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Welcome to Stocks and Translation Broadcasting from the New York Stock Exchange. I'm Jared Blicky, your host, and with me is Yahoo Finance's Alexandra Canal in for the People's Voice who's on assignment. First, please like, subscribe, and comment on stocks and Translation on Spotify, Apple Music, Amazon, or YouTube, and today we are welcoming Michael Gain. He is a.Chief economist at Morgan Stanley, and it's great to finally have you here today. We're going to be talking about the ever evolving tariff landscape and the US economy in general. Our phrase of the day is asset price shock. Why investors are watching the wrong bouncing ball. Who really decides the fate of this economic expansion?And this episode is brought to you by the number 1944. It's a level traders are watching in the Russell 2000, but today for this discussion, it is a year, the year the world rewrote the monetary rules is 2025, our next reset. So Michael, it's a big day for the world. We, uh, we're calling it. President Trump is calling it Liberation Day. We have no idea what's going to happen after the belt today, but we're gonna talk about a bunch of different things. Just bring us up to speed on what you think of how things have evolved with the Trump administration.and global US economics so far.

I think it's,we've seen a shift in sentiment, right? What started out as I think optimism about, you know, let's call it a lot of good things. You're going to get all the positive elements of the, the growth agenda, um, but I think that was quickly replaced by concerns and worries about a much more expansive tariff agenda than I think markets were, were thinking about.Um, and immigration controls, I think, which we all expected, right, the two of those things together have made markets think about stagflation, not literally, right,

not maybe lower case. That's right,

alittle lower case. So the slower growth, the stickier inflation.So we had a very rapid shift from what we thought was maybe over optimism to a little more reality if not even pessimism. So I think it's been a very fast and furious open for the for the Trump administration. Changes have come fast and furious, and, and I think that has weighed on sentiment

and to that point, like you were saying, we've really seen a big focus on tariffs and a little bit the immigration side, but tax cuts, deregulation, some of those things that Wall Street really cheered after his election.That's sort of been put on the back burner. Do you think once we get that, will that be enough to sort of offset some of this tariff pain?

Probably not. I mean, you're, you're right that there was a lot of optimism around that, and our argument was those are the slower moving parts of the agenda. It takes years to reregulate the economy.And it'll, it will at least take, we think most of this year to do the fiscal bill. So it's, it's possible you get some offset from, from that, but deregulation, it's probably a sector story. It's probably more about energy and finance, not so much a macro story, and I think we, I think they will find it challenging to expand the deficit. I think where they will likely end up is keeping fiscal policy broadly unchanged.And so on net, it's something we think will still lead to slower growth, but there's possible, you know, we don't, we don't know, we'll have to see how that agenda evolves, but I think what's key is it's more of a 2026 and beyond story. Tariffs and immigration should weigh on the economy this year.

All right, we want to get to our phrase of the day, which is asset price shock. So this is a sudden drop in the value of assets like stocks, bonds, or real estate that can ripple through the economy and hurt spending, especially by wealthier households, and that wealthier households, that's kind of the key part, because in your notes to us you're saying that investors are too focused on spending by the lower income bracket. Just kind of unravel this for us. Yeah, so

coming out of the pandemic, there was the whole excess saving argument, the revenge spending.And I think there was concern that when that excess saving ran out and inflation was still high, would there be pressure on lower and middle income balance sheets in a way that caused the economy to to tip perhaps into into recession. And our argument is that's the wrong way to to think about it, that the the real risk, as you mentioned.It is an asset price shock because upper income households, we're talking about roughly the top 20% of income earning households sit on a majority of the wealth, and they also account for 40 to 50% of total spending.So I, I think what stands out right now in the US economy is still the level of its asset prices. It's not a leverage bubble, it's not an overinvestment cycle. So I think the real risk is if the, if the noise and uncertainty around trade policy causes equity valuations to fall, does that upper income household say, hmm.Maybe we should spend a little less and save more, and I think that's the catalyst for abroader slowdown.

I'm curious, you're an economist, so do you look at the stock market very closely? I feel like it's very intertwined right now, as you were just mentioning because there's this ripple effect if the wealthy income consumer has been holding up this economy.And then they're seeing their stock portfolio tank. They're going to pull back, stop spending that leads to that ripple growth that you were mentioning. So how closely are you watching stocks down? Is that out of the norm?

So the way you encapsulate it is the right way, I think, for an economist to look at it. We don't kind of pick winners and losers this industry over that industry.But in our mind, it's the level of of wealth that determines how how willing you are to consume out of current income, right? So we're differentiating between wealth and income here. So the higher asset prices are, the more wealthy the economy is, the stronger actual consumption can be, the lower the saving rate is. So what we watch it for.It's, it's like a, a financial conditions component. If equities go down, it's, it's as if interest rates went higher, you spend less, save more, and, and this is where we get into economists love to talk about Keynes's paradox of thrift, right? Where, where if if individually you save, it feels virtuous and the right.Decision, but if we all save, we're in trouble because my spending is your income in the economy. So what feels good individually if it happens on a broad enough scale actually creates the

teenage could have heard it, I could have said, Mom and dad, this is good. I,

um, what reports are you looking at that kind of clue you in? What's your canary in the coal mine here?So frequency data, anything in there.

It's, I mean, the, the economic data right now is really noisy and it happens in these kind of moments where we get kind of shocks to trade and inventory. So it's the GDP data is really hard to, to read. I'd honestly say focused on the tried and true employment report.So are we, the monthly one, are we adding jobs at a sufficient pace to keep labor market income growing above inflation? If we're not, the economy is going to slow down.

Howmuch longer though can this solid labor market support this economy? We've already seen hints of softening. We'll see if we get any impact from those doge layoffs that hasn't showed up in the hard data yet, but how much more is there? Well,

I think there's less cushion I think is the way we would we would phrase it.Um, I mean, we're at, we're running roughly around 150,000, 160,000 jobs a month recently. That doesn't feel good vis a vis where we were. But his, historically, yes, if you go back to the 10 years after 0809, we got about 150,000 jobs a month. We call that a recovery.So it, it doesn't feel great vis a vis where we were, but I think there's enough cushion where as long as we're adding 100 to 150,000 jobs a month, we'll be OK. The further you start dropping down below 100, you have to question the sustainability. But

wedon't even wait for it to go negative. That's the the headline payrolls number. What about unemployment.And, and also wage growth because we've seen these, we haven't talked about inflation yet. We've seen tremendous inflationary pressures within the last few years and right now it just kind of seems sticky. Like we're almost stuck at a, at an unacceptably high but not too highlevel,

right? And so I, I'm gonna wrap in the immigration story into this too, because, um, if, if we have much slower immigration, which it looks like we will, right, going from 3 million immigrants a year, maybe down closer to 0.That means much less growth in the labor force, so it could even be the case that slower employment growth still coincides with a low unemployment rate and a tight labor market, and that's a stagflation and that feeds into a, you know, a wage environment that may be above where you think it should be as a policymaker and it it it maps into the tariff story where growth should slow.Probably some firmness or stickiness in inflation, and that's what makes policy making in this environment hard.

Do you thinkthe immigration story has been buried a little bit? Yes,

I think it's because tariffs are a big, bright shiny object. We get announcements on them frequently as we, as we all know, uh, and so they drive attention and, and they're, they're visible, right? The prices will go up. Tariffs are going on. Immigration, we don't see it in, in real time.But I think it's just as important in in terms of your view on the outlook as as tariffs are.

What do you think? How do you think investors should be looking at this? I know you're not looking through at this through a markets lens. It's an economists lens, but just generally, how should people living their ordinary lives, who want to invest? What are what should they be thinking about?

Well, so we're in a we're in a period of heightened uncertainty, right? So there's there's probably more potential paths for the economy.Than we've had in a while. And so I think what that means is diversification is important. You can, we still think the economy will, will grow just at a slower pace. We're not calling for a recession. So we, we would say you still want to be involved in the areas that generate uh returns. So, you know, high quality corporates, equities, right? So our strategists would have all the views kind of on, on where things are. We're not saying don't participate, we're just saying you probably want to balance that with things that'll do well.If the world doesn't turn out fine, so cash, short term treasuries, right? So maybe barbell your exposure that it'll work in different environments. So when, when there's so many different paths for the economy to go, diversification is your friend.

And what do you think about the Federal Reserve's role in all of this and the Fed put Mr. Powell, can save us? Can he save us

save is a strong word.Um, it's a really difficult environment for them. Risks on both sides of their mandate lie in the, the bad direction. I'm like, yeah, so threading the needle for them is hard. I think what they, their intention will be we'd like to look through any tariff induced inflation and ease if necessary to support activity. The problem is, of course, the tariff induced inflation comes first.The weakness and activity tends to come later. Yeah, so it, it, it, the more we do tariffs and the higher inflation goes in the short run, the more maybe it means the Fed delivers cuts that the market wants, but later, and that's the trick, the timing differential here is, is tough.

He said the word transitory. This is Jay Paul at the last FOMC conference, uh, and I kind of cringed. He's, I don't know if that was doubling down on something if it was a misspeak, but I mean, there's a lot of thought that goes into the preparation for these, for these events. I'm just wondering what you think about him using that wordagain.

Well, he, he's tried to avoid using it for several years, right? But it's hard to, so they were talking about looking through inflation and things like that. So yeah, we all noted it.Um, and I, I think the, the issue is, well, can you really rely on it again? Are we really going to, to do this again? I think they're right on that. I think the evidence is that tariff-induced inflation isTemporary, he said the textbook says the textbook says you should look through. So he's, I think what he was doing there is essentially trying to communicate, you know, their so-called reaction function. How should you expect us to behave, which is an ease and bias, right? He said several times, we're either gonna stay where we are or cut, right, so a very asymmetric reaction function there. The, the, the hike story is, is one where it's not transitory.And it actually creates second round effects and services inflation and inflation expectations. They don't expect that, but they need to make sure that that's not happening before they, before they ease, and that's the difficulty. So I, I,

yousee how the narrative is gonna go. Yes,

that's right. And it, and it was, he kind of got, I don't want to say he got backed into saying transitory, but yeah, you can kind of feel like, oh.We're gonna, we're gonna say this again.

All right. Hold that thought. We need to take a short break. Coming up, we're gonna take a look at a new global economic order plus a runway showdown featuring America's favorite Treasury Secretary. It's Hamilton.This episode is brought to you by the number 1944. That is the year the world. The entire world rewrote the financial rules at Bretton Woods. President Nixon upended it a few decades later by closing the gold window. Half a century later, we are looking at other options, to put it mildly, how do you see this unfolding here?

Yeah, I think the easy.The answer here is to say we're we're moving away from the post World War II.Arrangements. And I think under a democratic administration that would have happened with more gradual drift. The Trump administration is getting us there faster. So I think the direction of travel was there.The question is, I think where you're getting us where do we end up?I think the honest answer is we, we don't know.But it does feel like there's, there's a lot more, you know, like it's going from a unipolar world to a multi-polar world. Maybe back in the old days we would have called this something like the Monroe Doctrine, right? Uh, you know, the, the, the spheres of influence where the major countries in each region kind of take control of, of their, their own.Backyards, right? So the US will take control of the, the western hemisphere, Russia, Europe, China, but it's, it's a world that can be stable but it's certainly more fractured. So it's hard to know exactly where we land, but at least for the moment that seems to be the direction of travel, right? So I think, simply put, the world is choosing less openness, right? And that's, that's keeping markets on edge.

Yes, and this kind of ties into the Mar a Lago Accords, which I was a little late to the game. I was reading it over the weekend, but there's a lot to unpack in there, and it has to do with security guarantees that the US is providing the world, and the cost, according to this uh document should be borne byOther nations buying our century bonds, that's 100 year bonds, and I don't know how much play this has within the Trump administration, but it seems to have some play here. I'm just wondering how you think about this and is this just a total upheaval? Is this realistic? Is there a timetable here?

Unclear. Is it, is it realistic? It's it's probably will not achieve their ultimate goals, right? So if the goal is toTo reduce the current account deficit, um, there's a lot of components in the Mar a Lago accord involving coordinated selling and weakening of the dollar as a sovereign wealth fund, as you mentioned an exchange of shorter term liquid treasuries for longer term century bonds, but I think honestly at the end.If we're not going to take the steps necessary to correct what's driving that current account deficit, which is a large federal deficit, then I'm not convinced you can, you can get there without, you know, the adjustment you really need, right? So it's, it's it's a, it's an end around.The fact that really what you need is some balance in the federalbudget.

How do you get that? It just feels like

every year we continue to ratchets up the spending regardless.

And you do have in theory

that's well I mean we, we know the answer. You need more revenue and less spending, right? But the political consensus to get there really difficult to, to achieve, right? So I think in, in the end, um, trying to implement.Other arrangements, in this case, the components of the Mar a Lago Accord probably don't get you to where you want to be. But they do represent, I think that one of your points here is thatInvestors need to consider a much wider range of potential outcomes. So don't just think this, this is just a tariff story. It could evolve into many other components. So I think we need to think more expansive in in our potential next steps for policy.

And when we're thinking of expansion and really the relationship between the US and other countries, what are your thoughts about foreign boycotts and how we're starting to see that kind of pop up in the data and the drag, the potential drag.That could have to GDP, Goldman Sachs have an estimate about 1 to 3% translates to just over $80 billion hit, modest hit and compared to where we're at. But do you think that's something that should be a concern right now? Well,

Iwould wrap that into a broader, it's one thing to choose less openness, it's another thing to choose to be closed,

right?

And the further you go down the we need to be self-sufficient and and everybody backs away from trade.Then that's a, that's a dangerous scenario, right? There's there's only kind of one period and like call it the modern industrial history of the world when trade as a share of GDP fell. It's a particularly bad historical time period that nobody likes to reference.So I think that's kind of the risk. The more that, the more that the barriers go up in in all directions, then it's not just about kind of backing out of the global arrangement, you're moving into a much more restricted trading environment and then you're talking about, you know, a much more worrisome outcome. We're not there and I'm not suggesting we're, we're going there, but I think what you're pointing to is the rest of the world won't just kind of sit by idly.And, and wait for us to implement what we're going to implement. You, you will get responses from other countries along the way, which will complicate the narrative, the multiple

scenarios alluded

to. All right, hold that thought because we're going to continue this conversation into our runway battle. It is a clash of global visions, protectionism versus globalism. Now, starting out first, clad in structured authority and early American ambition is Alexander Hamilton. If you've seen the musical, you know, it's about.Central banks, national debt and economic order, the original power suit, but don't blink. Here comes Tom Friedman, New York Times columnist and Pulitzer Prize winning author, gliding in with lightweight fabrics and global threads. His look, it's decentralized, digitized, and deeply interconnected, all tailored for a flat world. The spotlight is on a fraying post post-World War II runway. Nations are retreating behind tariffs and fences, and globalism, globalism is out. Self-reliance is in.So, is 2025 still Tom Friedman's moment, or is Hamilton making a comeback in bespoke protectionism? Michael, who's wearing the brave new world best?

Not at

all loaded.

Not at all loaded. Uh, look, I mean, Hamilton was protectionist in the sense that he did favor higher tariffs to protect US industry when we were at a much earlier stage of development. He was much more globalist on the capital side of the agenda as, as you, as you mentioned. So the federalizing of the federal debt, the the recognition that if we want to grow as an economy, we need to attract capital.So I think global financial markets and product markets need the same arrangement. So that and I'm gonna give you a cop out economist answer. They're both right in, in this case, meaning you can't have one arrangement for the flow of goods and services and another arrangement for capital, right? It makes it, it's non-compatible in, in that regard. Right now, I mean, the horse race in the moment is the protectionist arguments winning.Right, so Friedman's losing at the moment, but he continues to write, I think, very compelling, uh, articles. If you, uh, you know, if you want to kind of condense the the global story into a, a readable format, I think he's been nailing it as good as anybody right now.

We gota couple of minutes left, um, love to get your take on anything we haven't touched here and I'll give you the floor.

Well, I think just the, the one thing I, I would say, uh, in referring back to the many potential outcomes story, it's been how many years now, you know, going back to late 2019, we've been dealing with one major bout of uncertainty after another, and, and I know investors and markets, everybody wants clarity and certainty. They want resolution to uncertainty, they want uncertainty clearing events.And I think the point is we're living in an environment where that's just not possible and we're not going to get it, right? So the desire for certainty, truth, and, and the right outcome.We still need to pursue that, but I think you need to, you need to sit and feel comfortable in a lot more uncertainty than we've had in the long.

That sounds great.I wish that would happen. You know,

and it led me to a question that I had coming into this was what's the threshold of

uncertainty. We got about 30 seconds. Yeah,

uh, the honest answer is we don't know, right? It's something you only know looking in the rearview mirror. The, the initial response is uncertainty tends to make everybody wait.And so it slows things down and, and it makes the economy vulnerable to whatever the next shoe is. So I think uncertainty alone is unlikely to do it, but uncertainty puts you in a position where if the next shoe drops, then you can have a problem. The

shoe dropped yet or are we?in this wait and

see move hasn't dropped, hasn't dropped yet hasn't dropped yet.

OK, that's all I need to know.

All right. We are winding things down here at Stocks and Translation. Be sure to check out all our other episodes on the Yahoo Finance site or mobile app. We'll see you next time on Stocks and Translation.