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Welcome to Stocks and Translation Broadcasting from the New York Stock Exchange. I'm Jared Blicker, your host, and back with me is the voice of the people, Sydney Freed. Please first like, subscribe, and comment on stocks and Translation on Spotify, Apple Music, Amazon, or YouTube, and today we are welcoming once again Joe Bruce Willis. He is the chief economist over at RSM, and the last time Joe was here.Right before Trump's inauguration, we are talking regime change, and today we're going to be following up on some of those ideas, many of which have played out and we're going to bring it forward, looking at what might come next. And yes, we're going to dredge up the dreaded R word. But our word of the day is dedollarization, why China, Russia, and others have been dumping dollars and what the alternatives look like.And this episode is brought to you by the number $3.17. That is the average price at the pump for a gallon of gas in the US Why Joe says it might be hiding lower. So Joe, we're gonna get to our word of the day in a minute, but, uh, just give us your high level overview of what you think is going on right now. Well,

right now there are several shocks that are coursing through the American economy, and that's got to do with trade policy. You know, we've seen a trade shock which definitely costs a little bit of financial volatility.And to be honest with you, I mean, I'm very comfortable calling it financial shock due to what's going on in the bond market and in the foreign exchange market. Corporate and consumer confidence have turned over.Starting this week, there's a decrease in shipping volume into the ports of Los Angeles and Long Beach. It's likely to be greater than 35%.Of the goods that are arriving, they're arriving at roughly double the cost.At one pointInventories which are large, will have been run down and we're going to see likely some space on the shelves across the economy and we need a situation where there's too many goods chasing chasing too few supplies, prices go up.So we're in the interstitial we can see the tip of all of this happening. It's not quite there in our hard data, but we can see it anecdotally good honest brokers like those at the port of Los Angeles are telling us these things are happening and you should expect to see this in a reasonable amount of time.So this is a great time to be talking the economy, and

we're gonna talk about that. I remember those store shelves. You caught my attention with that. I want to get into our word of the day because this ties into everything we're talking about de-dollarization. So this is when countries reduce their reliance on the US dollar and trade and investment and reserves, shifting towards other currencies or assets.And that's something that we've seen happen with China and Russia starting over a decade ago. We've seen them rotate into gold, but there's been a lot of talk about what the new monetary order in the in the world might be. And tell us how this ties into what you've been talking about and writing about recently.

OK, so for a long time because the United States has chosen to use its monetary dominance.To influence countries such as Russia or China, those countries, which are revisionist countries have tried to move away from relying or over reliance on the dollar and dollar denominated assets, especially when conducting transactions to buy critical minerals and energy.Unfortunately right now it's occurring and this is much more alarming from my point of view, is that because the Trump administration is trying to rebalance the global economy.In terms that are much more favorable to the US, our trade partners who are recoiling.Um, have decided that they, they're not certain about.Holding dollar denominated assets such as US Treasuries.They're dumping them on the open market and you're seeing a reallocation of assets away from the dollar and dollar denominated assets. As such, we've seen a general decline in the greenback, and this is elicited, um, a discussion on whether the dollar as a currency reserve, is it a privilege or a burden. Now I come down in the privilege category.But we're seeing, unfortunately, we've had weeks over the past month where we saw Japan unceremoniously dumped 20 billion.And treasury on the open market, which caused the dollar to to decline. Now if you're out there and you're watching or listening to this and you're not a capital markets professional and you might say, can you explain this in English? Yes, yes,

that was gonna bemy question. Stealing your thunder. Tell, tell me why it affects me

because yields.Tend to move in strong correlation with the dollar in the same direction, but after liberation day.Yields have gone higher. The value of the dollar has gone lower. When that happens, your living standards are about to go down because everything's about to get much more expensive and indeed that's really where we're at, you know, more than a month in to uh a fairly significant policy shift around trade.Around an attempt to rebalance the global economy and while the Trump administration says they're for a strong dollar policy, they clearly want a weaker dollar.

Well, when you say, uh, like it makes things more expensive, um, I, I, I get how tariffs raise costs for people like, but why does the dollar being lower automatically mean

costs? So Sydney, do you like guacamole?

Yeah,

me too. I grew up in Southern California. My grandmother Juanita taught me how to make it.And it's got to do with avocados and tomatoes and red onions, a little pepper, a little garlic salt, making me hungry. If you wanna live on the edge, you have a little cilantro, maybe some diced jalapeno, and live a little crazy, right? I like crazy, but you know those tomatoes we import those, most of them from Mexico, right? And if you put a tariff on imports from Mexico, let's just say 10%.But the dollar declined by 5% against the peso. That means the cost of that tomato has increased by 15%. It's the tariff plus the depreciation of the dollar. Now you multiply that by millions and millions of items and the dollar has depreciated by up to 20% against some tradable currencies, you're in a very different world, right? And these things tend to show up in slow.Non-noticeable ways till one day you're like, you know what? I was at the grocery store last week. I bought 3 bags of groceries for $125 and I just walked out. It's $14,750. What, what just happened? And then that's when the public starts asking questions. We're not there yet, but you know what? By July 4th we will be.

Joe, I love how you begin this, uh, recent article that you wrote. The recession will start on the docks of Los Angeles. You've already hinted at some of the, uh, some of the parts of this, but just kind of walk us through your logic here and how this ends up in recession and then maybe, you know, what are the odds here that we avoidit

some so I wanna give a shout out to Gene Soroka, who runs the port of LA. I'm on the board with him at UCLA.And he's a real honest broker to everybody out there in the economic and financial world, and he gave us all the classic heads up and said, hey, bookings on ships into the port have declined noticeably and you should expect to see it in April, May, June and July at the at the at a minimum.So what happens is less goods are arriving at the port. That means they're gonna be more expensive. And let's say we're gonna round up and use 40%.Less shipping volume shows up at the ports of Long Beach in LA. Now when those things arrive, they have to be unloaded. They then go to 15 different hubs.They then are shipped all over the country now.If there's 40% less goods.I mean you're gonna have 40% less trucking.Jobs, then the warehouse guys. Well, you don't need them all if there's less coming in, right? And then how do you get them from the, thePort of LA to the hub sometimes trains sometimes air freight, right? So you get ripple effect all the way throughout the economy and it touches everything all the way from the guys working at the docks guy I played basketball with in high school who literally works on the docks. He's a union guy, right? And it will touch the docks, logistics, transportation all the way to the grocery store.

We saw this happen a few years ago though with the ports and there was no recession, so why would there be a recession now? What's the difference?

Thedifference is is that we've had a large policy shock having to do with trade and the fact that something that left ports in Shanghai are showing up and it's gonna be 145% more expensive, right? Those costs have to be passed along. Now I know the Trump administration says Chinese pay it.That's simply not true.9 out of 10 out of $10 of those price increases are going to be passed along downstream to people who buy it.And that's how you create the chain reaction that goes from an economy that's decelerating to one that's in recession.

Yeah, earlier you, you said that we, uh, this hasn't shown up in the hard data yet. When do you expect to?

Yeah, I

stole it. So today is May 7th.And we're, we're still looking at April data that only partially captured post liberation Day.All right. When we start to see the May data.In June, the June data in July and the July data in August, that's when you'll really see the hard data turn over. Next week we're gonna get the CPI. You'll start to see little bits of it, dribs and drabs from the tariffs that were put on early in the administration. This will be April CPI, yeah, April CPI. That's correct. Thank you, Jerry.Um, but it will take a, a bit more time. Right now it's more anecdotal, like Gene Siroa informing all of us that, hey, an event's about to happen.Um, so this time it, it, it really does feel like we've got a recession that's in train, no pun intended. We've assigned a 55% probability, and we, we think that's about right, um, you know, our baseline scenario is a recession. Our alternative to the baseline is slower growth,

and then for that 45% where we avoid recession, what in the data makes you think, OK, we're probably gonna steer clear of this, and then.I guess related to that, is there anything policy wise if if President Trump were to reverse his stance on things and we saw the hard data pick up in the right direction, anything there that could lead you to say, OK, recession is no longer my base case.

OK, so two things one, the condition of upper end consumers. The 40% of households are responsible for over 65% of spending. As long as they stay in the game, we got a puncher's chance to avoid this. OK, second.The bond market remains undefeated. Hm.It wasn't the political opposition. It wasn't the logic of economists. It wasn't a push back from the public that got the president to begin to step back. It was the bond market,

5%, 30 year. That's

right, 4.75%, 10 year. We begin to breach those lines, administration will pull back more. Now the administration went into a trade war with this idea of escalation dominance.They thought that they could escalate and countries would capitulate quite quickly. Clearly that hasn't happened. The bond market revolted and they've had to come back down the escalation ladder one painful rung at a time. Should we see them pull back further? Yeah, then we can avoid this, but I want to be clear here.It doesn't mean we're gonna go back to 3% growth, to 4.2% unemployment, uh, 2.3% inflation, which is where we were before all this started, right? What it means is, at best, we get stagflation.An economy that's grinded basically a halt and just narrowly skirted a recession. Back when we were talking about say 2023 when we had a negative quarter on GDP and it was the first quarter that had to do with trade in Europe. The real economy never slowed down. We didn't have that here, and that's because we had real strong tailwinds then. Now we don't, we got some pretty stiff headwinds for the economy.And I think everybody who's out there who manages a portfolio has a 401k manages a business, you really have to be engaged in this. There's a reason why we haven't done these trade wars like this. 150 years of economic evidence tell us that there are lose-lose propositions, that there are no winners, and I don't think we're gonna really end up having winners here either. It's just how, what degree did you lose on the other side of this? then hopefully something can be learned again.

We're going to pick that up right after the break. We do need to take a short break. Coming up, we're going to be talking energy prices, and on today's runway battle we've got central bankers squaring off against politicians.This episode is brought to you by the number $3.17. That is the price of 1 gallon of gasoline in the US. That's an average price. And, uh, Joe, I was noting I was looking at a chart of WTI crude oil that's the US benchmark. It's down 17% this year. It justRejected the $60 price level. It's traded into the low to mid-50s. Uh, that's pretty low for crude oil by historical standards going back about four years. How come gasoline hasn't come down to match that, the price at the pump?

Coupleof things. One is there's um early year retooling.Of gasoline refinery capacity here in the United States, so simply that we're just not putting out any seasonal. That's right. Usually it's a little bit later, but I think they're taking advantage of this this time frame where the economy is decelerating demands already diminished a bit to, to retool second.The tariffs 25% on aluminum and and steel turns out you need those steel pipes to extract that oil from the ground, and you need that aluminum and steel inside a petroleum refinery. So that's why. Now does it mean gasoline prices are going to continue to modestly rise? For now, no, and as a matter of fact, if you look at wholesale gasoline futures, we should see a pretty nice decline perhaps towards $3 a regular gallon of unleaded gasoline.Now, here's the problem.We've got an administration that's talked about drill baby drill as if you just drill enough it'll send the price down and everybody will be happy. Well, that's not exactly how the dynamics of the oil and energy industrywork.

I don't think they like volatility.

Theydon't like volatility, but you know what they really don't like? Low prices.As West Texas Intermediate dipped below $60 a barrel, and was floating at around $57 a barrel on Monday, you know,It's well known in the industry that once you get to those levels there's going to be a decline in the volume of production because not all the oil fields have the same extraction price. Some of the Eagle Ford's $25 a barrel. Now they're gonna be good, but there's other portions in different areas of the of the economy where the lifts above $60. So

the net effect on the economy, lower energy prices, good for the average person, but.Um, lower crude prices might be symptomatic of something larger at work which could eventually lead to layoffs. Is there any more that, is there any more to this dynamic?

Sure, the problems inside OPEC.Cheating inside the cartel, the Saudis have decided to add over 400,000 barrels, uh, to the equation to punish, uh, the UAE, Kazakhstan, and Iraq who are flouting the, the restrictions that, um, the cartel has set.This is happening that when the Nordic countries, some of the Africans in the United States are increasing supply because prices set on a global basis. The price of Brent crude, the domestic or excuse me, the global benchmark and West Texas Intermediate, North American benchmark have all dipped into the 50s or low 60s. This is critical.If it's not economical to engage in extraction, you just reduce volume. And as they say in the commodities industry, you know what solution for low prices is? Low prices, yeah. So be careful what you ask for.My sense is we're not gonna get this great big decline in the price of gasoline that solves or offsets the inflation problem that's going to be caused by tariffs. It's a matter of fact, if you see the price of oil overshoot, and I don't know about you guys, but commodity prices are volatile where you tend to get reverting a sustained period of overshooting that didn't mean revert. That's correct.Um, we could very well end up with a situation where domestic production goes down. We don't want that because we export oil, we export natural gas. We need it and want it to be plentiful.That would not have a beneficial outcome. And then you could see layoffs, although what you're talking about is industry layoffs here. One of the things about our oil and energy industry, it's incredibly efficient. We just don't have a lot of people who work there, right? You could conceivably have an industry problem and the unemployment rate wouldn't even move.

What is the actual correlation between like a barrel of oil and the price you pay at the pump?I've never understood, like it's under, what is it, crude is under 60 bucks a barrel right now if it goes to 56, how does that correlate to the price you pay at

the palm? You get a fairly strong correlation but not something you're gonna want to bet and usually large sums of money on.Um, and that's because we've got a global cartel. You've got policy intervention, right? Uh, one of the dirty little secrets is, is the price of oil and energy is not set by the market.It's set by collective action inside um OPEC and sometimes the swing factor can be the United States underA narrow set of circumstances, but remember what was the biggest shock we've had over the past 10 years? It was when Russia invaded Ukraine and all that to 130. That's right. It took all of that energy off the market and there was nothing OPEC or the United States can do about it, yeah.

All right, perfect segue to our runway showdown here, not really, but we're gonna, we're gonna do this anyway, a face off between two very different economic styles. First up, we have the central bankers. They are dressed in subtle, neutral shades. They're all about restraint and long-term discipline. Don't be fooled though, even the best dressed central banker can misread.Room overreacting to data and pivoting too hard too soon. But next, coming in bold and bright are the politicians, flashy, fast moving, and always ready to make a statement. They're quick with promises, but their policies can be shortsighted sometimes, putting popularity ahead of long term stability, yet they are the one with the people's mandate.So Joe, on today's economic runway, who is wearing it better, the cautious but sometimes overreactive central bankers or the vibrant and potentially volatile politicians?

Definitely the central bankers.And because we're engaged in a a policy change that's a bit too chaotic, unpredictable, and causing a lot of uncertainty that within a couple of months we're gonna see how businesses have just said there's no clarity. I'm not allocating funds, I'm not investing, I'm not hiring and then who's gonna, who's gonna come to the rescue.If the economy turns over and we go into recession, it's not gonna be the guys wearing the extra long red ties.

Well, let me be

the central bankers.

Let me ask you because we're taping this on Fed day, so we're not gonna speculate about policy, but in general, uh, where do you think the Fed lands in all of this because we really haven't even touched on that.

The Fed playbook, when you've got conditions that imply a rising unemployment rate and an increase in inflation is to lean towards the side of your mandate.Fed's got a dual mandate, maximum sustainable employment and price stability because full employment.Uh, a precondition of that is price stability. You lean towards the side of your mandate that you're furthest away from. That would be inflation.So the Fed will do nothing this summer.No,yeah, yeah, the Fed's going to likely wait until the fall until they have a.Opportunity to ascertain the impact and unintended consequences of trade policy before they choose to alter the current path. I gotta tell you at this point.We're gonna have a pretty big pick up in pricing.CPI may go 555-6% very quickly

again 56%.

Yeah, you cut rates into that, you're gonna have a problem with stagflation, right? The central bankers just simply aren't gonna do that and we'll be lucky to get cuts this year at this point unless the administration declares victory and goes home.You know, we're here at the New York Stock Exchange. There's a lot of enthusiasm about deals. It's deal week again. Now, I don't know about you guys. It sounds a lot like infrastructure week, right, which became a running joke between 2017 and 2021, right? Interesting. We don't get those deals and they don't pull back. We're gonna be all be talking about a secondary price shock.And wondering just how long do we have to endure this.

Joe, we got to leave it there. Really appreciate your thoughts today. We are winding things down here at Stocks and Translation. Be sure to check out other episodes of the show on the Yahoo Finance site and mobile app. We are also on all your favorite podcast platforms, so be sure to like, leave a comment, and subscribe wherever you get your podcast. We'll see you next time on Stocks and Translation.