192. Can We Cope With Trump’s 15% Permanent Global Tariff?

0:00When he did Liberation Day, you know, he was threatening those enormous tariffs. At that point, markets massively took fright. It is very striking that, yes, lower growth, yes, higher inflation, but stock prices have recovered. The dollar remains weak. So far, we have avoided disaster. Monzo Business is the proud partner of The Rest is Money. Now, did you know that over 600 ,000 businesses are already banking with Monzo Business? And mine is one of them. To celebrate us teaming up, we've got a special offer for you. New customers get Monzo Business Pro or team for free for the first six months.

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2:08Hello and welcome to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. I mean, I've been sort of struck by just the ruthlessness of this sort of capitalist system, the sort of UK-US approach to finance and corporate life, in the sense that we saw that appalling series of tragedies affecting the founders of Autonomy. Both died in tragic circumstances. But another company, HP, Hewlett-Packard Enterprises, that thought he'd been ripped off by Mike Lynch, the founder of Autonomy, coming after him and winning an enormous settlement after his death. I mean, it was an extraordinary soap opera, everything that's been happening.

2:58A tragic soap opera over the last few years, hasn't it? Yeah, I mean, horrendous, because you'll, of course, have seen all the headlines when Mike Lynch was killed last year when his yacht sank. It was him, his teenage daughter Hannah, and then five other passengers and crew who died when this yacht sank off the coast of Sicily. It was last August during a storm, which caused the vessel itself to capsize and sink. And obviously, at that point, Mike Lynch was celebrating, wasn't he? Because there'd been this ongoing court case. And at that point, things looked like they were getting better for him, didn't they?

3:41And then tragedy struck, not just to him, but also one of his colleagues as well was killed in a hit and run accident. And obviously at that point, all the conspiracy theorists came out. Just to remind people, the coincidence of these two deaths is sort of jaw dropping because, you know, one gets run over when he's out running in the UK and the other dies in a freak storm in Italy. It is astonishing. Yeah, I mean, you and I both write thrillers, don't we? And I think this, the plot of this story is one that you would read and go, no, that's unbelievable. So it really has been quite a tragedy. But still, the story continues, doesn't it?

4:25Because now, as you just alluded to there, Hewlett-Packard are saying they are owed 700 million. They actually claimed, I think the actual number in this court case originally was four and a half billion dollars. I mean, what's happened is that the court has just ruled that Hewlett-Packard Enterprises, HPE, has owed£740 million, which is more than the estate of Mike Lynch has. And so it would bankrupt his estate, would mean that his heirs would get less than nothing. There's quite a tricky decision now for the administrator of that estate to decide whether to appeal. There's one view which says they've got nothing to lose from appealing.

5:27And this is the bit where you sort of then start to really think about conflict between what you might call fiduciary duty. That's the sort of duty that any company has to its shareholders to maximize value, profit for shareholders versus normal human emotions. because the decision that HPE has to make is, given that there's a very large sum of money that is vested in Mike Lynch's widow, who did survive the boating accident, HPE now has to decide whether to come after her, because she is very, very wealthy in her own right. And it's absolutely fascinating to see what HPE decides on that front.

6:22And let me just add a bit of detail about what money we're talking about here, because this is Hewlett-Packard accusing Mr. Lynch, Mike Lynch, and the former chief financial officer of fraudulently inflating the value of autonomy. So HPA bought it for just over$11 billion back in 2011. Mike Lynch himself made about£500 million from the sale. But over a year, just over a year later, HPE had to write down the value of autonomy by$8.8 billion because it said it found serious accounting in proprieties. So in other words, HPE are saying they overestimated what the company was worth and they did that fraudulently.

7:10And that's been the big issue here. And as you say, now it's a question of HPE are clearly not going to drop this. so what happens next and this is something that unfortunately Mike Lynch is as you say widow is gonna have to face now despite the fact she's lost her husband and her daughter which seems as you said right at the beginning all of this just like the corporate world being incredibly harsh but equally there are shareholders involved in all of this there's people owed money you know there'll be various lots of real people in that story too so where does it end I guess it's always been a slightly odd story for me because yeah you knew him didn't you well I knew him a bit I'd come across him a few times I'd always had a slightly wary shall we say relationship with him because he was a passionate Spurs supporter which and as everybody knows I support the other North London team.

8:10But the reason I always sort of felt, I don't know, what's the word, a sort of weird semi-intellectual connection is there was a period, oh God, it was about 2000 or so, 2000, 2001, where I briefly tried to enter the sort of financial dot-com world. I worked with a bloke called Terry Smith, who went on to become, you know, arguably Britain's most successful investor. He set up an incredibly successful fund management company called New Smith. And he had an online, a digital model for evaluating what companies were worth based on their cash flows. And he always said that autonomy was massively overvalued because he said there'd been this mismatch forever between the profits it declared and the cash flows that it generated.

9:15Given I had confidence in this model, I was always very wary of autonomy's valuation. So when HP started bellyaching that it'd been ripped off, you know, in a way it wasn't that surprising. for me. I suppose the thing that one should point out is when it came to accounting in those days, there were a ton of companies that basically manipulated the rules to make themselves look more attractive. I mean, autonomy was definitely not unique. Can I ask some questions on this? Because two things. One is, surely these companies do their due diligence to check that all the financial figures are legit. And I suppose they can't fully audit the entire company but you'd think there'd be enough done behind the scenes because these you know these acquisitions often take a long time don't they and there's surely in that process that's when things should be ironed out and secondly when you buy something you're deciding whether you think that the price you're paying is right you can't come back at people years later and say oh well actually it's not worth what i thought it was because things can change in that time and I appreciate if there's fraud in the figures that that means it's slightly different but it feels it just feels like in hindsight we could all say things weren't what we thought they were at the time and surely enough due diligence that should be done to stop this happening because then as a business owner you would be afraid to that this might come down the line someone might buy your company off you and then later on threaten you with legal action if it doesn't do as well as as they'd hoped it would do.

10:52Certainly it is extraordinary, given how much the then Hewlett-Packard would have paid its advisors, its bankers, its accountants. It is extraordinary. They made the scale of mistake that they subsequently claimed to make. I mean, but again, just to reflect briefly on the court judgment, what the court judgment essentially said this week is the bulk of the loss that Hewlett-Packard made on autonomy was down to its own incompetence and mismanagement. As I said, it's only 8 % of the valuation that they're saying was dodgy. So this, in the end, reflects badly on autonomy, but also on Hewlett-Packard, because I think you said the write-off was$8.8 billion.

11:49and, you know, only a fraction of that, the judge ruled this week, was down to, you know, Mike Lynch's overvaluation. But a fraction is still a lot of money when we're in the billions, isn't it? That 700 million is still a substantial amount of money. Yeah, it is. It is. So after break, we are going to go back to the big economics, the big politics of the world and we're going to respond to a listener's question who sort of characterised me in a way actually that Prime and I characterised me many years ago as the fourth horseman of the apocalypse. Or as I like to affectionately call you, Mystic Meg.

12:33So coming back to things more macro, Robert, we've had a very interesting question in from Claire, who's one of our listeners, and it made me think we should talk about this. So at the end of 2024, so last year, you made the prediction, Robert, on the show that 2025, this year, would be the most monumental year of our lives. So let's just have a quick listen to what you said. I do think it's the most important year of our lives. Doesn't mean to say it's either going to be appalling or good, but there is so much in play of a significant nature. there are a vast number of these so-called low probability, but massively high impact events.

13:22If we just run through them, the war in Ukraine, we're all expecting some kind of a ceasefire and a peace deal. If Putin, and this is what we expect, keeps vast amounts of Ukraine that he has illegally taken, that has massive ramifications for what he may feel empowered to do next. It has massive ramifications for the security of Europe. If Israel, for example, were to take increased military action directly against Iran, that has massive implications. We actually heard on the podcast when we interviewed Bill Browder, just one of the ramifications for some of these events going badly wrong. He talked about if you effectively surrender to Putin, vast numbers of Ukrainians are going to become refugees, and many of them are going to come and live here.

14:15If what looks like a positive development, the overthrow of Assad, actually ultimately leads to chronic instability in Syria, then again, we'll get waves of refugees coming to Europe and wanting to come to the UK. It seems a mad thing to say that these are relatively small examples, but they are relatively small examples. In terms of the whole world's economy, artificial intelligence, the most powerful industrial revolution that any of us have lived through, we talk all the time about the responsibility of government to prepare workforces for potential compression of wages, some loss of jobs, impact on culture, impact on the media.

15:00We're just not getting a national debate about any of this. And the speed of change is not slowing down, except in one place, which is I don't see governments like ours gripping the risks and the great opportunities in the way that they should be. So there we go. That was you, 2024, one of your great monologues. Has the reality been better or worse? Do you think, Robert, that's what Claire wanted to know. I mean, God, there's loads you got there. Yeah, that's right. Unfortunately. Some things look perhaps marginally better. If you look at Syria, although at the moment we are seeing very, very worrying ethnic conflict there.

15:45It's quite striking that Trump met the new leader, that there is an attempt by the West to try. They may fail to bring about a bit of stability there. I stand by what I said, which is that this is a year that is changing everything. I didn't in that particular clip dwell on the impact of Trump. But the most important influence on the way that our world is changing is Donald Trump. I mean, the other thing, though, that I think we should talk a little bit about now is I stand by every word I said about artificial intelligence. Actually, I spent quite a lot of time recently with some absolutely brilliant people in this field.

16:32And I'm even more concerned that within literally a matter of a few years, enormous numbers of jobs are going to be wiped out. The pace of change in AI is so rapid that I think by the end of the decade, we will be facing the most extraordinary economic and indeed social upheaval as jobs get eliminated. And I remain deeply concerned that our government and indeed no Western government is remotely preparing for that in terms of changes to welfare systems and education. But the thing that I didn't discuss in that clip is obviously the way that Trump has massively rolled back free trade and globalization.

17:16And that is a permanent, in my view, change to the global economy. This new world of tariffs will outlast his time in office because the Democrats are not talking about rolling back tariffs. Tariffs are with us to stay. And this is of really enormous significance to our prosperity. Yeah, it's probably just worth updating everyone on where we're at with Trump, because I know as Liberation Day happened in April, you know, lots of people were listening in to find out what on earth was going on and what it all means. And since then, we've had various trade deals negotiated and agreed, including, of course, our own with America.

17:56But just in the last few days, it's worth just talking about that deal that Trump has made with Japan. And you'll remember we told you not that long ago how important Japan is to America, not least the fact that they own, what is it, a trillion dollars worth of US government bonds. So, you know, quite frankly, Japan is a country that's helping America to do what they need to in their economy, which is a bit of a joke when you think about that. And in terms of this deal that they've negotiated, it's 15 percent tariff. So it's interesting, this, isn't it, this deal with Japan, Robert? Yeah, and I think it's likely to be a benchmark for other deals with major economies.

18:39I mean, at the moment, there is still a standoff between the European Union and the US. European Union scrambling around to try and get a deal to avoid the 30 % tariff on the EU that he is threatening. I was quite struck by some work by Goldman Sachs, leading investment bank. They say that right now, the average tariff that Trump has imposed on the world, if you just look at all the different things that he's done, you know, the 10 % on most goods, but there are some exemptions at the moment for pharmaceuticals. there's a 50 % tariff on steel and aluminum, except in the UK, where we've got a tariff deal and it's 25%.

19:31But Goldman Sachs says that in the round, the average tariff imposed by the US, imposed by Trump is 9%. They and actually you this is sort of implied by quite a lot of what Trump says. They expect the average tariff when this thing washes when all the sort of negotiations that he's doing washed through in the next few weeks and months. They think the average tariff that he will impose on the world will be about 15%, which is exactly what he's now agreed with. Japan, it is a tax on the world. It does mean that both growth in the world as a whole and in the US will be a bit slower it means in the u.s that inflation will be a bit higher is a bit higher than it would otherwise have been and it's already going up isn't it because we've seen from the latest u.s inflation figures it's gone up from 2.4 percent to 2.7 percent and you know jay powell the chair of the federal reserve said when these tariffs would come out you know these trade tariffs are going to lead to slower economic growth and higher inflation and that is what we're seeing happen here.

20:45I mean, Trump is obviously still raging with the Fed anyway because he really wants them to cut interest rates and they still haven't. And, you know, we've been wondering, haven't we, Robert, about whether he's going to try and bin Jay Powell off, try and get him sat because he's not meant to go until May next year. But he's already said several times that he's looking for someone to replace him. Yes, lower growth. Yes, higher inflation. But it is interesting that we're not at the moment looking at catastrophe in the short to medium term, which when he did Liberation Day, you know, he was threatening those enormous tariffs.

21:19At that point, markets massively took fright. It is very striking that stock prices have recovered and are back in America at record levels. The dollar remains weak. At the so-called short end, the shorter dated maturities of US government bonds again have recovered a bit. that when it comes to borrowing over a longer period of time, the US government is paying more than was the case pre-Trump. So I think the important thing to note is that there have been significant shifts, but so far we have avoided disaster. Yeah, but time will tell because obviously there were lots of measures, people reacted quite quickly, didn't they, when the tariffs were going to come in, with more ships suddenly being sent to the US in time to try and miss the tariff deadlines and all this jazz.

22:13So I wonder if it's just going to take time as well to feed through, particularly with things like the prices in America of inflation. Yeah, this is a long game, as you say. And just to pick up on, you know, the important things you were saying about the Federal Reserve, it's not just the chair of the Federal Reserve that Trump will replace next May. It looks as though he will allow J-PAL to serve out his term while continuing to put pressure on the Fed to cut interest rates faster than otherwise. And this is actually frankly what investors are now focusing on. They are massively focusing on the way that they worry that the president is undermining the important independence of the US Central Bank.

23:02Even, however, if he succeeds in appointing both a Fed chair, who he feels he can somehow manipulate, and indeed new members that he feels he can somehow manipulate, there are very large numbers of other voting members of the US Federal Reserve. So he can't totally take control of the US Federal Reserve. Yeah. Just on the trade deals Trump's doing, did you see the stuff that obviously the EU are like preparing for this date on the 1st of August when they're, you know, if they don't negotiate a deal before then tariffs are going to be at 30 % with trade with the US. They're looking at what they can do to get back at America and so they're looking at tariffs on things being sold to them like Boeing aircrafts, cars, bourbon but what they've said they're not going to include and who knew that there was such a big business in this is purebred horses that they buy from America, bovine semen and strawberry plants.

24:10So never Robert was bovine semen going to be something I thought I'd be talking about on The Rest Is Money. But there we are. It's clearly big business between America and the EU. I mean, we talk about everything on, so I'm not surprised we're talking about boba and semen. But the thing that I am struck by is surely European strawberries are way more delicious than American strawberries. Why do we need their strawberry plants? I don't get it. Who knows? If anyone knows, let us know. But we should probably wrap things up there. More from us soon. But that's it for now. Bye-bye. See you soon.