Transcription
So we're looking at the US futures. We're back at 7000, and the S&P VIX futures suggest this more is mission accomplished. Our markets getting this one correctly. And as far as what the economic fallout is likely going to be on the back end of this, I mean, I find it puzzling that it's sort of no problem. We have we're from this very volatile situation. I think what markets look at is that we have the tariffs. We had this, and the resilience was phenomenal. Maybe the AI, the background of AI and growth, maybe all the deregulation that's been going on in the Trump administration. Some of it, I think, very good; some of it, very ill-advised, both of them making things go forward. So, you know, it's coming from a high level. But I, I think it's naive to think it's mission accomplished. I think it's a temporary respite. The Iranian regime is still in place. Frankly, the US regime is still in place. And I think more things will happen. But again, the markets have just decided, doesn't matter, you know, everything's going to be fine. I think it's a little naive. And you've said this, this could potentially be bigger than Liberation Day, what we saw with the tariff impact last year. How are you factoring in all the consequences of this war now economically? Is it going to be stagflation light? Some are even saying, you know, if you're going to shut down 20% of the oil supplies in the Strait of Hormuz, that could lead to recession. How are you assessing the second-order and third-order effects of this war?
Well, I mean, it's definitely a big stagflation three shock event as it stands. And following on the tariffs, which are also a stagflation three shock and still working their way through the system. I mean, it depends on how far it goes, how things react. I think over the medium term, this pushes interest rates up, not down. There's inflation is not coming down. It's been up for many years. The Federal Reserve says, oh, don't worry about the tariffs, don't worry about this, don't worry about the next thing. And after a while, expectations will adjust. And I think real interest rates are being pushed off inflation-adjusted interest rates because more military spending, populism, high debt levels everywhere. So I think this is the kind of shock that the systems are not that resilient.
Longer term, you bring up a very good point because we were already having trouble getting inflation back into range before the war started. And here we are. And I wanted the central banks need to rethink that 2% numbers. Is it, is it two and a half make more sense given the realities that we have? Well, first of all, most people have no idea what inflation is, not just if it's two or two and a half percent. But my colleagues at Harvard who do surveys on does find that the average person, most of them have no idea even what the definition of inflation is. So if it stays moderate, it's not so bad and probably no one notices. No, I don't think the Federal Reserve should change what it says they're trying to do. But the trouble is, I mean, people notice it drifting off and prices not coming down. And so it's certainly a problem. I, I don't think you can wish it away. It makes it harder. What seem to be coming along, inflation coming down, right? And now postpone further.
What does this mean for the dollar? I mean, I think when when the Iranians suggested that any sort of safe passage way through the Strait of Hormuz is going to be paid in either crypto or renminbi, it did raise a lot of eyebrows on what the outlook for the dollar is. We have seen this whole theme of dollarization, but how much do you think that narrative has been eroded now? Well, for rather how the war works out, right? I mean, if it's a big win for the United States, it's probably good for the brand. Probably strengthens the US hand. Military power is a part of the strength of the dollar. On the other hand, if it doesn't go well, if it looks more like Iraq or Vietnam, which is very much a possibility, is still here, all possibilities are there, then I think it's negative regardless. Asia, which is half the dollar block, is dominated by China. China has been working for some time to build out its back office, its pipelines, its switching, at least its imports pretty rapidly. And to me, it's working on the exports. And I think what Iran was saying was really just in place with what a lot of countries were saying, and it didn't surprise me at all. What are they going to do, ask to be paid in dollars and then find out there's a sanction on them and they can't use them? Well, the Fed could give them a swap line. I think that's a different maybe if they were going into business with them. On controlling the Straits of Hormuz, as Trump suggested. Who knows? That was an. Option. That's right.
I mean, we were coming off. So we have we have this war. Prior to that, we have terrorists. Prior to that, we had the pandemic. All three forced companies to rethink their supply chains and trade links. Does this accelerate that phase, you think? Oh, I mean, for sure. I don't know how things are going to reorient themselves. It'll change what kinds of energy countries use. But if we step back, it also underscores how Europe and say India, many parts of Asia are really weak and building out their electricity, they're not competitive in AI already because they don't have enough electric power to support it. And now this underscores that part of they're having problems maintaining what they have. So, you know, I don't know what action we'll take, but I certainly sense on the European side maybe some real movement on both trying to be more independent from the dollar, building out their own back office, doing what China is doing, having swap clients in Europe and also trying to build up electricity, India. But it's really it hurt the rest of the world much more than the United States. That's part of why it happened. If the US were taking the hit that its allies were taking in the Middle East, that Asia has been taking, that the Europeans have been taking, I don't think it would have happened that the US did this. Our dollar. Your problem? Yeah, we're doing it. We don't really care. And I think in the long run that sort of undermines the leadership of the US. Again, if it turns out low, you know, brilliant, you know, they took out this regime. They're now becoming part of a normal Middle East. The world is developing. It's different. And we don't we don't know how it's coming out. But, you know, it definitely could go the other way.
China, I mean, obviously has in some ways been the voice of stability in this whole world order in some ways. I'm just wondering, in terms of the economy, there's this also idea that they're a bit more resilient because they have the cheap energy. They've been transitioning into renewables for the past ten years. How resilient do you think China, the economy is to these global shocks that we're seeing now? Well, on the one hand, China's economy has been in a very weak position for a long time due to its overbuilding of real estate and infrastructure way out into the Netherlands and China, way out in the hinterlands, I should say. And it's still working that out. I think it's had years to go. That's a big part of the economy. And these things like electric vehicles having solar panels. They're small potatoes compared to the size of the real estate industry. But that said, I mean, there's a tremendous determination in China to keep moving forward. You know, if there's a step back, we're going to keep moving forward. A lot of resilience to the system. I've listened to discussions in the United States of, well, how do we get around China? How do we home shore, how do we not have this? And it's almost like a joke. I think it's clear that it's not easy to do. I mean, at the moment, the US is basically importing the parts it needs to fight a war with China. WEST Well, I mean, it's sort of at that level. And the idea, you know, striking independence, China has a lot of determination, a lot of state capacity. They make mistakes. They go too far in one direction like they did in real estate. And I think we're seeing it in other things. The idea they'll just go to the moon is wrong. And the IMF forecasts for them, I think, are still optimistic where they have it coming down to 4%. I think you China averages 3% growth over the next ten years. They'll be doing well, but it'll be doing better than the United States. And so, you know, certainly China is coming, but slower.
This three, 4% growth in China, you think. In the still inflationary forces to sort of show up on the surface. Is that enough? Given the capacity of the there and deflation right now in China? They've had a massive fall in consumer wealth. Housing is 70% of total private wealth and it's fallen 20% nationally. By the official numbers, probably it's fallen more. It doesn't necessarily lead to the kind of banking problem that Bernanke wrote about and that we emphasize in Western economies, because they're actually not so many houses underwater because down payments are way larger. And prices went up, but people's wealth went down. And if you just calculate, you know, how much that wealth shock paper heard from Brookings a week ago about this with one Shenyang, if you just calculate that it can drop consumption for a long time. And so the Chinese government, in order to get to a higher growth rate, would really have to do something to build out consumption, which it struggled to do. But that said, even if they're at 3% and rolling along, building out their AI, their military, I mean, it's still formidable.