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You're often painted as doom and gloom, the big bear, but I've spent many a time with you and we've had conversations where you're constructive and it feels like this is that moment. What are the factors that lead to that constructive view for you? Well, I've recently said that tech trumps tariffs and what I mean is that uh US is really number one in many of the technologies of the future.
AI, machine learning, robotic, automation, semi, fusion, quantum, defense tech, green techch, act, fintech, you name it. And I expect that actually US potential growth because of that could increase from the current 2% towards 4% by the end of the decade. So that's a 200 basis points increase potential growth.
Even tariffs and there'll be some deescalation restriction migration. Best estimates that they could reduce potential growth by 50 basis points. you have 200 on the plus, 50 on the minus. So it's a ratio between 4 to one. So I think that that's why that over the medium term the fact that US is very innovative implies that whatever Trump does doesn't matter.
So tech trumps tariff, tech trumps Trump too and the traders of course trump uh Trump and they forced him to back down through market discipline. The most powerful people in the world are the bomb vigilantes. So I think is boxed in there'll be deescalation. we'll still have a inflation rate you know I expect that the trade deal imply that uh for most of the world you have tariffs between 10 to 15% on China 60 but even with 10 and 60 that is what actually Trump was announcing in the campaign trail you get inflation core PC towards 4% by the end of the year let's say to disposable income you have weakening of consumer and business sentiment you get a short and shallow recession by Q4 it's going to be short and shallow because then the Fed is going to cut rates since inflation expectations are the anchor, but we'll have a we'll have a short and shallow recession by year end.
That's probably highly likely. Can I jump on that point? What gives you the confidence the Fed can respond to that? Because there are some people who are worried about the inflation that might pick up and the fact that might constrain the Fed's doubish bias. Uh, no, you're right. That's why people are already saying they should have cut in May or in June or July.
I don't think it's going to happen before September because as Powell said yesterday, inflation will be higher. unemployment is going to be higher. Last time around they made a mistake. They thought that increase in inflation was temporary and was not and then they had to catch up on it and so on. So this time around you can make the arguments that since inflation expectations are anchored since the Fed is not wimping out and forced being forced by the white house to cut rates right now when inflation rises going to be a level effect rather than a rate of inflation.
If inflation expectation remains anchored, if you don't have second round effects, then once unemployment rate goes higher and that weakens the labor market, then the Fed's going to feel comfortable to cut rates. But right now, they have to stay on hold. Exactly. Because they need to cut once then the economy weakens significantly.
People have been talking about stagflationary like scenarios that growth is slowing and as you acknowledge that that would probably happen to some degree in the near term and that inflation was going to remain higher as some of the trade arrangements get readjusted. Why is that not a significant concern for you at a time where even the Fed seems to not have clarity on whether that's going to be the predominant theme?
Uh it's growth is going to be lower recession inflation is going to be higher. I think the difference between now and said the 1970s when you had the old shock of 73 or 79 was the inflation was already high and rising and the Fed was behind the curve and then you had the anchoring of inflation expectation.
This time around I think they have shown some credibility in anchoring inflation inflation expectation. You're right however that you never know second round effects may occur. You have not only the impact of the tariff now the dollar is weakening that's another impact on import prices. That's why the the Fed has to wait until the hard data show that there is beginning of a recession.
If they start cutting rate earlier then you have the anchoring of inflation expectation and that's going to be a problem. How much of the Fed's hands tied? because the long end of the yield curve is not necessarily anchored to Fed policy in the same way, especially given some of the deficit concerns.
And I know that that Congress member wanted to talk about what was going to happen with the total pool of debt, not the debt to GDP. But I'm actually curious about how they issue that debt and just what that does to some of the yield premium going forward. Well, the long hand depends on the Fed in terms of inflation expectation and depends as you point out this premier or term premier on fiscal policy.
I think the administration is sensitive to the idea that uh if you have a very large deficit eventually bond yields can go higher that can further crowd out the economic recovery and we'll see the results of this fiscal plan. Some of the stuff they're doing on increase the deficit some of it like uh tariffs or reduction in IRA subsidies medic cuts will reduce the deficit.
But I think they'll be quite sensitive not to have a headline number for deficit next year. It's higher this year because then bond will go much higher and that's going to hurt further the economy. But because you're gonna have a fiscal drag, I think most likely next year then the Fed has room for easing a little bit more.
Now they want to start also manipulating the long end of the bonding curve. You know, I wrote this paper with Steve Miran criticizing what Yan was doing by reducing the supply of long debt and issuing more of the short one. But this time around is not just the ratio between the two. They're talking about buybacks.
Literally buying more of the long-term to get it out of the market to issue more of the short-term. That is doubling down on this ATI policy. Just doing more of the more of it actually rather less of it. Norio, there's only one person I know with more air miles than you and it's our friend Muhammad Alan.
You travel the world a ton. Yeah. Have attitudes towards US assets changed? Have the conversation shifted in the past few months? uh they've shifted but I would say there's going to be a difference between fixed income investors many of them can be uh sovereign either central banks or sovereign wealth funds uh these folks are worried about the deficit are worried about us having damage the credibility of the United States that's why you had higher bond yields and a weakening dollar so that trend may be continuing because they're going to have to get out and the rivals of the US like China they have to get out of dollar assets probably going to go into the gold and things of that sort but my view is that Um since there'll be an investment boom driven by this increasing productivity capex in the US is going to be much higher.
The current account deficit is going to become larger even with uh even with the tariffs just because investment is going to be higher as a share of GDP. Savings are going to remain low because private and public savings will be low. So our current account is going to be wider but the influence financing is going to be both FDI and portfolio investment into equity market.
So you have actually more even overweight in US equity assets over time because of the increase in secular. Can we just say on that? This is really important. So we've been debating now for a number of months about whether this was a cycle level shock or a system level shock. The policy announcement of the last month and we wondered whether that structural long into the US dollar which is a system level story would be disrupted.
Are you saying that will stay the same that you'll just see this flood of money keep coming in to the United States into US assets? As I said in fixed income, maybe people are going to try to get out, especially if the deficits are larger unless bond yields are much higher. But I see an investment move in the United States in increasing productivity, secular boom, and therefore being overweight in US equity is going to become the story over the next few years, and that's going to compensate any exit out of fixed income assets.
So the dollar is going to weaken, but it's going to weaken gradually. And the reserve currency role of the dollar is going to be dented, but not damaged to any significant extent. So we can live in a world in which actually the US current account def is going to be much larger but driven more by a boom investment rather than weak public savings.
The dollar remains strong and we're going to live with that because there'll be strong economic growth. You mentioned some of the diversifying that you could see away from the dollar to things like gold. Any other thoughts on where that money might go beyond just gold? Um well you know if you're a rival of the US, say China, if you dump your treasury first you have a marktomarket loss on the value of those things.
If you sell treasury and you buy R&B, you appreciate the R&B. Something you don't want to do. If you sell dollar, instead of buying R&B, you buy yen and euro. You appreciate the yen and euro and you upset the Japanese, the Europeans. You want to have good relations. So what do you do? The best thing you can do is to sell treasuries and buy gold.
And that's why gold has been going higher because gold is the only reserve asset that cannot be seized because we've seen in the Russia, Ukraine that even yan, euro, Swiss Frank pounds can be seized. So I would see gold being the the the biggest winner. Now over time of course the Chinese want to have a new rail of payment systems that is bypassing the US dollar and swift and there are now technology that gradually over time are going to allow them to do so but I think it's going to be very gradual process. So the dollar is going to remain meaningful global reserve currency.
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