Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Lee. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg
Speaker 1: dot Com, and of course on the Bloomberg Terminal. The
Speaker 1: perfect conversation. Now, Mike McKee, as always one of the
Speaker 1: best in the world, the best at following this fat
Speaker 1: sitting down with the St. Louis Fed President Jim blad
Speaker 1: My good morning to you, Buddy, Good morning to you John,
Speaker 1: and good morning to you Jim Bullard. Thank you for
Speaker 1: joining us on Bloomberg Radio on TV. Thank you thanks
Speaker 1: for coming out to our new museum here. Yeah, this
Speaker 1: is the Money Museum. It's fascinating and if you're in St. Louis,
Speaker 1: you should come visit it. We're sitting right next to
Speaker 1: the sign that talks about hyper inflation, so it's it's
Speaker 1: it's sort of a perfect spot for us here this morning.
Speaker 1: A week ago, you were the lonely dissenter looking for
Speaker 1: a fifty basis point rate increase. Now the chair has
Speaker 1: all but promised a fifty basis point increase at least
Speaker 1: that's the way the markets are taking it at the
Speaker 1: main meeting. What happened in the last week, I think,
Speaker 1: I mean, those that are interested can read my dissent
Speaker 1: statement which is out last Friday and is on our
Speaker 1: web page. Uh. I think the FED needs to move
Speaker 1: aggressively to keep inflation under control. Our policy as we
Speaker 1: sit here today is still a very large balance sheet
Speaker 1: and very very low policy rate. We need to get
Speaker 1: to neutral at least so that we're not putting upward
Speaker 1: pressure on inflation during this period when we have uh
Speaker 1: much higher inflation than we're used to in the US economy. Well,
Speaker 1: when you say we have to get to neutral, how
Speaker 1: quickly you have been arguing for more than two d
Speaker 1: basis points. Yeah, I think faster is better. And I
Speaker 1: think the nineteen tightening cycle or removal of accommodation cycle
Speaker 1: is probably the best analogy here. That one was quite successful.
Speaker 1: The FED moved three basis points in a single year
Speaker 1: and then made some adjustments afterwards. In the result was
Speaker 1: that we hit our two percent inflation target over the
Speaker 1: next ten years. The economy boomed in the second half
Speaker 1: of the nineties, So I think this is a situation.
Speaker 1: It's like that we came out of the pandemic, we
Speaker 1: got surprised by inflation. But now what you have to
Speaker 1: do is move the policy rate up discreetly a fair amount,
Speaker 1: not to be too disruptive, but I think fifty basis
Speaker 1: point moves would definitely be in the mix. And UH
Speaker 1: and then get to a level that we can be neutral,
Speaker 1: and then from there we can decide if we want
Speaker 1: to be restrictive in put further downward pressure on inflation.
Speaker 1: But right now we're putting upward pressure on inflation. It's
Speaker 1: a wrong place to be given where inflation is well.
Speaker 1: As I noted, the markets, whether you look at swaps
Speaker 1: or futures, are now pricing in fifty for May fourth.
Speaker 1: The Fed doesn't like to surprise the markets. Should we
Speaker 1: assume that that's what you're gonna do? Well, I you
Speaker 1: know I can't. I'm just one person on the committee.
Speaker 1: I don't know where the rest of the committee will be,
Speaker 1: and the chair has to manage that process. Um. I
Speaker 1: thought that was good speech yesterday that laid out the situation,
Speaker 1: and we'll see where we are when we get to
Speaker 1: May fourth. Now, the economic data have been closely watched.
Speaker 1: But from what you're saying, it doesn't sound like it
Speaker 1: really matters between now and May that we're too low
Speaker 1: in terms of the Fed funds rate and inflation is
Speaker 1: too high and those are the only two considerations. Well,
Speaker 1: that's a big picture, and I think that's right that
Speaker 1: we don't really need a lot of more data here.
Speaker 1: But you never know in this world and in this business,
Speaker 1: you can always get surprised. Obviously, we've got geopolitical risk
Speaker 1: out there. I guess my feeling on that is that, UM,
Speaker 1: you know, we can't wait for that to get resolved.
Speaker 1: This could go on for a very long time. UH,
Speaker 1: and certainly geopolitical tensions, even if the war ended tomorrow,
Speaker 1: the tensions would last for a long time. So I
Speaker 1: think the best contribution we can make is to get
Speaker 1: our house in order and make sure that the US
Speaker 1: economy is doing as well as we can uh achieve.
Speaker 1: And UH that will be the best that we can
Speaker 1: do to contribute to the global situation without going all
Speaker 1: our star on everybody. Uh. The idea of neutral is
Speaker 1: a moving target. Different people think of different levels. UM.
Speaker 1: One analyst summed up your policy right now as the
Speaker 1: feed is going to keep hiking until something breaks. Is
Speaker 1: that the best way to think about it? Now, that's
Speaker 1: not a good way to think about We're gonna go
Speaker 1: to neutral, which is the place where we're not putting
Speaker 1: upward pressure on inflation. You don't want to put upward
Speaker 1: pressure on inflation where you've got headline cp I, you know,
Speaker 1: close to eight percent here and probably more to come
Speaker 1: in the in the inflation reports ahead. So we want
Speaker 1: to get to neutral so that we're not putting upward
Speaker 1: pressure and probably get to a restrictive policy. So we're
Speaker 1: putting some downward pressure. History tells us that the faster
Speaker 1: we move to that situation, the better chance we'll have
Speaker 1: of moving inflation back to target and getting a boom
Speaker 1: in the U. S economy too. What's neutral to you
Speaker 1: on the funds rate? I've got two percent. That's because
Speaker 1: my our star is lower than others. I'm willing to
Speaker 1: go with a zero our star. So that's lower than
Speaker 1: other estimates that are out there. So I'd be uh
Speaker 1: two hundred basis points on the funds rate, but I
Speaker 1: want to go to three hundred this year's to get
Speaker 1: mildly restrictive, uh, and then that will help us turn
Speaker 1: inflation around, and hopefully we'll also get some moderation inflation
Speaker 1: from other sources. What you worry about is inflation psychology
Speaker 1: getting embedded in the economy. What are people in your
Speaker 1: district CEO is telling you about shortages, supply chain problems,
Speaker 1: and about what they're able to charge pricing power. Well,
Speaker 1: most disturbingly, they're telling me of the pricing power is
Speaker 1: not a problem, that they're able to raise prices and
Speaker 1: pass on the higher costs to their customers. So that's
Speaker 1: the exactly the kind of situation that you don't want.
Speaker 1: You want them to be more worried about losing market
Speaker 1: share when they raise prices, and so for that dynamic
Speaker 1: has been worrisome to me, and that's something I think
Speaker 1: we need to get under control. I think discrete adjustment
Speaker 1: to the policy rate would help break the inflation psychology
Speaker 1: and help keep inflation under control in that sense. Uh,
Speaker 1: they're also saying a great deal about supply chain issues
Speaker 1: and how those are going to continue, and they will
Speaker 1: probably not get solved anytime soon. We may have to
Speaker 1: wait out into three That's way too long for this
Speaker 1: policy process. So I don't think we can just wait
Speaker 1: for that to happen. What about the balance sheet, which
Speaker 1: your best guess is the best course for reducing the
Speaker 1: balance sheet and what effect would it have on interest rates? Yeah,
Speaker 1: I said in mind a sent statement that I'd be
Speaker 1: happy to just get started on the balance sheet runoff.
Speaker 1: Now I think we overstated our welcome on purchases. You know. Uh,
Speaker 1: it's always hard to make these judgments. But in retrospect,
Speaker 1: looks like we allowed the balance sheet expansion to go
Speaker 1: on too long. So I'm be happy with uh. Sooner
Speaker 1: is better. Uh. I would have been happy to do
Speaker 1: it at this meeting, this previous meeting last week. I
Speaker 1: see no reason to just not to just get going
Speaker 1: on that process. We've got a long ways to go
Speaker 1: on that dimension as well. The balance sheet approaching nine trillion,
Speaker 1: you know, pre pandemic it was four trillions, So you've
Speaker 1: got a lot of uh, a lot of balance sheet
Speaker 1: reduction that can go on. It would be passive runoff
Speaker 1: before we let you go. How would you advise people
Speaker 1: to look at the Summary of Economic projections and make
Speaker 1: sense of it given that it says interest rates are
Speaker 1: gonna rise to be restrictive and inflation is going to
Speaker 1: just drop off over the next three years, but unemployment
Speaker 1: is not going to move at all. Well, the real
Speaker 1: economy is doing very well. The US economies, even with
Speaker 1: geopolitical risk, is expected to grow at above trend pace
Speaker 1: this year, next year, even the year after that, and
Speaker 1: a lot of forecasts. So UM, that's going to continue
Speaker 1: to put downward pressure on the unemployment rate and continue
Speaker 1: to have UM an even stronger labor market. Um. If
Speaker 1: you look at the Kansas City FEDS Labor Market Conditions Index,
Speaker 1: it's almost at an all time high here. Uh, it
Speaker 1: probably is going to go to an all time high.
Speaker 1: So one of the best labor markets in a generation.
Speaker 1: So I just think that that, you know, the real
Speaker 1: side of that kind of with continued reopening, uh following
Speaker 1: as the pandemic continues to fade. Here, I think there's
Speaker 1: a lot of reasons to think that we'll have a
Speaker 1: robust economy going forward, and that suggests robust labor markets
Speaker 1: going forward. So what we have to do is adjust
Speaker 1: the policy rate and discreetly get to the right level.
Speaker 1: Then we can make adjustments from there and you can
Speaker 1: get a soft landing. And I think so, Jim, but
Speaker 1: we did, We're gonna do it again. Jim Bullard, President
Speaker 1: of the St. Louis FET, thank you very much for
Speaker 1: joining us this morning. T k is missing out today.
Speaker 1: Can we say that you agree some Kings missing out
Speaker 1: in a major way. When this invasion started a month ago,
Speaker 1: Tom wanted one person on the show, and it's our
Speaker 1: next guest, and Tom's not here, And if Tom was here,
Speaker 1: the introduction front next guest would be about thirty minutes long.
Speaker 1: For good reason. Angela Stent joins us now, the nonresident
Speaker 1: Senior Fellow at the Brookings Institution and the author of
Speaker 1: Putin's World, Russia against the West and with the rest Angela,
Speaker 1: let's start here. There is this Western centric conversation that
Speaker 1: there is some instability building in the Russian government, that
Speaker 1: we could have regime change, that Putin could fall. Can
Speaker 1: you give me your line of thinking, God, what's happening
Speaker 1: within Russia? Yes, I think many of us are clutching
Speaker 1: straws and there's wishful thinking here. I mean, what do
Speaker 1: we know? There are some rumors that some high level
Speaker 1: intelligence people have either been arrested or fired and blamed
Speaker 1: for obviously the failure of intelligence at the beginning of
Speaker 1: that war, but these are just snippets. We know that
Speaker 1: there have been demonstrations against the war, that thousands of
Speaker 1: people I think at least ten thousand people have been arrested.
Speaker 1: They can face up to fifteen years in prison for
Speaker 1: their protests. We know that to render thousand Russians approximately
Speaker 1: have left since the beginning of the war, and they've
Speaker 1: gone to Europe other parts of the former Soviet Union.
Speaker 1: But we really don't have any proof that in Putin's
Speaker 1: inner circle there is any plot afoot, and it really
Speaker 1: would have to be his inner circle. He's very much
Speaker 1: in a bubble. He doesn't see very many people. Yes,
Speaker 1: some of the oligarchs have obviously complained about what's happened
Speaker 1: to them, uh and uh. They they've lost their yachts
Speaker 1: and their homes. We know that. And we heard rumors
Speaker 1: that the head of the Central Bank, Albero Mabiullina, wanted
Speaker 1: to resign, but she's still in her post. So I
Speaker 1: think we have to be very cautious about assuming that
Speaker 1: a palace coup is underway. At the moment, Putin appears
Speaker 1: to be firmly in the saddle. He's obviously isolated. He's
Speaker 1: lashing out verbally as we saw. But when we saw
Speaker 1: this big rally last Friday that he had in the
Speaker 1: stadium they're celebrating the anniversary of the annexation of Premier uh,
Speaker 1: he seemed to be very much in Church Angelo. When
Speaker 1: it comes to lashing out. How much are we going
Speaker 1: to see an escalation in the types of weapons used
Speaker 1: in some of the methodologies that Putin opts for in
Speaker 1: light of just what you talk about, the fact that
Speaker 1: he has cornered and isolated. Well, we're seeing obviously the
Speaker 1: bombardment of cities. We're seeing a humanitarian catastrophe there is
Speaker 1: you know, our government is warning that the Russians may
Speaker 1: use chemical weapons. They've been warning that for at least
Speaker 1: I think a week, and of course Putin has made
Speaker 1: veiled hints about the potential use of nuclear weapons or
Speaker 1: a tactical nuclear weapons. So I think we do have
Speaker 1: to watch out. If you go back to the Syrian playbook,
Speaker 1: the way that the Russians behaved there with the indiscriminate bombing,
Speaker 1: the raising to the ground of the city of Aleppo,
Speaker 1: and the use of some chemical weapons, we just we
Speaker 1: do have to watch out for that, and that of
Speaker 1: course is a major concern going forward Angela. It has
Speaker 1: been suggested by the Biden administration as well as others,
Speaker 1: that putin his ultimate ambition does not end with Ukraine.
Speaker 1: What he would really like to see is a return
Speaker 1: to the Soviet Union in some sense. If that is true,
Speaker 1: what does that mean about the likelihood of a lasting
Speaker 1: peace agreement or at the very least an agreement at all.
Speaker 1: So you might get an agreement to end this war eventually. Um,
Speaker 1: we know, you know what clearly involved Ukrainian neutrality. The
Speaker 1: question is what about Premia and the and the don Bass,
Speaker 1: the southeastern uklaying region. Uh, that's a possibility. We're not
Speaker 1: nearly there yet. But beyond that, if the Russians managed
Speaker 1: somehow to prevail, Yes, Putin's ambitions go beyond Ukraine. He's
Speaker 1: talked about a new Slavic Union state comprised of Russia,
Speaker 1: Jelous and Ukraine. That's a possibility. Um. But he's also
Speaker 1: hinted that Russia has its sides even further west, that
Speaker 1: it wants to re establish a sphere of influence not
Speaker 1: only in the post Soviet space, but maybe in central
Speaker 1: and Eastern Europe too. So I think the likelihood of
Speaker 1: a lasting peace agreement. This is really quite far off,
Speaker 1: and we really then we would have to have all
Speaker 1: the party sitting down, as Mr Popnisker said, and and
Speaker 1: rethinking euro Atlantic security going forward. And that's a major test.
Speaker 1: And at that title of your book, Putin's World, Russia
Speaker 1: against the West with the rest? Can we talk about
Speaker 1: the rest when we think about the rest? Now increasingly
Speaker 1: we just think about China, And I wonder if the
Speaker 1: rest wants to be with Putin for much longer here?
Speaker 1: Do you think a that China will back away from
Speaker 1: its relationship with Russia because of developments on the ground
Speaker 1: and be do you actually believe that Vladimir Putin would
Speaker 1: listen to Jijing Ping if president she trying to intervene.
Speaker 1: I don't think China is going to back away from
Speaker 1: its relationship with Russia. I think China is in a
Speaker 1: difficult position because obviously Putin wouldn't have gone ahead and
Speaker 1: done this had he not thought that he had Chinese support.
Speaker 1: But Pain has cultivated this relationship with Bondema Putin. I
Speaker 1: mean it's a mutual cultivation and they see each other
Speaker 1: as authoritarian leaders determined to push back against a world
Speaker 1: order that was imposed by the United States and its allies.
Speaker 1: So I think I think we should not expect China
Speaker 1: to back away from back in Russia. But of course
Speaker 1: Chinese major banks now are apparently complying with some of
Speaker 1: the sanctions. It'll it'll be tricky for the Chinese to
Speaker 1: avoid having a major economic problem with the West because
Speaker 1: of the sanctions. But I think they will remain back
Speaker 1: as of Russia, even though they repeat that they believe
Speaker 1: in the territorial integrity and sovereignty of Ukraine. India is
Speaker 1: another country to watch. The Indians have not criticized the Russians.
Speaker 1: They're not going along with the sanctions. They have their
Speaker 1: own issues with China. They have a huge arms relationship
Speaker 1: with Russia. And then you have African country South Africa,
Speaker 1: you have compus in the Middle East, in Latin America.
Speaker 1: So we have to remember that the West is united
Speaker 1: in its condemnation of Russia and its horror up this war,
Speaker 1: but much of the rest of the world isn't because
Speaker 1: it also has a much more skeptical view of the
Speaker 1: United States. And you know, we are so lucky to
Speaker 1: catch up with you today. Come back soon, please, And
Speaker 1: to the stand there of the Brookings institution, and of
Speaker 1: course later one an author. Let's get to Francisco Blanche
Speaker 1: they had a global commodities and derivative research and be
Speaker 1: a very global research and Francisco. Let me throw this
Speaker 1: one out there, the animey. How much credibility is the
Speaker 1: anime lost in the last few weeks, Hey, John, Well,
Speaker 1: it's it's been a messive process, that's for sure, UM.
Speaker 1: But one of the advantages of having multiple exchanges around
Speaker 1: the world is that we've continued to see a live
Speaker 1: prize for Nickel in Shanghai. So even though we've we've
Speaker 1: had some disruptions in trading for several days, I think
Speaker 1: at least there's been a reference out there that people
Speaker 1: could track and that's been a positive I think compared
Speaker 1: to private prior prior crisis Francisco, how much more do
Speaker 1: we have to see of these clearinghouses getting disrupted or
Speaker 1: even the consequence of them increasing their marginal requirements in
Speaker 1: order to avoid some sort of disruption like that leading
Speaker 1: to lower liquidity. Well as as you know, since the
Speaker 1: financial crisis, we've been concentrating a lot of the risks
Speaker 1: on on exchanges UM and UM and obviously that's that's
Speaker 1: I think partly creating some of the problems, but also
Speaker 1: remembers as volativity in commodity markets goes up to unprecedented levels, UH,
Speaker 1: it really is hard to avoid bringing up those margin
Speaker 1: calls or or bringing up those margins in in in
Speaker 1: the commorities that people trade, because the risk is just
Speaker 1: simply a lot higher. And we've seen that with Nickel,
Speaker 1: with that other commority markets and UM. I even think
Speaker 1: that some of the weakness we saw in oil UH
Speaker 1: in the last week and a half or so was
Speaker 1: related to the liquidation of of long positions linked to
Speaker 1: increase margin calls and and of course, as you probably know,
Speaker 1: open interests has actually fallen in oil despite the incredible
Speaker 1: risks that we are running here with the war in
Speaker 1: in in the Ukraine still unfolding and still at you know,
Speaker 1: a crucial point, I would say, I'm reading side of
Speaker 1: energy aspects actually pointed to that phenomenon is a reason
Speaker 1: why oil prices are so low, not so high, and
Speaker 1: she actually thinks that Brent could get up to one fifty.
Speaker 1: I think you agree with her that by June we
Speaker 1: could see Brent get up to one fifty, but then
Speaker 1: quickly fall back down. Do you still believe that it
Speaker 1: will quickly fall back down based on the fact that
Speaker 1: a lot of people expect a prolonged conflict and prolonged
Speaker 1: consequences in the commodity markets. Well so, so our our
Speaker 1: scenario since October of last year was a spike to
Speaker 1: a barrel by the summer, and we we had that
Speaker 1: view based on a post COVID demand recovery on limits
Speaker 1: to how much open can previews, on limits to how
Speaker 1: much shale is likely to respond, and of course inventories
Speaker 1: which which are still very low. I think what the
Speaker 1: Ukraine crisis has done is probably the entire expectation by
Speaker 1: at least barrel. So we we actually do have a
Speaker 1: one fifty or target for the summer in our baseline scenario,
Speaker 1: and an average of one then for a year um.
Speaker 1: It could still get worse, right, I mean, I don't
Speaker 1: want to sugarcoat this. It's a very bad situation. And
Speaker 1: uh Europe could still opt to restrict Russian oil purchases,
Speaker 1: in which case we would see meaningfully higher prices. That's
Speaker 1: what we call our ugly scenario is where where Russian
Speaker 1: supplies not only get disrupted by a million or a
Speaker 1: million a half barrels a day, but up to four
Speaker 1: million barrels a day in the market of course of
Speaker 1: a hundred million barrels, where Russia actually supplies about eight
Speaker 1: two to the global to to to to dive global markets.
Speaker 1: So um, so things are not great and could still
Speaker 1: get a lot worse. Um and uh. And actually, if
Speaker 1: you look at the petroleum product markets, we've seen diesel
Speaker 1: prices already surpassing the high points or that we saw
Speaker 1: back in thus and and uh it's also an eight,
Speaker 1: so it's not just cruel it itself. It's also of
Speaker 1: petroleum products. And again, diesel is the basis of the economy,
Speaker 1: is the basis of everything we from from harvesting to industry,
Speaker 1: and diesels connected to the JEFF fuel which is obviously
Speaker 1: flying but also trucking. So so really the backbone of
Speaker 1: the economy is being very impacted by these exceptionally high
Speaker 1: fuel prices. It's it's it's the new fangs, you know,
Speaker 1: it's it's fuel, agriculture, airspace. Um it's also nuclear and
Speaker 1: renewals and of course gold and critical medals. Um. So,
Speaker 1: so it's all of that that's kind of come back
Speaker 1: into four with um with the crisis, So Francisco, you
Speaker 1: mentioned they're an ugly scenario. In the ugly scenario, what
Speaker 1: does that equate to in terms of a dollar figure
Speaker 1: on a barrel of crude? How is that different from
Speaker 1: your base case of a hundred and fifty by summer?
Speaker 1: Our our right with scenario is two hundred dollars of
Speaker 1: barrel plus and uh and and the way we get
Speaker 1: there again is pretty simple, right, I mean, if you
Speaker 1: think about every million barrels a day of disruptions from
Speaker 1: Russia equates to twenty to twenty five a barrel on
Speaker 1: the price. So if we get to you know, we
Speaker 1: go from a million plus to uh to to four
Speaker 1: million or so, we have to add sixty to seventy
Speaker 1: lords of barrel to to our our our our baseline
Speaker 1: spike scenario. Um and um And as I said, I mean,
Speaker 1: I think that's been it's been so difficult to impose
Speaker 1: restrictions on Russian exports because at the end of the day,
Speaker 1: when you when you sanction a commodity of a very
Speaker 1: large producer, you're ultimately gonna end up paying a higher
Speaker 1: price as a large importer. And of course, the European
Speaker 1: Union is one of the world's largest importers together with China,
Speaker 1: so so restricting the supplies of energy from your largest supplier,
Speaker 1: which again Russia supplies a third of europe soil and
Speaker 1: your gas essentially with just significantly elevate energy prices which
Speaker 1: are already at record levels. So that's why I think
Speaker 1: there's been a lot of um political debate there. Well, Francisco,
Speaker 1: let's talk about other sources that supply that. What assumptions
Speaker 1: are you making about potentially more capacity come online from
Speaker 1: OPEC plus or from the shail patch, well from from
Speaker 1: OPIC plus it obviously I think that the big I
Speaker 1: think the big potential supply editions could come from Saudi
Speaker 1: Arabia or from from the Emirates United Are Emirates. We've
Speaker 1: we've also seen some progress being made on the run
Speaker 1: nuclear Deal, which could all surprise some relief. If you
Speaker 1: put together all of those, there could be up to
Speaker 1: let's say, up to three million barrels day of incremental supply.
Speaker 1: I'm talking about Iran, Saudi Arabia and Emirates trying to
Speaker 1: max out production. The issue is, of course, with the
Speaker 1: very low inventory levels that we have, if we max
Speaker 1: out production then there's really no room for error. We
Speaker 1: are kind of keeping our fingers crossed that uh no
Speaker 1: missiles from them and end up impacting Saudi export facilities
Speaker 1: or or or the situation and Livia us on worsen
Speaker 1: or the God forbid, we see another uh string of
Speaker 1: supply disruptions elsewhere around the world, So so that that's
Speaker 1: where the channel. Just remember, energy security has taken the
Speaker 1: really pretty much the headlines here. And I think, um,
Speaker 1: when you think when you look at E. S G
Speaker 1: versus energy security, we've seen much much bigger focusing on
Speaker 1: energy security because security is like oxygen, right, energy securious
Speaker 1: oxygen to the economy in the same way that that
Speaker 1: that security and national security is oxygen to to all
Speaker 1: of us because you don't think about it much. But
Speaker 1: once you don't have it, that you start to lose it.
Speaker 1: That's the only thing you're gonna think about. And and
Speaker 1: and that's really the I think that at the heart
Speaker 1: of all the debates we're saying in the political sphere
Speaker 1: and um, and I think all the warnings that have
Speaker 1: come from from people like like like me, you know,
Speaker 1: the analysts saying, well, you know there's there's pros and
Speaker 1: cons if if you end up pushing too harden on
Speaker 1: on the restriction side, you could also end up with
Speaker 1: with a very bad economic outcome for Francis and I
Speaker 1: think that they're kind of balance. So just finally, because
Speaker 1: the policy change, we could say from this energy transition,
Speaker 1: there was almost a disregard for fossil fuels and the
Speaker 1: see years, particularly the beginning of this administration. Do you
Speaker 1: think it will change things on the policy front over
Speaker 1: the next several years, not just this year. Look, I've
Speaker 1: been making the case that the US would go from
Speaker 1: from energy independence to energy dominance and and energy independence.
Speaker 1: We made the case ten years ago when shale started
Speaker 1: to to emerge as a new and feasible technology. We
Speaker 1: saw an enormous amount of supply growth and we thought
Speaker 1: that you was gonna become independent. Now we think it's
Speaker 1: gonna become dominant and regardless of policy. Remember, markets in
Speaker 1: in the US are are very very powerful forces, and
Speaker 1: UH with this kind of prices, we're gonna see a
Speaker 1: lot more liquid natural gas exports out of the US.
Speaker 1: Even even um UH Secretary carry UH former Secretary care
Speaker 1: has actually agree. I agree that natural gas is now
Speaker 1: critical to the energy transition. So we're gonna see more
Speaker 1: of that. We're gonn see more petroleum product exports. We're
Speaker 1: gonna see more chemicals exports, more fertilized or exports. Just
Speaker 1: the US is gonna it's gonna really grow dreamand adically
Speaker 1: its energy production base as the rest of the world
Speaker 1: is facing the shortages. Remember the US, the US natur
Speaker 1: gas price still five dollars and mbt US under five
Speaker 1: doors and with you so um, that's about thirty doors
Speaker 1: barrel of foil equivalent. So America has not only the
Speaker 1: cheapest energy on the planet, but also the safest, John
Speaker 1: Jonathan and and I think I think that that's These
Speaker 1: are two very good reasons to UH to up investments
Speaker 1: in the in the energy space in the US. And
Speaker 1: I think we'll see that. Even I think President Biden
Speaker 1: mentioned himself that that UH that there's a lot of
Speaker 1: leases out there that that can still be drilled, and
Speaker 1: I think they will. I think we'll see a turn
Speaker 1: as as a previarious situation between the between Russia and
Speaker 1: the Ukraine becomes more entrenched and and and presumably U
Speaker 1: S sanctions, UK sanctions potentially sanctions could be there for years,
Speaker 1: potentially degrading as well. The the profile of of commority
Speaker 1: production for Russia, which which as you all know, is
Speaker 1: usual the world's number one commority producer on many fronts.
Speaker 1: In a big way. We've learned that the harder this
Speaker 1: time around. Francisco gotta leave it there, Sir Francisco Blanche
Speaker 1: their Bank America. Joining us now is Joe and Phebey,
Speaker 1: partner and portfolio manager and advises capital management. Want to
Speaker 1: start here with you, Joeann, and just go to the
Speaker 1: price section of yesterday Yields up, banks down? Can we
Speaker 1: start there, jo Anne? Why? Yeah? Sure? More and Jonathan
Speaker 1: and team um. You know, clearly the market is adjusting
Speaker 1: their expectations for bank earnings based on a flatter yield curve.
Speaker 1: But people have to remember that a lot of the
Speaker 1: sorts of loanable funds for banks does come from checking
Speaker 1: accounts demand deposits on which they pay no interest. So
Speaker 1: any increase in interest rates is going to be a
Speaker 1: positive for net interest margins obviously be better with the
Speaker 1: steper yield curve. Um And then I think the second
Speaker 1: thing is the concern over the growing risk of recession,
Speaker 1: which could impact the amount of loans that they make,
Speaker 1: so lower loan allems would also tend to reduce their earnings.
Speaker 1: But I think overall banks have a pretty positive outlook here.
Speaker 1: Given what the FETE is saying, It's still looks like
Speaker 1: we're gonna have growing production, growing loans. We're still in
Speaker 1: a reopening recovery, even if it's a bit slower than
Speaker 1: we originally expected. Given what's going on with commodities because
Speaker 1: of the Russia War in Ukraine, buns are meanwhile joy
Speaker 1: and pricing in a bit of recession risk. Are we
Speaker 1: seeing the same sort of pricing in an equity markets
Speaker 1: if you look below the surface, you know. I think
Speaker 1: what we're seeing in the equity markets reflects the change
Speaker 1: and interget expectations that began last programmer when the Fence
Speaker 1: signal that it was going to start raising rights. We
Speaker 1: saw these multiples come down really dramatically, and we saw
Speaker 1: this big reallocation among large institutional money managers, utall investors, etcetera,
Speaker 1: away from tech and high multiple stocks towards more cyclical stocks,
Speaker 1: more consumer staples as well. And I think that reallocation.
Speaker 1: I think we're seeing action in the market that suggests
Speaker 1: that reallocation might be over and if investors want to
Speaker 1: get some exposure to growth, give it a slowing aggregate economy.
Speaker 1: I think they're gonna have to come back to those
Speaker 1: strong secular growth companies, you know, whether it's company exposed
Speaker 1: to the server market, data centers, etcetera. So I think
Speaker 1: that is really what we've seen in the equity markets
Speaker 1: has been a big reallocation. Plus you know the expectation
Speaker 1: that growth overall is going to slow down. Joanna, do
Speaker 1: you lean into that or do you think they're equities
Speaker 1: right now are not listening to the message being sent
Speaker 1: by bonds. Yeah, I think you know, it's always the
Speaker 1: case that bond market is gonna look a little bit
Speaker 1: more closely at the recession risk. But you know, one
Speaker 1: thing to be aware of is where else are investor
Speaker 1: is gonna go? Equities is really the only game in
Speaker 1: town in terms of building some source of appreciation. And
Speaker 1: if you're a long term investors, as our clients are,
Speaker 1: I think you can ride out this volatility, but be
Speaker 1: you know, let's make no mistake, it's going to be
Speaker 1: volatile for a while given these geo political risk But
Speaker 1: the equity market I think still holds now lots of
Speaker 1: opportunity for investors with a long term view to get
Speaker 1: some exposure to secular growth even if the economy slows down,
Speaker 1: even in a recession, there are ways to build in
Speaker 1: some insurance against some of these risks that we're seeing now,
Speaker 1: whether it's defense, named cybersecurity, energy, there are a lot
Speaker 1: of ways to build insurance into portfolios in this kind
Speaker 1: of environment. So, Joanne, what you're saying kind of echoes
Speaker 1: what our colleague John Author's wrote in his Bloomberg opinion
Speaker 1: piece today. That is, essentially, yes, higher yields and theory
Speaker 1: can threaten equities, especially those that command higher multiples. But
Speaker 1: at the end of the day, a more aggressive FED
Speaker 1: is going to be worse for bonds than it is
Speaker 1: for stocks. Is that essentially the thesis you subscribe to. Yeah,
Speaker 1: I think that's a fair statement, and I think we
Speaker 1: have to put the injury strates into perspective. Um First
Speaker 1: of all, inter strates, at two and a half three percent,
Speaker 1: it's still incredibly low. Historically, it's still a relatively cheap
Speaker 1: source of funds. And remember, corporations tend to borrow longer term,
Speaker 1: so they're looking more at the tenure in the thirty year,
Speaker 1: and those seem to be anchored by FED credibility. Con Clearly,
Speaker 1: the market does expect inflation to come down, and that's
Speaker 1: why we're not seeing such a build up in rates
Speaker 1: at the longer end of the herb. And also we
Speaker 1: have so much demand for the tenure globally because it's
Speaker 1: the safe harbor, because you know, pension funds have to
Speaker 1: be there, Central banks are going to be there. So
Speaker 1: I think that helps to anchor the long term cost
Speaker 1: for corporations, which does suggest more investments, more expansion. Job
Speaker 1: openings are still record highs, and so I think we're
Speaker 1: still going to see expansion on the production side of
Speaker 1: the economy, even while we see some constraints on consumers.
Speaker 1: Then Joan Pheeney always fantastic to catch out with you
Speaker 1: of Advisors Capital Management, David Rumasty, we are so lucky
Speaker 1: is here with us. As markets grapple with the conflict
Speaker 1: in Ukraine, a big question has been why things have
Speaker 1: been so sanguine if incredibly volatile. What was Ken's response
Speaker 1: to adjust this incredible willingness to look past some of
Speaker 1: the conflict and continue to buy well. Ken has built
Speaker 1: one of the greatest hedge funds in our countries, just
Speaker 1: and also now has built a great trading operations Citadel Securities,
Speaker 1: And in those kind of situations, you have to know
Speaker 1: what the geopolitical forces are going to be and what
Speaker 1: they're likely to do in terms of their impact on
Speaker 1: the markets. So he has a team of people that
Speaker 1: are looking at this situation, but nobody really knows right
Speaker 1: now exactly what's going to happen. But he's obviously worried
Speaker 1: about it because it will impact markets and affect his trading,
Speaker 1: and it also affect his Citadel Securities business. Kenn has
Speaker 1: had more impact than almost any major financial person on
Speaker 1: the markets in the last number of years because Citadel
Speaker 1: Security has become one of the biggest market makers in
Speaker 1: the countries. And also his hedge fund is done spectacularly well,
Speaker 1: probably the most the second most profitable hedge fund in
Speaker 1: our country's history. And this has called a lot of
Speaker 1: people's attention, especially as he consolidates a lot of equity
Speaker 1: trading volumes within the Citadel Securities unit. How much do
Speaker 1: you talk about the need to keep a wall between
Speaker 1: these businesses, to keep them separate in both perception and actuality. Well,
Speaker 1: he does keep them separate because they're obviously potential Inflix,
Speaker 1: but he's obviously had it walled off and he has
Speaker 1: separate teams of people. Uh. They are owned by about
Speaker 1: fifty people. His hedge fund is owned by about fifty
Speaker 1: people including himself, and his Citadel Securities owned about fifty
Speaker 1: people including himself. He's obviously the largest shareholder in each.
Speaker 1: But he also recently sold for Citel Securities. He sold
Speaker 1: um a piece of it five percent to Sequoia Securities
Speaker 1: or to Sequoia I should say, uh venture fund, and
Speaker 1: also to a Paradigm which is a crypto company, and
Speaker 1: he kind of hinted in the interview that now they'll
Speaker 1: probably begin in the not too distant future to make
Speaker 1: markets on crypto currencies, which he hadn't done before. He's
Speaker 1: been a skeptic of cryptic crypto, and now he says
Speaker 1: he's less skeptical. Well, David, what caused that change of heart? Well,
Speaker 1: when markets move a certain way and your force of
Speaker 1: the markets, you recognize the markets are saying something that
Speaker 1: you didn't recognize was the case earlier. So he's now
Speaker 1: been a skeptic of crypto since his beginning, but now
Speaker 1: he's kind of said the markets has two trillion dollars
Speaker 1: of value in crypto currency. So if you're going to
Speaker 1: be a player in the in making markets for people,
Speaker 1: you can't afford to not be in that crypto market.
Speaker 1: So what opportunities is that create for him and prosided
Speaker 1: Almore broadly, well, crypto now has a gigantic following among people,
Speaker 1: and I think it's going to get bigger. And this
Speaker 1: is one of the reasons. What we've learned recently is
Speaker 1: that the governments can take away your assets pretty quickly. Now,
Speaker 1: everybody's not a Russian oligarch, but these Russian oligarchs thought
Speaker 1: they had all their money hidden in various places where
Speaker 1: they can get anytime, anytime they wanted, and so did
Speaker 1: the Russian government. Russian government thought they could get its
Speaker 1: assets anytime. Now we can see the governments can freeze
Speaker 1: and confiscate your assets. So many people are looking at
Speaker 1: this around the world and saying, wait a second, maybe
Speaker 1: I need to have some assets that the government can't
Speaker 1: get to, or they're hidden, or they're anonymous, And I
Speaker 1: suspect you'll see a lot of people in China and
Speaker 1: other places where they want to hide wealth buying more
Speaker 1: and more cryptocurrency. So I think it's going to be
Speaker 1: a big growth business. It's one of the really important
Speaker 1: points that will be discussed. It is at nine pm tonight.
Speaker 1: I look for to looking at the full interview, David,
Speaker 1: but before we let you go, I do want to
Speaker 1: shift gears a little bit. We've been hearing from FED officials.
Speaker 1: We heard from FED Chair J Powell yesterday, today, this morning,
Speaker 1: just moments ago, Jim Bullard of the St. Louis Fed
Speaker 1: coming out saying that he does think that we can
Speaker 1: achieve a soft landing, even as the FED moves to
Speaker 1: a more restrictive policy, based on the on the ground
Speaker 1: experience that you have with the firms you're investing in.
Speaker 1: Do you think that it is achievable? Well, nobody really knows,
Speaker 1: but I think the Fed is done a reasonably good
Speaker 1: job of recognizing now that interest rates probably need to
Speaker 1: go up. And the question is how much and how
Speaker 1: how frequently? And I think the markets are now assuming
Speaker 1: about a six uh six different times this year, we'll
Speaker 1: probably have rate increases, probably of twenty five basis points
Speaker 1: each time, but it's not impossible there could be a
Speaker 1: fifty basis point increase at some point, depending on what
Speaker 1: the inflation numbers are. I do think the FED has
Speaker 1: probably said, uh, it may have missed the market a
Speaker 1: little bit, and maybe it could have been a little
Speaker 1: bit earlier and maybe a little bit stronger in fighting inflation.
Speaker 1: I think the word transitory is one that's now probably
Speaker 1: not going to be used again. Well, and of course
Speaker 1: they stuck to that for quite some time. How much
Speaker 1: credibility do you think the FED has lost or still has? Here?
Speaker 1: The FED has enormous credibility around the world because of
Speaker 1: what the FED is. But the FED, you know, it's
Speaker 1: not perfect, and maybe they would say in hindsight or
Speaker 1: when the memoirs are written by people, they will say, well,
Speaker 1: maybe they could have acted a little bit sooner. But
Speaker 1: I don't think it's a gigantic problem. And then now
Speaker 1: we're on the right path, so I think it's okay.
Speaker 1: That's at nine pm, David Rubinstein. We all look forward
Speaker 1: to watching every week. Thank you so much for being
Speaker 1: with us. This is the Bloomberg Surveillance Podcast. Thanks for listening.
Speaker 1: Join us live weekdays from seven to ten am Eastern
Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from
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Speaker 1: the terminal. I'm Tom Keene, and this is bloom