Wall Street ends another week at record highs

0:04Hello and welcome to Business Matters. I'm Roger Hearing. On the programme today, market euphoria on Wall Street with record highs, but is there a risk that the bubble may burst? The US Treasury eases sanctions on some businesses selling arms to the military regime in Myanmar. Is it a sign of a change of attitude in Washington? Also new evidence of China's birth rate crisis, finishing off a 140-year cathedral building programme in Barcelona. And with Donald Trump doing diplomacy on the golf course in Scotland, is conducting business on the green a good thing? And I'll be joined throughout the programme by two guests on opposite sides of the world.

0:46Gabby Castro-Fontura, director of Sunny Sky Solutions, who's in Punta del Este, Uruguay. Gabby, a very good evening to you. Good evening, Roger. Great to be here. And we're hoping to be joined by Michael Janda, business editor, ABC News Australia, from Sydney. We're having a little technical issue with that. We will hopefully get him up fairly shortly. But, Gabby, let me ask you as I try and get a sense of what's going on where people are and what's going on in Uruguay right now. Well, at the moment, we're quite concerned about the tariff war particularly affecting Brazil, which, as you know, is our biggest neighbour and one of our biggest trading partners, just watching that closely.

1:27Yes, obviously tariffs being a big thing, as indeed they are, of course, in many places right now, looking at Donald Trump's policies and what it will mean. Now, I'm told we actually can talk now to Michael, Michael Janda. Michael, can you hear me? Yes, good morning, Roger. Good morning, and thanks so much for being... Good morning, where I am, anyway. Yes, I think it is just about still, isn't it? And, yeah, Michael, thanks so much for being with us here on Business Matters. And, yeah, I've just been talking to Gabby about what's catching the headlines this morning, where she is, What's making the headlines in Sydney this morning?

2:01Look, I heard you mentioning about tariffs and the big news this week in Australia was the change in policy on beef imports from the US, which is very much seen as a concession to the Trump administration in order to get a trade deal done. I mean, as with the UK, Australia was only subject to 10 % only, 10 % tariffs, the baseline. But obviously there's the threat of higher tariffs. So this has been seen as a move to try and soften that. Does it mean Australians are going to have to eat US beef or what exactly? Well, this is the irony about the arrangement, Roger, is that we actually export a lot of beef to the US.

2:52And the reason for that is that, as you'd imagine, being such a large country with a small population, we have a massive surplus of beef that we need to sell overseas to the US, to China, to Japan, to other markets. And the US currently has a beef shortage. So that's why they're importing a lot of Australian beef. And US beef is currently more expensive and unavailable anyway. So it's highly unlikely we're actually going to import much US beef, even though the remaining bans are being lifted. Yeah, it's a strange thing. The whole tariffs issue does seem to put up some rather strange situations in lots of places, including, I think, high tariffs being put on islands where nobody lives.

3:30But I'm sure it will all shake itself through eventually. But it's interesting in the context of the uproar, really, that's been caused by the tariffs policy. You'd imagine that many companies in the US would, well, be a little bit worried, perhaps not quite sure how they should go. But you'd be wrong, because in terms of share values, at least, it's been, well, onward and upward. A wild few weeks, in fact, on Wall Street. Stock valuations close to record levels. The S &P 500 index hit a string of all-time peaks this month. US corporate borrowing costs are nearing their lowest level in decades.

4:07NVIDIA became the first company worth over$4 trillion. And Bitcoin has soared, and even meme stocks, as we reported earlier this week on the programme, are back. And all this in the teeth of that uncertainty caused by the president's mercurial tariff policies. Well, now there are warnings that all this heightening of shares might, in fact, be a bubble. And it could be about to pop. I've been speaking about this to George Steer, the Financial Times stocks correspondent in New York. It's unusual, right, because there's so much economic uncertainty right now because of the tariffs and the way in which Trump is rolling them out and then bringing them back.

4:45The jobs market is holding up, but there are cracks beginning to appear, and yet we've had, I think, five record highs for the S &P 500 this week alone. So it's a strange rally. Big investors have said it's disgusting, revolting, they hate it, but they have to buy into it because it doesn't look like it's going to stop anytime soon. Yeah, because the factors all seem quite strange. We're seeing the cost of borrowing seems to be dropping quite a lot, which obviously, I guess, encourages it. But the signs of overheating really do seem to be there. Yes, and I think that's most evident in the sorts of stocks that are suddenly doing very well.

5:21We've had in the last week a kind of revival of the meme stock mania that swept through markets in 2021. So unprofitable or smaller companies that haven't suddenly become more profitable are suddenly doing very well. GoPro, Krispy Kreme, Kohl's, a department store. There are hundreds of percent over the last week or so driven by this kind of online Wall Street bet style fervor. But are we also seeing, you know, some of the stocks that are very well thought about maybe at the moment? Tech stocks, obviously, with the AI boom. Is that where it's really coming through? I mean, I know NVIDIA has reached four trillion the first time over that threshold.

5:58But is it in general tech stocks? Yes. Tech stocks have led the market, have dominated the market for years. As you said, NVIDIA has done incredibly well this year. Tesla less so because of Elon Musk's travails. But yes, it's the growthier stocks, the expensive tech stocks that have done well over the last few years, that have driven the market higher over the last few months, companies like Palantir too. And yes, this exuberance in the tech space has kind of spread throughout the market and has kind of now swept up smaller growthier tech stocks as well. So I guess there are two questions here.

6:31One is why is it happening? And the other question is how long is it going to last? Hard to say how long it'll last. Why? I think it's just there's a sense that Donald Trump is now that the worst of the tariff, the worst of the unpredictability caused by Trump's initial tariff announcements in April, now that that's passed and there's a sense, you know, that he's going to start deregulating over the next few months in a way that he's already started to. I think all of these things are conducive to higher stock prices. There's a lot of cash on the sidelines still. There's a lot of positivity, depending on your political persuasion too.

7:04So that's driving a lot of this, the rally and a shortage of alternatives. European stocks have lagged behind again. China has its problems. So there's nowhere else really for investors to go but the US. But I've seen words like euphoria, exuberance. I mean, all this sounds like pride coming before a fall. Are we at risk of being in a bubble and that bubble bursting? Oh, yes. I think, yes, by certain measures, price to book, price to dividends, price to sales, you could say that, yes, the stock market is in or approaching bubble territory. Betting on when that bubble will pop is a very, very tough game, a fool's errand almost.

7:44So, yeah, no one could put a date on when it might deflate or pop. Something, a black swan event, something will happen that will cause some kind of correction, you'd think. But yeah, hard to say when. But we're currently in sort of holiday-ish times. I mean, is it possible to say optimistically that nothing's really going to change much until everyone's back in September? Well, that's what people said this time last year. And there was a huge sell-off in August that knocked tech stocks in the US particularly hard. So it's in part because so many people and big traders are away on holiday during August.

8:18there's less liquidity there's less cash flowing through the system so when something bad does happen things tend to sell off even more aggressively so if it wouldn't take much to knock this rally over basically it's a fragile rally. George Steer of the Financial Times. Michael do you share his analysis? I completely agree and we're actually seeing some very big risk events coming up in the very near future that could well knock this rally off its course Obviously, the most notable is next week's August 1 tariff deadline. We might have seen Donald Trump claim a trade deal with Japan. That's still a 15 % tariff rate on Japanese goods.

8:59And, you know, a lot of economists are now expecting that to be the average tariff rate on imports into the US, which is a very significant rate, you know, the highest since the Smoot-Hawley Tariff Act. and, you know, there's no certainty of a deal with the EU. So Trump's meeting EU trade representatives while he's in Scotland this weekend. If there's no progress on a deal, I think there is a risk you could see markets unwind quite dramatically if it looks like the EU and other key trading partners could be subject to the 30 % tariffs that have been threatened. Yeah, it all seems to come down to the tariffs still, doesn't it?

9:39And Gabby, I mean, you were talking about tariffs earlier. I mean, if there is, you know, what prospect do you think that problems on the tariff front in the end could perhaps create that bursting of the bubble? I think the general feeling now is that it's bad, but not as bad as we thought it could be. So as an economist, my technical term for it is that few feeling, you know, The markets are responding to the fact that things are not as bad as we thought a few months ago. On a personal basis, I think, you know, the financial markets and the real economy sometimes seem to operate like on two parallel universes.

10:20And also, you know, people like us work in the real economy sometimes just wonder how all these trillions and billions actually work. It's pretty so much outside the scope of our, you know, of our grasp, of our knowledge, of our intelligence. So it's just unbelievable. Yeah, and it's interesting, that gap you're talking about, because, Michael, one of the things people keep saying is, well, you know, we could get to a point before too long when shops, US shops, will have their shelves empty or the prices will be so high because of tariffs that people won't be able to get the things they want. And once that kicks in, then surely that's a huge puncturing confidence because, as we all know, the US consumer is kind of the bellwether, the holder together of economic stability.

11:02yeah well look a good analogy is wiley e coyote and we've seen this a lot in financial markets but you know you know how he runs over the cliff chasing the road runner and he hangs in midair for several seconds before he looks down and realizes that there's nothing below him and in a way that kind of is the feeling of where financial markets are at because even if donald trump does strike all these trade deals if we're talking about an average tariff rate of 15%. You will see consumer prices rise eventually in the US and you will see business investment and profit struggle. We already saw General Motors just in one quarter have to take a$1.1 billion US write down on its earnings because of the impact of auto tariffs.

11:52Now, that was set at 25%. Obviously, if they come back to 15 % across the board, that would help a little bit. But we're still talking about massive hits either to profits or more likely when these companies can't afford to absorb it anymore, they pass it on. And even if there aren't shortages in the US, you will see inflation rise higher. And you have a Fed that at least until next May with Jerome Powell in charge is very focused on keeping inflation under control. And the market is effectively still betting that interest rates will eventually fall further in the US. But under these policies, they may not, particularly with the undermining of the US dollar and the need for higher interest rates in the US to keep attracting capital, something that hasn't been an issue for the US for decades.

12:41Yeah, no, that is really interesting. And Gabby, that's reflecting what you were saying at the few moment, you know, the idea that, okay, we've got the here so far, no one's died, we're okay. And that this may be around the corner, because one of the things you were saying to me earlier on, that at the moment, I think Wall Street Journal actually is pointing this out today, it's the point where the companies absorb these costs, very much as Michael was saying. There comes a point when they can't, and that's when it all kicks over and becomes a massive problem. Yes, exactly, and I think particularly with the tariffs, you know, against Brazil, you know, the price of coffee is going to shoot up, and when your morning latte is at stake, I think that's going to, you know, that's when it's going to hurt.

13:24Because at the moment it's all, you know, happening in another planet, on another planet, and then suddenly it's going to hit home when you, you know, your morning macchiato, you know, it's a steak. And beef as well. I mean, you've got an Australian and a Uruguayan on the programme, so let's not start talking about beef because we could go on forever. Yeah, well, we're mixing up beef and coffee and cartoons and a few moments. It's very interesting. It's good ways of seeing into something that actually could be otherwise very opaque. So thanks to both of you on that. Let's talk about something rather different.

13:53For many years, the US has imposed economic sanctions as a way of putting pressure on the military government in Myanmar. But now, suddenly, several individuals and companies accused of supplying arms to Myanmar's military regime have seen the restrictions on them lifted. Now, the White House hasn't commented on that decision, but it comes after Myanmar's ruler, General Min Aung Hain, wrote to Donald Trump. His letter praised the US President's leadership and applauded the closure of US-funded media outlets covering Myanmar's ongoing civil war. Human Rights Watch and other campaign groups say the lifting of these sanctions by the US Treasury could indicate that Washington is moving to accept Myanmar's junta.

14:37I spoke about all this to Vicky Bowman. She's the UK's former ambassador in Myanmar and also former director at the Myanmar Centre for Responsible Business. What does she make of the lifting of these sanctions? What does it tell us about US policy towards the Myanmar government? It is absolutely a coincidence. And indeed, there's been a senior Trump official saying this was just a decision taken in normal course of business. But when you look at the people who've been taken off the sanctions lists, none of these are people that matter remotely to Senior General Min Aung Lai. And the kind of sanctions lifting that he was asking for in his letter to Trump would be things like unfreezing the billion dollars of blocked Myanmar funds, which are the Federal Reserve.

15:19So this is not what he was asking for. Is the bigger issue likely to come through, though? Is this just the start of a change of policy, do you think, from the White House? I don't think there is a policy, and I think this is part of the problem. I think that Myanmar is just caught up in the slipstream of all sorts of other chaotic decisions which are taken, particularly around things like USAID, funder of many Myanmar projects, both humanitarian and also work with the local democratic groups, freedom of the media. So those kind of things have hit the Myanmar opposition hard. In terms of trying to change the policies of the Myanmar government, I mean, these sanctions have been on for a long while.

15:55They haven't really had much effect anyway, have they? Well, I think there are multiple forms of sanctions. And what these are is sanctions on individuals who are business people who have over the years decided to engage in business with the military in different ways. And it's not all about arms trading. I mean, there's a couple of the people taken off today who were accused of working with the military owned company on non-arms trading related stuff. So this is kind of chump change in the wider political economy. It's really not significant for the wider political environment. So a bit of US Treasury housekeeping rather than anything else, effectively?

16:34I think so. I mean, these people were mostly put on sanctions lists in 2022, 23. It would have taken them a while to hire lawyers. Those lawyers have to go through a sort of approval process with the sanctions body OFAC of the US government. And then they've got to submit their case on behalf of the clients. And they'll have to say either that the case against them was wrong or that the client has stopped doing the kind of things they were being accused of. So they'll have had to go through all of that. And that will have taken probably over a year. And probably the OFAC department will have wanted to take these as a batch.

17:07Indeed, there's one of the lawyers that supported some of these clients who just posted on LinkedIn saying that he'd had sort of three victories in this delisting, both related to North Korea and related to Myanmar. But what about overall, Vicky, the economic pressure that the West in various forms has tried to bring on the Myanmar government? Is it actually having much effect? I mean, the government's now caught up in a civil war. You can't imagine that there could be much more pressure that could be bought. But is even the pressure that's there making any difference? I really think that the West and its economy is pretty irrelevant for most of what goes on in Myanmar.

17:44It's always been a quite self-sufficient economy because of the long isolation that it imposed on itself from 1962 onwards. It's imports of manufactured goods from China mostly. So the West's interaction with Myanmar's economy is minimal anyway. Is there any kind of financial economic support going into the rebel-held areas, which are, as I understand it, fairly substantial now within Myanmar? I think most of that was previously coming from Myanmar diaspora. A lot of those funds, I think, have dried up because this has now been four years. And so what we're now seeing with many of those rebel held areas is that they are self-funding through a combination of mining.

18:25So there's a few artisanal mines, some of the rare earth mines up in the north of Myanmar, which export across to China. And then extortion, frankly, of the local population as well. That's been a common complaint that we're hearing. The economy is in a mess as a consequence of the conflict. But I don't think that anything that's happened around this sanctions delisting matters a jot compared to the wider humanitarian crisis that's in the country. And no sign of an end to the civil war or the humanitarian crisis in the country as a whole? I don't think so. I mean, we have from the senior generalman, An Lying, his intention to have elections at the end of the year.

19:00And I think that, you know, it's quite clear those will not be democratic or free and fair. Whether or not they provide an opportunity for the next chapter, I don't know. But certainly they're not going to produce a peaceful outcome. Vicky Bowman there speaking to me a little bit earlier. Now, Michael, I mean, this is very much in your country's backyard, I suppose. And Myanmar, well, the ongoing civil war that's happening there and the seemingly endless crisis that country's caught up in. What's the view from Australia? Look, they'd be concerned if it wasn't, as just discussed there, a housekeeping kind of move.

19:42People may not be aware that a prominent Australian economist was detained for a former advisor to Aung San Suu Kyi. He was detained for a very long period in Myanmar. So he finally was released and returned to Australia. But certainly the Australian government is very concerned about the military regime there. You know, Australia is trying to keep pressure on, as are most Western countries, to see a return to democracy. So anything that undermines that certainly, you know, again, flies against the Western liberal democratic consensus. And Gabby, I suppose the overall point, the wider point here is the usefulness or otherwise of sanctions, which seem to be on many countries.

20:31We know obviously a lot on Russia at the moment, of course, on many different groups within the Middle East, clearly on some in Myanmar and that sort of area, and some, of course, now on Venezuela as well, in your neck of the woods, and how they seem to be put there, but actually have very little effect in changing the way anything happens. well yeah Cuba will be the yeah Cuba that was the other one I forgot yeah that's the one that comes to mind but I mean talking about democracy Latin America and the US have a long history of you know the US supporting probably you know that some of the strongest dictatorships we've seen in the world so when we see a case like this one although it's so far away from us so remote it just resonates you know and you just you just want peace after all and you'd like a country like the US to support democracy and not the other way around.

21:22Yeah, and Michael, I mean, it just, financial issues, financial sanctions on individuals, as I say, doesn't really seem to change the way things happen. People just sit back and go, we've done the thing we needed to do, we've shown our disapproval, and then you just let it play out as it will. I mean, in the Russian example, it changed the ownership of some Premier League clubs. That was probably the most public example of the effect of individual sanctions against Russian oligarchs. But it is true that it hasn't undermined, I guess, the hope in that example is that by targeting powerful individuals, they would rise up against Vladimir Putin.

22:04And I guess in Myanmar, it's a similar principle. If you can hit the regime's leadership where it hurts, Maybe they'll change their ways because it's hitting their hip pocket. But as you say, it doesn't seem to be particularly effective. And we've got this alternative trading block, particularly through China, massive demand coming from China, particularly for countries that export raw materials. And Myanmar has a lot of rare earths. And that can really undermine Western efforts to try and hit financially. Yeah, it just seems, as you say, to be, you know, the effort is there. The willingness is there, but the effect sometimes isn't.

22:42Anyway, in the next part of Business Matters, we're going to be looking at China and China's birth rate crisis and very empty kindergartens. We'll find out why and what it means. Stay with us.

23:03Welcome back to Business Matters with me, Roger Hearing, And my guests today, Gabby Castro-Fontura and Michael Janda. And if I had been saying that the last six months, perhaps a year ago, much longer, I might well have been introducing Peter Ryan. Now, many of you listening will remember Peter very, very well, a frequent and very valued guest on this programme. And I have debated many things with over many, many years. And I'm very sad to say, as you may have heard, that he died just over a week ago. And in fact, Michael, I mean, a huge loss, of course, to Australian journalism. And I think his funeral has only just happened.

23:41And a lot of very, very moving, very heartfelt tributes, I think, to the man, the journalist that Peter Ryan was. Yes, Roger. I was there yesterday, actually, one of the pallbearers at the funeral. And, you know, Peter was a giant in Australian journalism. and he was a very tall man for anyone who met him in person. So he's a giant, literally and figuratively, and just a wonderful human being. I've been at the ABC about 17 and a half years and Peter had been there for the better part of 40 with a break in between to go in the private sector. The church yesterday was absolutely packed with family, friends, A lot of people from the business community who had great respect for the coverage Peter did.

24:35He was always extremely fair. He had one of the best contact books of anyone in Australian journalism. And, of course, a huge number of fellow journalists, and particularly from the ABC, the Australian Broadcasting Corporation. You know, such a loved person, so respected. And, you know, a huge loss to the profession. and as a person. Yeah, and as I say, very much a very, very valued contributor on this programme, and I over the last 10 years have very much enjoyed conversing with him. And Gabby, you've often appeared on the programme with him as well. Yes, Roger, I was deeply saddened when I heard the news, and first of all, my condolences to his family.

25:22I think one thing I'm grateful for is that knowing what he was going through, which I only found out now, to have made him laugh on some of those programs, wow, you know, it means the world to me. And also to say, you know, that this reminds me just how important kindness is in a world full of, you know, noise and war and anger. And it's so easy to get distracted. And then suddenly, you know, you realize that you don't know what the other person, you know, on the street or on social media or somebody you're lucky enough to share a program with is going through. So that little bit of kindness, I think, from all of us can make a big change and may he rest in peace.

26:03Yes, indeed. And we were speaking to him only, in fact, I think a couple, two or three weeks ago, I certainly spoke to him and he gave no indication whatsoever, really, that he was obviously in the difficult situation he was. Michael, he was someone who was just like that, he was a professional. He was an other professional. He was speaking to you from palliative care from his hospital bed. I didn't know that he'd done the cross with you a few weeks ago, but I, as it turned out, had visited him the next day, which was the last time I'd seen him. And it's just a reflection of the professionalism and the sheer love of journalism that Peter had, that he wanted to keep doing everything he could as long as he could.