Transcription
too. Yeah. Who are you with? Who are you with? Because you're asking such nice questions.
>> Sticking with trade. This morning, our next guest is out with a new piece in the Ft. It's called "What the World Got Wrong About Tariffs." Joining us this morning, Rockefeller chairman Ruchir Sharma. Ruchir, good to have you back.
>> Good morning.
>> Thanks.
>> Good to be here.
>> Your piece is great. You talk about what people thought was going to happen with the dollar. You talk about what people thought was going to happen with stagflationary impacts. But your overall point seems to be that the world's a lot more complicated than just one thing, like tariffs, or one man like Trump.
>> Exactly. I think that we're so obsessed with Trump and tariffs that that's the only factor, we think, which is driving the economy and financial markets. But what I argue in the piece is this: that the reason why the tariffs are not having an overall impact as bad as feared in the aggregate data, is because the negative impulse from the tariffs is being offset by the AI mania that we are seeing, by the fact that in the latest budget bill, there are tax offsets, which counters some of the hit that corporations are taking from the higher tariffs, and also the fact that even though tariffs are pushing up some consumer prices from toys to sporting goods, it's being offset by a decline in energy costs and rents and possibly used cars as well. So that's my point, that we get obsessed with one factor. Something similar happened in 2023, when we thought the Fed's massive rate hikes would lead to a recession, and at that point in time, we learned later that the AI spending boom and the massive fiscal stimulus kept offsetting the Fed's rate hikes. I think that's something similar is at play this year.
>> So, you know, you know, to Carl's point, the one you're making, there's so many crosscurrents. So where does it mean we stand right now? Efficiency is being gained from AI. Huge CapEx spending on AI, for example. Revenues being taken in by these tariffs that are going to be at a 15% rate, potentially across the board, conceivably helping on the deficit. Meanwhile, we got a big bill that just passed that conceivably will hurt on the deficit, and a dollar that was down more in the first half of the year than we've seen since 1973. So where do we stand then? Given all of that?
>> I think that pretty much unchanged as far as the US economy is concerned, which is that you had the negative impulse from tariffs. About 80% of that is being absorbed by US corporations and US consumers. About 20% is being absorbed by the foreign suppliers. But as I said, that because of the CapEx boom that we're seeing due to AI, you know, just the hyperscalers, their CapEx estimates have gone up from 290 billion at the beginning of the year to over $350 billion now. So that's a massive boost. And there's $100 billion tax offset that's happening in the budget bill. So I think that that's offsetting the damage being done from the tariffs. But if the effective tariff rate moves further higher from here, we need even greater boost to economic activity from somewhere to offset it. My feeling is this: that the US economy today is doing just fine, but there's one fatal flaw, which happens to be the deficit. That the reason the US is getting away with, you know, these kind of spending and tax offsets, which other countries from Japan to UK cannot do, is because the US is able to run such a large budget deficit of 6.5% of GDP. Those countries are not. As long as the global markets are willing to fund this US deficit of 6.5% of GDP, I think the US is able to get away by offsetting the pain coming from tariffs. I think that really is the main story here.
>> Well, Japan's debt levels are higher, you know, relative to GDP, about 250%, I believe, compared to us, which is 100% relative to GDP. But they are starting to see some bond market tremors related to issues there from their fiscal health. And I'm just curious, how long do you think that this free lunch essentially will last for the US? Is there a risk that stagflation is just delayed and will be punted to the second half of the year, maybe next year?
>> And I said that I think that the AI is doing a lot to lift the animal spirits of the economy. It's leading to the CapEx boom as well. So I don't think that the tariffs is going to be the big story, to be honest with you, for the US economy on a net basis. I think that the vulnerability lies with the deficit. And if the politicians think that they can keep pushing the string here and, you know, they're going to go for a like even higher deficit, that's where the pushback comes. You mentioned about Japan's debt to GDP being much higher. But remember, the US is much more dependent on foreign savings to fund the deficit. Japan is not. So I think that in the US the situation is a bit more vulnerable. And I think that but for now, we are in the midst of this massive AI mania. And that AI mania, I think is also helping the US fund the deficit. Foreigners want a piece of the AI action. They want to buy US products when it comes to AI. And I think that that's really what's going on. So these cross-cutting site work, I'm trying to explain here that why have we not seen a bigger stagflation impulse already, even though the US is already getting 1% of GDP in tax revenues from the tariffs? So I think that's my main thrust of the piece. But yeah, I think that the AI mania and the fact that the budget deficit is still being financed are two factors offsetting the drag from tariffs, right.
>> That said, I mean, people were talking about 5 to 10 year market-based inflation expectations this morning, close to a two-year high. I wonder if you think the market's beginning to settle in on maybe not stagflation, but certainly inflationary friction.
>> Yeah, I think there is some sort of negative stuff there. But still, it's pretty much in check, Karl. I mean, you know, as I said that a couple of years ago, I said that the US is going to be running a budget deficit of 6.5% of GDP. What do you think happens? I think all of us would have thought there's going to be a riot in the bond market, but here we are at 6.5% and the moves are still very incremental. I think that's the real big surprise. And my suspicion there is that because of this mania, the foreigners and even the domestic bidders, they just keep to keep flowing money into the US. And I think that that's what's holding the US up. So it's a it's hanging by a thread in a way that the US economy is hanging by a thread, I think. But because if it weren't for the AI mania, I'd say that a lot of this negative stuff from the deficit, from the tariffs, all of this would be showing up much more in the data and in the US economy.
>> Right. That's one one more reason why we certainly hope the AI threat is a sturdy one.