. But here's the thing. I'm Holly Fry and our skin exists precisely because of stats like that. Because more people than ever are living with conditions like psoriasis and hydrodinitis superativa.

And most of them are doing it alone, without answers, without community, without anyone to tell them what the heck is actually going on. You know, not that many people knew about it and I felt kind of alone. Like, am I an outcast? That's where we come in. We talk doctors. We talk appointments that are, well, a disappointment. We talk about the flare-ups and the breakthroughs. Then we dive deep into the wild, occasionally gross, always fascinating history of how humans have tried to understand our skin over the centuries. Spoiler alert, we did not always get it right. Listen to Season 3 of Our Skin, a Personal Discovery podcast on the IHeartRadio app, Apple Podcasts, or wherever you get your podcasts. The Bloomberg Sustainable Business Summit returns to Singapore on July 22nd.

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You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg business app. Or watch us live on YouTube. There's all sorts of good conversations forward today, but this is the one if you want to listen to someone who had the courage to be in the market when it was difficult. Now, Paul, right now it's so easy to be in the market. It's every day it's like, you know, every mutual fund, up 10 cents, up 15 cents. I know, I know.

It's crazy. Emily Rowland with us, co-chief investment strategies. It's a man your life in Boston. So old John Hancock, 1946, new John Hancock, 1960. 1976. Which tower are you in in Boston? Well, me personally, neither one. I don't go there very often. I'm usually on the road, but we are in the new tower, the shorter one, like Berkeley's 200 Berkeley.

200 Berkeley is. Okay. Very cool. You know, it's like this huge institution, this just said be in the market back to World War II. How do you stay in the market now, like the stress is staying in the market? market the nifty 50 in the 60s. It's all about earnings, earnings, earnings. So the number one input to our work has always been about following the profits. Stock prices follow profits over time. And it's a key reason that we've been overweight U.S. versus international equities for the last

10 years because that's where the earnings engine has been on and it continues to be today. We did have a rotation, you know, when the tariffs began last year out of the U.S. And has that reversed itself? There's money coming back into the U.S. versus other markets? It has started to this year. And there was this idea that permeated the narrative last year. Like, the U.S. is no longer exceptional. And we saw those capital flows leave, whether it was stocks, whether it was dollars.

You saw that fall onto the shores over in Europe. And it was really a sentiment thing. Yes, there was a modest improvement in economic growth and an earnings growth. But Eurozone GDP, guess what it is right now? It just came in at 0.1%. Yep. And so clearly we're seeing the U.S. in a better place from an economic perspective and from an earnings perspective. And you're starting to see that reflected in the relative performance here as well.

How are you guys? I guess one of the things we've seen just extraordinary earnings growth, as you mentioned earlier here in the U.S. What's driving that? I mean, we don't see those kinds of 20%, 25% plus earnings growth numbers in the S&PF. Is it AI? What's driving it? It's AI, AI. AI and some fiscal support as well. So one thing that's been talked about a lot is AI. And it's not

just this idea that semiconductors are just seeing this massive explosion in demand. It's almost like they're acting sold out right now. And we're seeing that reflected. We're also seeing companies do more with less with AI. And that's actually helping margins expand. It wasn't that long ago that we were talking about margin compression. That's going the other way as well. And then all the wealth impact, the wealth effect has helped the financial sector because companies are doing great with our wealth management businesses. So it's really expanding around all sectors. You're on the road. How do you respond to someone who raises their hand and says, that's great, except it's not like John Kerry's pioneer fund of a million years ago with 300 holdings. My top 10 stocks are 45%

of my fund. Discuss. Concentration risk is a major issue. And it's not just in the United States. If you think about the emerging market equities, it's three stops. So is it the normal that we don't understand? It's the normal. And the 300 stock diversification is an academic construct. It's wild. But I would say to your point earlier, the entire stock market's becoming an AI market. Like you look down in market cap, it's more AI coming into those indices. You look at Tom, value this year is handily outperforming. growth, guess what's in value? Semiconductor stocks because their earnings are so good.

The global semiconductor index is up over 100% over the past year. Guess what? Their earnings are up over 100% over the past year. So the valuations have actually cheapened up a little bit. So AI is really driving markets globally. We have to be careful about diversification. And we're looking for other areas to play the AI power demand story, whether it's around utilities, whether it's around industrial companies,

the picks and shovels around AI. I think that trade has some legs. We're going to get some inflation data today. I know the Fed's going to be paying attention. I assume you will as well. Are you surprised how well the equity markets performing in the face of rising inflation? I mean, nothing seems to be able to stop this equity market. The dip buying is absolutely relentless.

The things that the market cares about are currency. So the dollar and higher yields and higher oil prices. Those are your three things. So if that inflation number comes in hot, Definitely the bond market's bracing for it this morning. If that does result in a backup and yields, we could have an issue. Well, like your first lunch at Johnny Hancock. Did you go to lockovers?

Of course. I remember that place. It's Avons now. Oh, the lobster viz. It was amazing. It was amazing. But, like, you know, I miss lockovers.

I mean, Avons is wonderful, but it's not lockovers. You know, it's like way too mojito. They don't have mojitos at lockovers. No. No, no. No, it's old school. Grandma used to take me there. Nice martini.

There's a major John, Major John Hancock hangout. Back in the day. I have a nodding acquaintance. This is wonderful. Emily, thank you for coming into her studios. It's one of the great calls.

It's like Ben Layler when he was at H.S.BC. Now at Bredesco, it's easy to be in the market right now. Where were you in 2018? Emily Rowland said, please, Investor. Stay with us.

More from Bloomberg's surveillance coming up after this. Cashflow crunch. OnDec's small business line of credit gives your business immediate access to funds up to $200,000 right when you need it. Cover seasonal dips, manage payroll, restock inventory, or tackle unexpected expenses without missing a beat. With flexible draws, transparent pricing, and control over repayment get funded quickly and confidently.

Apply today at ondeck.com. Funds could be available as soon as tomorrow. Depending on certain loan attributes, your business loan may be issued by OnDEC or Saltic Bank. OnDec does not lend in North Dakota. All loans an amount subject to lender approval. Okay, not so fun fact. Autoimmune skin conditions are actually on the rise. Cases are climbing nearly 20% every year.

I know. Terrible opener for a podcast ad. But here's the thing. I'm Holly Fry and our skin exists precisely because of stats like that. because more people than ever are living with conditions like psoriasis and hydrodinitis superativa, and most of them are doing it alone, without answers, without community, without anyone to tell them what the heck is actually going on. You know, not that many people knew about it and I felt kind of alone. Like, am I an outcast? That's where we come in. We talk doctors. We talk appointments that are, well, a disappointment.

We talk about the flare-ups and the breakthroughs. Then we dive deep into the wild, occasionally gross, always fascinating history of how humans have tried to understand our skin over the centuries. Spoiler alert, we did not always get it right. Listen to season three of Our Skin, a personal discovery podcast on the IHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Hi, I'm Barry Rittaltz inviting you to join me for the Masters in Business Podcast. Every week we bring you conversations with the people who shape markets, investing, and business. I speak with CEOs, Nobel laureates, market innovators, and legendary investors. Whether you own stocks, bonds, real estate commodities, even crypto, these are discussions you absolutely need to hear.

Subscribe to the Masters in Business podcast on Apple, Spotify, or anywhere you listen. listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg business app or watch us live on YouTube. It is the most talked about book

right now across the transatlantic. So Maya Keynes is wonderful at the Financial Times and she's teamed up with Adam Paulerson's crew at the Peterson Institute. Chad Bowen joins us. Chad has thought harder about American trade over the last two or three decades than anyone

I know the book is how to win a trade war. And because, you know, Chad wanted to do 800 pages. And so Maya said, are you kidding me? It's readable. It's approachable. It's airplane ready. How to win a trade war? This isn't the trade economics, Chad, of when you were a youngster at Bucknell, isn't it?

What does the new trade war look like? Well, the new trade, first thanks. It's great to see you, Tom. The new world is all about trade wars. and the world has fundamentally changed, right? We used to say, I as an economist used to say, nobody wins from a trade war, so you shouldn't even fight it. Well, unfortunately, that's not the world that we are living in right now.

We have to fight the trade war. President Trump likes to use tariffs in the trade war, so that's one thing that you have to use. But I think what we try to do in this book, and you're right, it is an airplane read, but it's not even a transatlantic airplane read. You can get it much, a couple of hours, right, figure out what's going on here. It's about much more than tariffs. It's about stockpiling. It's about using subsidies. It's about export restrictions. All these stuff now making the headlines.

When William Klein and the team, the oldsters at Peterson Institute were thinking about this, we were giving textiles away from the Carolinas to China. The distrust in America about the labor component is tangible. How do we get the trust of American labor back to do trade? Well, I think the first thing that we have to do is you have to be honest with them about what the underlying problems are, right? And yes, some of the problems was the speed of the shock that the United States faced with all these imports from China. But that's sort of the old trade war. That was the thing that we could have, maybe should have dealt with 20 years ago. But that's not the trade war that we need to be fighting today.

And so the first lesson of the book is fight the right trade war. The right trade war today is recognizing that China is playing a fundamentally different game than the United States and every other major Western economy out there. China wants a world where the world outside of China is dependent on China for its supply chains, but China doesn't want to be dependent on the rest of the world for its supply chains. So that lack of interdependence, China wanting the rest of the world to be dependent on it so that it can weaponize it sometimes. As we saw last year with rare earths, permanent magnets, that Nexperia semiconductor story, I think we have to be honest with the American people that this is a trade war that actually we do have to fight.

It may be different from what they thought, but it's the important sort of level set to getting the stakes right. Chad, I think I'm probably like most of our listeners and viewers. I didn't even think about logistics and trade and all that kind of stuff. Stuff just kind of showed up on the shelves. And then the pandemic happened. And then they were like, oh, yeah, now I get it. We need to pay attention to this stuff.

Did we need tariffs and net tariff policy to achieve maybe some of our strategic goals of onshoreing or near-shoring? So what we argue in the book is that tariffs are a part of the story. But really, I think where the United States has not quite gotten it right so far is the breadth of the tariffs. You certainly don't need to have them on all products. so strategically use them, and the countries with which you apply the tariffs. So if you're thinking about what's the problem, right? Well, we've got excessive concentration of production of certain goods, essential products, the American manufacturing needs, American consumers need, and it's all in China.

Well, then it might make sense to use tariffs as part of some other policies against China. But you don't simultaneously need to impose those tariffs on Europe, in Japan, especially if you want those other friends and partners to be working with. you because then you've got them fighting a trade war, a two-front trade war, dealing with China, but then also having to deal with you, the United States at the same time. Chad Bonewood is the hottest book in economics right now. How to win a trade war? Can't say enough about it. We're going to continue here. An optimistic guide to an anxious global economy. Chad, I got two ways to go here. On your back blurbs, you've got my book of the summer two,

three years ago, chip wars by Chris Miller of Tufts, and the basic idea of technology semiconductors. and such, how do we prosecute a trade war wrapped around the technology of Taiwan and Korea? Yeah, well, that's that. I think an important part of the trade war story here, and I think there's at least two different pieces of that that we have to confront. One is, and you're right, Chris's book is amazing. The first is dealing with the challenge of Taiwan, right? So it is a little bit worrying that 90 plus percent of global production of leading edge chips takes place in one location. It's not China, China. So it's not the same sort of problem as, you know, are they going to weaponize it against us? But having it all there in a world that suffers from floods,

earthquakes, not good. We've got to diversify. How do you do that? Industrial policy a little bit, but it's got to be smarter than the way we've done industrial policy in the past. You've got to think about demand what the United States did with the Chips Act, but you also, sorry, supply, also have to worry about demand, what we didn't do necessarily with the Chips Act. All these fabs in the United States, great. We've got the production capacity now. But why isn't it that Nvidia and, you know, AMD and all the chip design companies want to use them yet? Right. We've got to create some other incentives there too. But then the second part is the AI challenge with China and this race, right? And the use of export restrictions and balancing those in the

appropriate way to make sure that the American side of this story does end up. I got to squeeze this in, this is important, folks. I mean, he's doing this tour with Samoa Keynes. Paul. She shows up with a ukulele. I mean, she's playing ukulele at their book shows. It's too much. Chad's like, you know, a wallpaper.

He's like hanging out. Chap, nobody knows that you're the heritage of Fred Bergston, who is hugely supportive to my act, to Peter Peterson, who was hugely supportive of my act, and to Adam Posen, who's a bigger Red Sox fan than I am. Does your shop the Peterson Institute after your book, The Trade War, think we nudge back to the Washington Consensus? The beauty of the Peterson Institute, where I work, is there is no institutional line. Everybody has their own views, does their own analysis, comes up with their own perspective.

So I will leave it to my boss, Adam Posen, to give his own views. But I agree, you know, we're going to have these debates about what's the right way to tackle these sorts of problems. And it's great that we're doing so. And I'm just super glad to be able to bring, not a ukulele, but a copy of the book and to show it here on your show. Thanks for having me, Tom. John Tucker Carlson's going to have a ukulele next time. The book is How to Win a Trade War, Airplane Reading, even not Transatlantic to Richmond, New York to Richmond. It's going in the bag.

It sounds pretty good to say the least. I can't say enough about this. A lot of other people are on board what Keynes and Bone have done to really bring us up to date and a lot going on in trade. This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 7 to 10 a.m. Eastern, on Bloomberg.com, the IHeartRadio app, tune-in, and the Bloomberg business app. You can also watch us live every weekday on YouTube, and always on the Bloomberg Terminal.

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