127. Is Trump’s Bark Worse Than His Bite?

0:11Hello and welcome to The Rest is Money with me Steph McGovern and with me Robert Paxton. We have got back one of our podcast friends, haven't we? We've got back Karen Ward. Tell us a bit about her, Robert, just to remind everyone. So Karen is a managing director, chief market strategist for Europe and the Middle East at J.P. Morgan Asset Management, J.P. Morgan Asset Management, part of J.P. Morgan, the world's biggest bank by the enormous margin, incredibly influential institution. More importantly, she is just great at understanding the extraordinary shifts we're living through, economic shifts we're living through, and then explaining them in a way that I think makes them relevant to all our lives.

0:59So here is our chat with Karen Ward. Karen, great to see you. We have a president-elect who doesn't enter the White House for a little bit of time yet. How easy is it to forecast what the world is going to be like in 2025, given that he's made some radical proposals when it comes to tariffs, when it comes to rounding up undocumented migrants, unfunded tax cuts? We don't know how much of this he'll end up doing. We know if he does all of it, that could be quite a big shock to the global economy. So absent actually seeing him in action, how difficult is it to tell us what, even in the UK, our prosperity is going to be like next year?

1:52It's tricky. I mean, we always have the difficulty whenever we have a newly elected leader of working out what they've said on the campaign trail will actually be a day one priority. but we have as you say we've had some some pretty clear agenda in with regards to trade policy with regards to migration with regards to taxes really continuing what he began when he was first president i mean it's very very similar i think in terms of what he actually does there's two two aspects to the story for me i think often we're working out okay so this is what a politician has said to get elected what is the economic implications of that and when they are in office will that then temper their enthusiasm and I think through that lens we perhaps I certainly am expecting a relatively modest follow-through in terms of what he's said he will do purely because the situation is different to the economy that he inherited in 2016 and therefore I think many of these policies carry some much more significant risks.

3:01In 2016, he inherited economy that had inflation stuck below target. He had a deficit of 3%, the fiscal deficit, and the stock market was trading at about 17 times. This time around, inflation is stuck above target. The deficit is somewhere between 6 % and 7 % uncomfortably high for an economy at full employment. And we've just learned from the electorate, I think the one thing we've learned across the West is they really do not like inflation. So if he follows through on tariffs, deportations, cutting taxes, I think all of that threatens reigniting inflation. And then perhaps the Federal Reserve not being able to cut interest rates and so almost what he's giving with one hand the central bank having to take away so the economics I think this time speak to him being a little bit more modest a little bit more tempered you know and then you're always having to say okay well is economics going to rule out or politics but he has surrounded himself particularly his new treasury secretary as a markets individual you'd think he'd be getting this counsel about well let's you know maybe go a little easy on some of these policies.

4:22So through that lens, it is difficult. We should be very, I think, humble about the predictions we're making. But through that lens, I suspect we'll see something of everything he's promised, but on the more modest end of the spectrum. It's interesting though, isn't it? Because what you're saying there is, and I think you're right that he probably won't be as wild as he suggested he might be. But at the moment, there's a lot of uncertainty. And one of the things Robert and I were talking about is how when things are uncertain, that's when investors tend to put their money into dollar assets. So by default, Trump might end up doing quite well out of the chaos he's created relative to other countries.

5:04Like Robert was saying on one of our podcasts about how other countries could be the ones that get hit harder by these decisions made by Trump because of a lot of investors putting their money in dollar assets and therefore by default he'll do well from this? What do you think on that? Yeah, I mean, all aspect of the agenda is America first. It's trying to bring more global activity back into the US and therefore that must, you would think, be harmful for other regions. And I think it is clear that the policies in whichever way, the extremes to which he moved forward is unclear, but you would think it would be relatively beneficial to the US versus other regions.

5:46And you're right, Steph, as well, that actually often the uncertainty that does most of the damage. We learned in the last tariff war that actually, I mean, for example, what he did with regards to Europe was very limited, very targeted, you know, steel, very specific industries. but actually it led to a pretty broad-based reduction in business confidence and it really halted activity because of the sheer uncertainty of what might come next. So I think that's a fair point that just the fear of what could happen, you know, what's the old adage, you know, the only thing to fear is fear itself is very relevant.

6:24I mean, it seems to me that even if he doesn't do something as dramatic as, let's say, 20 % tariffs across the board on the whole world, which is something he did talk about during the election campaign, 60 % on China. He's very close to Elon Musk. It wouldn't surprise me, therefore, if we see very, very big increase in tariffs on Chinese electric vehicles. And that could have pretty huge implications for Europe. Because if you're China at that point, you dump your EVs probably at cut price. even if he is slightly more restrained, the implications for us could still be quite significant, couldn't they?

7:05Oh, that's absolutely right. I mean, I suspect his day one priorities on tariffs, because he will do something. You know, he's the self-proclaimed tariff man, as he said. I suspect the focus will be China. He struck a deal last time, but actually China didn't follow through with the purchases that they promised. so this really is picking up from where he left off of saying well we tried to negotiate this unpleasant surplus that you have with us it didn't work last time and I suspect we will see a lot of aggression towards China on the tariff front and absolutely that has implications for us here in Europe If China were to dump electric vehicles on Europe should Europe respond with tariffs and if they don't respond with tariffs wouldn't that decimate the indigenous car industry?

7:58I think this is part of a broader rethink that's happening actually in Europe. I think there is a realisation that Europe is struggling to compete with China. And that's not just with regards to China's relationship with the US and its excess supply. But I think in Europe, there's a realisation that in many ways, you know, we've been good global citizens. We've been focused on good long term policies to save the planet, to not pump loads of subsidies into our domestic industry because we're worried about the taxes of our grandchildren. You know, we're doing, if you like, here in Europe, the good, sensible thing.

8:39But I think there is a growing realisation voiced from some of the big industrial, particularly the big auto names of saying, well, hang on a second. You know, that's all very well and good, but no one else is on the bus. And if they're not, then all you're doing is you are we cannot compete. We are just going to have to move our production facilities to parts of the world where there aren't the same climate regulations and therefore energy costs are a fraction where we will get subsidies to build plants. And I think Europe is at a bit of a crossroads, honestly, Robert, of thinking, though our intentions were good, things are not going well at home for our domestic industry.

9:20And Germany's at the epicentre of these troubles, of course. And I suspect 2025 is going to be quite a year of a rethink of the direction. Now, does that mean they sort of abandon that good long term behaviour with regards to the climate, with regards to fiscal policy? I suspect it will at least very much be scaled back because quite simply, we can't do it alone. And we will just destroy our own domestic manufacturing because we cannot complete with the likes of China. And politically, of course, the far right benefits from all this uncertainty about the future of those sorts of jobs. Absolutely.

10:00Just on that point about manufacturing in China, I started my career in manufacturing. I used to work for Black & Decker up in Durham. And I bumped into the other day one of the lads who worked in the plant with me up in Durham. And he was now working out in China, running, not for Black & Decker anymore, he was working for another company. but he was saying they are already now trying to work out how to circumvent the tariffs so they're just trying to work out how do we get the our products to through to other countries to you know circumvent this and isn't there a case that that is just going to be what happens it'll just be them using other ways to get around it anyway it's already going on Steph if you look at what's been happening since this all began in 2018 when of course Trump first began the trade war actually the imports into the US from China have already fallen quite markedly actually but when you look at who has picked up the button it is Vietnam it's Mexico it's some of the surrounding countries but then when you pick into the detail of it it is Chinese plant that's established itself in Mexico but we've heard from the US administration they're onto this and hence there's this sort of discussion of China plus one.

11:15What they're meaning by that is the plus one is, well, where have they gone to try and circumvent the policy? And I do think the US will be very focused on almost trying to form a club of who's with us. And countries are going to, I think, increasingly be forced to pick a side. And what do you think Mexico will do? Because he did say quite late in his campaign, he was going to impose enormous tariffs on, for example, electric vehicles coming out of Mexico to the US because, in his view, these are effectively Chinese electric vehicles. So what would you do if you were Mexico? I mean, your border is with America, but you're doing quite well out of your relationship with China.

11:59So what does the Mexican government do? Well, I suspect they will be very much forced to pick a side. And I think they will side with the US and they will have to I mean there will be you know remember this is the man who wrote the art of the deal there will be I'm sure negotiations to be done it will be things like fine to have Chinese cars but your plant has got to be in the US you know it's not going to be blanket but I think to me the overarching result will be this clear fragmentation between those who are choosing to work with the US on this issue and those that aren't. The other thing that I'm really fascinated by at the minute, we keep talking about kind of Trump and all the uncertainty he brings, but there's so much political fallout kind of across the world at the moment, isn't there?

12:47You know, we've seen like Michel Barnier getting booted out of power because of the budget he wanted to bring, you know, the German government collapsing because of, you know, disagreements over how they solve their money problems. So it feels like there's a real sense of nobody knows how to get a grip of things at the moment in terms of their finances. And that must be a bit of a worry for businesses and investors. I think underlying all of these issues, largely, if I try to look at a common thread across the West, it's this really uncomfortable dilemma that the electorate has, which is we know we've got very rapidly ageing populations.

13:21And we know that we have promised those ageing populations a heck of a lot in health care, in pensions, in housing for old age. And the trajectory for government spending because of this structural demographic issue is very clear. It's going in one direction and that part of the electorate want what they have been promised and they are entitled to. But then you've got the other part of the electorate who have got to pay for it and don't want to. They don't want the higher taxes. They don't think that they're going to then get all of that provision in their old age. There's a sort of real cross-generational inequality issue that's developing.

14:05And the sort of economic solution to this issue is migration. because of course if you've got too many old people and not enough working people well bring in some migrants and you solve your mathematical problem but that's the other thread of the politics where things are going wrong in that the younger cohort who are facing the lack of public services that they thought and the higher taxes also don't want migrants competing on wages. So the politicians are in a very tricky position of making all of this add up and explaining to the electorate what the choices are. And, you know, I think that's what's going on, whether it's Germany, whether it's France, whether it's us here in the UK.

14:52And I don't know, honestly, Steph, how we overcome this difficult conversation. And so I suppose the thing that I'm really intrigued by is first, the government has announced a policy of increasing public sector investment or at least stabilizing it rather than cutting it, which is what the Tory government was proposing. On the other hand, you've got private sector businesses reducing investment. So it's moving in the other direction. Even if the government manages to get investment up, it's not really going to have a significant impact on productivity and growth for a number of years. Migration is politically impossible, as you pointed out.

15:33Many people say to me that the only really significant short-term boost you could get would be from joining the single market or the customs union, but this is a government that's ruled that out. If you were Keir Starmer and Rachel Reeves, just putting all these, I'm afraid, slightly gloomy factors together, first of all, how worried should they be? And secondly, what can they do about it? So what do we need? We need investment. We need private sector investment. Adding capital stock, adding better technologies, adding faster moving computers and Wi-Fi, etc. is what will generate productivity.

16:11Productivity generates real wages. It's the secret sauce. Productivity is that thing that fixes all problems. So that's what we need. And the route to that is, I would say, private, maybe helped by public investment. why isn't that happening I think it is not really the necessarily the cost of finance if you look at businesses why they are not investing they say they can't see the demand and they are uncertain about the future and I think this was the sort of big hope with the change of government that we were going to get at least some of the uncertainty result we were going to get a ministerial team that would stay in their seat for more than three months, which proves to be very helpful for industry speaking to the same minister for more than a few days before they're re-educating another.

17:03So we were going to have a sort of ministerial team that were going to really get over their brief. And then we were going to have this sort of long term business focus growth agenda that would sort of reignite the engine. And I think the worrying thing, the disappointing thing from the budget was understandably you know there wasn't abundant money there was some very difficult choices to be made but the choice that was made was to really prioritize short-term public spending rather than medium to long-term private sector because taxes were raised on businesses and the money was basically used for the next couple of years public sector pay and departmental spending and you know don't get me wrong I'm not it wasn't an easy decision because we know our public services are really struggling so I don't want to sort of suggest it was obvious that an alternative scenario the chancellor should have made but I think now as you say well what now you know we've got to come back then to a realization that that was a short-term solution but we've got to work out a better long-term plan for what we need for public spending.

18:17We've got to work out how we get some better productivity through the public sector because we've got to bring down the trajectory for public spending. And then we've got to come back to what is our growth agenda? What is our growth agenda? And how do we make sure that the private sector is thriving and has the appetite for investment? And that's what we've lost, I would say, in the last few months in terms of the signals coming out of government and what they will, I hope, return to in 2025. And we shouldn't be, you know, the upside in the whole story is that we are going through, we believe, a sort of technological revolution in terms of AI and these new technologies, which really do have the potential.

19:04I mean, this is then what comes interesting in my day job. If you look at the price of these tech companies, one would think if the investors community have got it right, these technologies are going to transform the world. So either that's all wrong. But if there's an aspect of that story that's correct, we have new technologies available. we've got to make sure our corporate sector are incentivized to invest in them to deploy them because that's that is ultimately what needs to happen you know i'm sort of obsessively enthusiastic about artificial intelligence and one of the things that i am struck by and interestingly i was at an event last night where tony blair was speaking and he talked about something that i think is completely missing actually from the rhetoric of any european leader which is a political story that's based around the potential of this industrial, this technological revolution, the AI industrial revolution.

20:03You just know that if this were back in the late 90s and Blair were in power, you know, he'd be all over this. Even if he overstated it a bit, there would be this massive message of hope around the way that productivity and living standards can be raised through this technological revolution. And I am slightly amazed. It's not just a problem with Starmer, who doesn't get the language right, doesn't seem to have the ability to tell that story. It's true of all European leaders. And we're so far behind America in terms of investment in this space. So on the first issue, I mean, I think here in Europe, when you talk about AI, there's a sort of natural fear amongst the electorate.

20:48Well, that's robots taking my job. and I think an education process needs to happen of no no no this is not I mean our the leader of of my firm JP Morgan Asset Management a lady called Mary Erdoers she I think describes it perfectly where she says we do not plan to reduce our headcount because of AI at all what I am going to do is I'm going to take away from you the no joy tasks she puts it you know that's the education that we need to do for the whole population let's embrace this a there aren't more workers coming in our demographics are awful and you have clearly said you don't want migrants so this is mostly about just coping with the fact that we haven't got enough people and the people that we have we need to give them the tools to be more productive so that there absolutely needs to be a correction of the narrative that this is going to be job destroying.

21:45It's not. It's going to just mean that we can maintain a level of growth, get rid of the no joy tasks and build productivity. So absolutely, governments need to be focused on that. Don't you think though it's going to happen in spite of what the government do anyway? Like technology, it kind of just passes politicians by more often than not. And then it's only like reactionary stuff that happens later on down the line when we're already all using it. Yeah, I think that's right, Steph. But I think there are things, this technology, I think we have to bear in mind is slightly complicated because it's about the use of data.

22:20And that brings in security concerns. So I think there's quite an element of what role the public sector can do and regulation can do to encourage, promote, get some of the foundations right. and I think you know coming back to my analogy about you know Europe being so focused on you know we don't want to subsidize we don't want to you know give money to industry because we're worried about deficits and and the US you know running a seven percent deficit I think at some point as well we've just got to say we've got to get in the race we've got to you know we're so worried about the hangover we haven't even gone to the party go to the party have one drink don't you know get hammered like the US.

23:00I mean the so-called compute capacity in the whole of Europe is trivial compared to America. Something I constantly remind people is, you know, Elon Musk personally has three supercomputers more powerful than any supercomputers in the UK. Yes, but there's no reason we cannot adopt. I mean, it's interesting. I was just looking at this yesterday. So the Magnificent Seven sales, 50 % of it, the Magnificent Seven are, of course, this handful of tech stocks that are doing all the exciting creation of the products. 50 % of their sales are outside of the US. So it's not technologies that we cannot deploy, but we do need some of the foundational support, the data centres, the energy, because, of course, this technology is very energy hungry and our energy prices are four times the US.

23:46So that hinders the whole story. So there's a real role for government to play, I think, in pushing this forward. Karen, we're doing a world tour with you, it seems, in this episode. Still loads more to ask, you know, so sit tight while we go to a quick break.

24:21In the last time we spoke to you, we were talking about why there aren't enough kind of companies listed here. and there's been various articles and stats coming out about this being the worst year for departures from the London Stock Exchange since the global financial crisis, despite the fact that we've had politicians and the like trying to make the city look more attractive. What do you think is going to happen on all of that next year and over the next couple of years? Yeah, I mean, you can see why companies are doing it because increasingly investors have been buying passively, buying benchmarks rather than buying individual companies.

25:01So you sort of want to be caught up in a benchmark that everybody wants to buy if you're issuing, because as a CEO... So basically it becomes a sort of vicious cycle. If people aren't buying the UK market as a benchmark, then your share price is depressed. And therefore, why don't you go to America where everybody wants to buy into America? Absolutely. Now, I think, you know, there are some self-correcting mechanisms. We'll start to, I suspect, now see some more M &A in the UK. I think that's going to be very rife through the course of 2025. That helps push up share prices. And we're going to see that M &A because British companies, you pointed this out earlier, relative to equivalent companies abroad are just cheap.

25:43And too cheap. Yeah, too cheap. Too cheap relative to their fundamentals, I would argue. So private equity and indeed competitors are just going to come in and buy British companies. Yeah. And then that helps with boosting the share price. That all starts to make it more attractive. So there are some self-correcting mechanisms, but it all takes quite a long time when you've got these big structural overlays of the US economy outperforming, the market outperforming. Global capital has been one direction for the last decade. You only have to look at the value of the dollar to tell you that that's been going on.

26:16So that's a big force to operate against. But there are these sort of slow moving corrections that I think will start to kick in. But it's hard, I think, for the government to intervene other than trying to get the foundations correct. You know, some of the discussions about, you know, forcing pensions to invest more here, you know, it's tricky. You can see where they're coming from. But at the end of the day, my company, you know, we're custodians of people's money. We have to put that money where we think that their returns for their pension is going to be the best rather than so there's a conflict of interest of what you're trying to do as an investor versus what the government are trying to achieve.

27:03So for me, it's more about the government getting the foundations of the economy, some of the stuff we spoke about, relations with the EU, perhaps, promoting physical capital investment here, getting those basics right. And then that is what I think is the route to solving the problem. Can I just ask you, what you're basically saying is you need to create the conditions in the UK where investors from across the world feel more positive about the outlook for the UK and actually want to put their money here. and it's just the wrong way round to compel these British institutions, pension funds, to put their money here if in the end the returns aren't going to be there because of this sort of general gloom.

27:50So start in a sense by creating demand for the UK rather than forcing the supply of capital is what you're saying. So on that point, just out of interest, if this government, it doesn't look as though it's going to happen anytime soon, started to move towards trying to negotiate the kind of access to the EU single market that we had before, seamless, costless access, some version of being a member of the single market and the customs union, what kind of reaction would we see from global investors in respect of where they want to put their money? Would there be, at that point, an almost automatic upward revaluation of British assets?

28:39I believe so. I mean, look what happened post us leaving. You would think at least some reversal of that. You know, we are a small open economy. We aren't the US. We cannot survive on our own. And, you know, the hope that, well, if we leave the EU, we will replace that trading relationship with other parts of the world and particularly the US were going to be the big brother that would ride in and save us just hasn't happened and obviously the US is turning increasingly inward we didn't strike a trade deal under an outwardly focused administration we're not going to be finding one I think forthcoming so again you know that's the conversation that we need to start having with the electorate on we understand why you voted you know we're not saying that we want to reverse every aspect of what being in the EU meant that you didn't like but surely just in terms of saying okay we want to control migration but we'd like to be able to trade in goods and therefore we're going to work together on regulation you know is that loss of sovereignty really upsetting the British population I don't know it's not obvious to me, certainly members of my family who voted to leave.

29:57It wasn't about regulations on agriculture and goods, why they voted. So, you know, let's have the conversation about what did you want? How's it working out? Are there any aspects we could now tweak as we go forward? But as you say, it's not obvious that it's, well, no, let's not be too pessimistic. I do think Prime Minister Starmer has shown a much more outwardly focused and has presented to the electorate happily that he is more outwardly focused, is happily being photographed on the continent in a way that I don't think we saw before. So I think he is demonstrating both internationally and at home that that's the direction of travel.

30:38But we could, I think, move forward a little bit more strongly on that. I mean, it just seems to me, this is a really difficult judgment for any leader, but if at a stroke that he decides to take an enormous political risk and just say look guys since we left the eu migration has actually increased and therefore this thing that many of you voted for which was a you know a reduction in immigration well the opposite has has happened and by the way if we rejoin you know what is still the world's biggest single market if we were to rejoin the single market and the customs union, at that point, our growth rate would increase very significantly.

31:22You're all going to be richer. Many would say you're going to get, if you're a prime minister, a bit of a political dividend in maybe in three or four years time, if you can get growth and living standards up for whatever political hit you take in the short term. Is that a calculation given how dire the growth prospects are that he should at least be thinking about? Look, I'm an economist, not a politician. And I think economists on this subject always have to be a little bit circumspect when they're making statements about this. He knows he's got reform breathing down his neck, of course, as we move towards, I mean, even now thinking about the next election, I think when they first gained office, many probably myself included thought they probably got 10 years to run.