Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordernt. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. So here's the latest
Speaker 2: this morning. Global bonds seeing their biggest sell off since May,
Speaker 2: with the Middle East conflicts reigniting inflation fears, Thawson's Slock
Speaker 2: of Apollo, writing, the key issue is the duration of
Speaker 2: the shock. Markets may quickly get used to a situation
Speaker 2: that could last weeks or even months. Tawson joins us
Speaker 2: now for more. Torston, welcome to the program. Does this
Speaker 2: shock have the potential to become an economic issue in
Speaker 2: the months to come?
Speaker 3: Yeah, because this is steflationary imp So it's actually quite
Speaker 3: similar to what we saw with the trade war. Prices
Speaker 3: are going to go up and Ultimately, if it persists,
Speaker 3: GDP is going to go down. So this creates a
Speaker 3: huge headache for the Federal Reserve because the Federal Reserve.
Speaker 4: Now needs to assist the dual mandate.
Speaker 3: Where is the hit the hardest is to hit the
Speaker 3: hardest on inflation. Should they worry more about inflation going
Speaker 3: up or should they begin to worry about the downside
Speaker 3: impact on the label market. That's why this is a
Speaker 3: complicated shock, just like we saw with the trade wall,
Speaker 3: just like we saw with Ukraine Russia, and thus we're seeing.
Speaker 2: Today talstin relatively speaking? Is it a bigger problem for
Speaker 2: the Bank of England for the ECB?
Speaker 3: Well, the challenge for Europe is that they depend more
Speaker 3: on energy. The US produces, of course, a lot more
Speaker 3: energy than it consumes itself, whereas in Europe we do
Speaker 3: have a much bigger energy dependency. And that's exactly why
Speaker 3: markets are trading the way they are, where Europe is
Speaker 3: getting hard to hit because this simply is a bigger
Speaker 3: energy dependency in Europe.
Speaker 5: How important Touriston is it for a styflationary shock for
Speaker 5: there to be enough economic momentum in a country to.
Speaker 1: Withstand and prolong price.
Speaker 3: Hikes challenge, Lisa, is that this starting point is extremely important.
Speaker 3: Inflation and cod pc each to day is three point zero.
Speaker 3: So if inflations today had been one point zero, it
Speaker 3: would have been a completely different discussion. But now that
Speaker 3: we have inflation already at three and now we're adding
Speaker 3: on top of that more upward lift on inflation over
Speaker 3: the coming quarters, potentially that is certainly a risk that
Speaker 3: the fare of certain needs would take very seriously.
Speaker 5: Well, this is the reason why I was surprised towards
Speaker 5: starting the conversations that I've had with a number of
Speaker 5: different investors, even companies, they seem really excited actually about
Speaker 5: the opportunities ahead. They think the economy is chugging along,
Speaker 5: they're looking to invest. The sort of manufacturing boom feels
Speaker 5: like it's actually getting legs. How much could that amplify
Speaker 5: the risk of a stagflationary shock, because it could cause
Speaker 5: the price increases to be more significant in a way
Speaker 5: that isn't just necessarily a one off shock from commodities.
Speaker 3: No, you're right, and I mean if you just think
Speaker 3: about what has happened in the last few weeks, first
Speaker 3: we would talk about, Wow, the US economy is strong.
Speaker 3: Then we were talking about, oh my god, we're all
Speaker 3: getting unemployed because of AI. Now we're back to talking about, Wow,
Speaker 3: inflation is going up. I mean no wonder that the
Speaker 3: people inside the Federal Reserve are looking at this and
Speaker 3: probably scratching their heads and saying, well, now there's another
Speaker 3: shock that we need to take into account. But in combination,
Speaker 3: the issue is still that the US economy is doing
Speaker 3: really well. We have three very strong tailwinds from AI spending,
Speaker 3: we have a strong tailwind from in the dustal renaissance.
Speaker 3: And let's not forget that the Congressional Budget Office they
Speaker 3: estimate that the one big built of a bill will
Speaker 3: lift GDP growth this year by zero point nine percent.
Speaker 3: That's an enormous boost to GDP coming from fiscal policy.
Speaker 3: So taken together, it is a very strong economy. And
Speaker 3: it is an argument that has been made by many,
Speaker 3: including me, that we are at risk, of course, of
Speaker 3: seeing more upside pressure on inflation. And now you add
Speaker 3: here in the last few days on top of that,
Speaker 3: some more upside pressure because of oil prices. And finally,
Speaker 3: let's not forget also if this was just a few days, well,
Speaker 3: the risk is now that even today now we're getting
Speaker 3: headlines about new oil facilities potentially also getting hit. So
Speaker 3: the challenge here is that, well, what headlines you we
Speaker 3: then expect over the next several days. Again, so it
Speaker 3: really is a complex situation because of this incredible risk
Speaker 3: we might begin to see even more upside pressure on
Speaker 3: in fision from an already pretty bad starting point.
Speaker 2: Well, Toss, and let's unpack the bill case for the
Speaker 2: US economy and the tax component of it. Let's go
Speaker 2: with tax refunds. And you mentioned the labor anxiety connected
Speaker 2: to what's happening with AI developments. I think that's a
Speaker 2: feature of the conversation going forward. Does that hold back
Speaker 2: people when it comes to spending those tax refunds given
Speaker 2: that they're not going to see higher energy bills, potentially
Speaker 2: high utility bills potentially, does that make them more risk
Speaker 2: averse conservative in the months to comet?
Speaker 3: No, you're right, John, because last year, if you go
Speaker 3: and look at, of course, what tax refunds normally are,
Speaker 3: they were around three thousand dollars per family. And now
Speaker 3: this year, if you think about that, the one big
Speaker 3: built of a bill is done retroactively starting in January one,
Speaker 3: twenty twenty five. That means that we have all paid
Speaker 3: too much in taxes in twenty twenty five. That means
Speaker 3: that our tax refunds will be bigger this year. On average,
Speaker 3: they will go out from three thousand dollars last year
Speaker 3: per family, so now four thousand dollars. And there's one
Speaker 3: hundred and twenty nine million households in the US. So
Speaker 3: if you multiply these two numbers, that's a one hundred
Speaker 3: billion dollars more in consumer spending coming along here POTENTI
Speaker 3: in March and April and May. So over the next
Speaker 3: seven months we're going to get quite a lift in
Speaker 3: consumer spending. But you're right, if consumers are very worried,
Speaker 3: they could be saved more. But that's why the key
Speaker 3: indicators to look at on that is to look at
Speaker 3: consumer confidence. Consumer confidence has done a little bit better,
Speaker 3: but our consumer confidence indicators getting impacted by this or
Speaker 3: not that becomes very important over the next sevel readings.
Speaker 2: So to uston that feels like much more of a
Speaker 2: European story potentially than the US one. How do you
Speaker 2: expect central bank is to guide us through this moment?
Speaker 2: We had some guidance from the Australian Central Bank over
Speaker 2: nights saying every meeting is live. What do you think
Speaker 2: will the approach will be of saving Europeans of the
Speaker 2: Federal Reserve the ec Bank.
Speaker 3: Well, I think it's easier for the Fed because they
Speaker 3: will probably be more two handed and say, on the
Speaker 3: one hand, we have inflation going up. On the other hand,
Speaker 3: we're worried about what this means for the labor market.
Speaker 3: It's more challenging for the ECB and the Bank of
Speaker 3: England because they don't quote unquote.
Speaker 4: Care about the labor market.
Speaker 3: They really only target inflation, and if the only target inflation,
Speaker 3: they should begin to be more hawkish. So that's why
Speaker 3: it makes sense that and rates expectations and central bank
Speaker 3: expectations are moving more in Europe because the Europeans have
Speaker 3: simply a different mandate, namely only inflation.
Speaker 5: Twist and does this torpedo the bull case for Europe
Speaker 5: and frankly for a lot of the XUS discussion, because
Speaker 5: even though yes, the United States could face the stagflationary shock,
Speaker 5: other places could struggle with that even more at a
Speaker 5: time with the market seems to be overly positioned that way.
Speaker 3: Well, the challenge for Europe is that the main book
Speaker 3: case for Europe is really that Germany has said that
Speaker 3: they will spend five hundred billion euros in infrastructure and
Speaker 3: spend unlimited on defense. So the question that of course
Speaker 3: is immediate here is to ask, well, what are the
Speaker 3: Europeans going to do now in the form of defense spending.
Speaker 3: What are they going to do in the form of
Speaker 3: more government spending. So the policy reaction becomes very critical.
Speaker 3: How is Europe going to respond to this. Are they
Speaker 3: going to say, well, too bad, inflation is just going up,
Speaker 3: or are they going to say, well, wait a minute,
Speaker 3: maybe we do need to do more on the fiscal front,
Speaker 3: and there is not much room to maneuver on that front.
Speaker 3: But it becomes very critical that on the policy front
Speaker 3: the Europeans are likely going to at least say and
Speaker 3: indicate more action as a result, In particular, if this
Speaker 3: does become more of a niggative risk to the genp.
Speaker 4: Outbook, stay with us.
Speaker 2: More Bloomberg surveillance coming up after this. Let's justus stend
Speaker 2: the conversation with US Marine Corps veteran Major General Mastin
Speaker 2: Roberson of Academy Securities right in the following Aroun's current
Speaker 2: ability to make clear and rational decisions is likely disrupted,
Speaker 2: but proceeds are still a problem that it's not easily solved.
Speaker 2: The Major General joins us now for more. Major General,
Speaker 2: welcome to the program, sir I always appreciate your insight.
Speaker 2: Let's just start with your assessment of the operation so far.
Speaker 6: Thanks John Laser. So, I mean, it seemed to me
Speaker 6: that the number one objective was to try to ensure
Speaker 6: that the nuclear capability for Iran is off the table,
Speaker 6: and it does seem that that part of the operation
Speaker 6: has gone well. If the objective was to take mid
Speaker 6: range and short range are particularly long range and mid
Speaker 6: range missiles and destruction of the navy, that's gone well.
Speaker 6: The challenge is the side effects of those, the closing
Speaker 6: of the straits, the attacks on Middle Eastern countries and
Speaker 6: their capitals, which doesn't really surprise me, because you've got
Speaker 6: to believe that everything that's happened from the Iranian side
Speaker 6: of the house over the last four days was probably
Speaker 6: prescripted that if we get attacked, these are the target
Speaker 6: season things you do, which probably at hindsight, is not
Speaker 6: best for Iran to be attacking the other Middle East
Speaker 6: countries capitals because it certainly plays against their ability to
Speaker 6: have an emotional connection to the Muslim people in those
Speaker 6: countries and separate them from their governments.
Speaker 2: So major general, that last point I think is quite
Speaker 2: important that the response we've seen from forces in Iran
Speaker 2: so far has been scripted. As time goes on, how
Speaker 2: do you think ILGC forces are operating or will operate
Speaker 2: in a leadership vacuum?
Speaker 6: I mean that's the hard part to predict, because I
Speaker 6: do think they're operating in a vacuum. I don't think
Speaker 6: that there's a central government that is in essence making
Speaker 6: decisions to say this is what we're going to do next,
Speaker 6: These are our objectives, this is what we want to
Speaker 6: achieve in order to get the upper hand. So it
Speaker 6: is going to be interesting to watch. At what point
Speaker 6: do they have the ability to name a government, and
Speaker 6: then even if they name it, does it have any
Speaker 6: control Given the amount of destruction that's occurred to their network,
Speaker 6: Do they have the ability to control their military or
Speaker 6: is their military pretty much now in isolated bubbles doing
Speaker 6: what they think are best without any centralized control. And
Speaker 6: that has a danger all to itself, But it also
Speaker 6: means that they're not going to be unified in objectives
Speaker 6: to be able to try to disrupt what the coalition
Speaker 6: right now is trying to accomplish.
Speaker 5: Major General, I wonder what we're learning about the nature
Speaker 5: of modern warfare in terms of the way that drones
Speaker 5: are being used and deployed by Iran and the asymmetry
Speaker 5: and pricing. Right, these drones are cheap, they are multiple,
Speaker 5: and they are quick to produce, and at the same time,
Speaker 5: some of the missiles that we're using to shoot them
Speaker 5: down cost tens hundreds of thousands of dollars.
Speaker 1: I mean, how is that mismatch playing out? How could that.
Speaker 5: Be something that shapes the nature of war going forward.
Speaker 6: Yeah, you're absolutely right, Lisa, that we the US have
Speaker 6: to figure out a better way to do this. We've
Speaker 6: got to figure out a cheaper way to do this.
Speaker 6: It doesn't make economic sense to do what you've just.
Speaker 4: Described with.
Speaker 6: Million dollar missiles shooting down hundreds of dollars drones. So
Speaker 6: it was fascinating to me to see that President Zelensky
Speaker 6: had offered to help us figure that out better if
Speaker 6: and help the Israel figure out out better, if they
Speaker 6: could convince and the Middle East could convince Russia for
Speaker 6: a thirty day ceasefire, so who knows that may happen?
Speaker 5: Well, Major General, the way that war is being fought
Speaker 5: is so different. In this case, there's a concern that
Speaker 5: retaliation could come in the form of cyber attacks or other.
Speaker 1: Types of disruption.
Speaker 5: How are you monitoring that given the fact that it
Speaker 5: could be kind of one off events in different places.
Speaker 1: How well protected is not.
Speaker 5: Only the US but also other Middle Eastern countries against
Speaker 5: that type of attack.
Speaker 6: I think we're pretty well protected. I mean, there's no
Speaker 6: way that you're going to get one hundred cent protection.
Speaker 6: But I think let's remember that even though this is
Speaker 6: a four day war that's just been on now, cyber
Speaker 6: attacks and penetrations have been a serious threat for years
Speaker 6: and buy and large. Even though Iran has a capability,
Speaker 6: their capability pales in comparison to some of the other
Speaker 6: capability of nefarious actors that are out there in the world,
Speaker 6: who certainly could insert themselves into this in a disruption
Speaker 6: type style, but I'm not sure it's to their advantage.
Speaker 6: It appears at this point that the Chinas and the
Speaker 6: Russias and the North Koreans are content at this point
Speaker 6: to sit on the sideline and watch this play out,
Speaker 6: and that's our advantage. That happens if it broadens and
Speaker 6: they become part of what you're describing, you know, a
Speaker 6: cyber type offensive defensive war, then that does complicate things
Speaker 6: for everybody. But I think we have a better defensive architecture.
Speaker 6: They probably we're willing to advertise for obvious reasons.
Speaker 4: Stay with us.
Speaker 2: More Bloomberg surveillance coming up after this. Of course, the
Speaker 2: main focus this morning remains on the rising tensions in
Speaker 2: the Middle East. Shipments of oil and other goods passing
Speaker 2: through the Straight offorll meerc have come to a virtual standstill.
Speaker 2: The Flexports CEO Ryan Petterson, writing, what began as a
Speaker 2: regional security crisis has now become a direct disruption to
Speaker 2: global supply chains. Ryan joins us now for more. Ryan,
Speaker 2: welcome to the program, Thanks for making time for us.
Speaker 2: Just how much capacity have we just taken out?
Speaker 7: Well, on the container shipping side of things, you see,
Speaker 7: there's sixty seven ships that are inside the strait.
Speaker 4: Of our moves right now. A lot of those are
Speaker 4: smaller ships.
Speaker 7: So it looks like zero point six percent of all
Speaker 7: the container shipping capacity and the world has taken out.
Speaker 7: And that is the equivalent of the idle fleet today
Speaker 7: and is one of the main ways that capacity can
Speaker 7: be controlled to kind of keep prices in place is
Speaker 7: if there's too much capacity, you idol ship. So it's
Speaker 7: a bigger deal and it sounds and what's going to
Speaker 7: really play out here is that the major container shipping
Speaker 7: lines and I've spoken to three CEOs of the big
Speaker 7: ten ocean carriers in the last forty eight hours that
Speaker 7: most of them have either paused bookings to the region
Speaker 7: or really diverted. They've all stopped shipping inside the strait
Speaker 7: of form moves but many of them and said, hey,
Speaker 7: we're not going to take any bookings. And so what
Speaker 7: that means is these containers are going to sit at
Speaker 7: ports around the world, especially in East Asia, China and
Speaker 7: Southeast Asia and not move. And so you're going to
Speaker 7: start to get real congestion at those ports. And we've
Speaker 7: seen this movie before where that congestion can lead to
Speaker 7: spikes and prices and all kinds of problems.
Speaker 2: So around let's talk about that. Some people reflected on
Speaker 2: the Energy Shark of twenty two the conditions coming out
Speaker 2: of the pandemic.
Speaker 4: Are there parallels here? For you?
Speaker 7: I mean, you know, the history always seems to rhyme,
Speaker 7: and it is about that congestion and how it flows
Speaker 7: through the supply chain and builds up in unexpected places.
Speaker 4: And now it all depends on how long this lasts.
Speaker 7: If it lasts for a long time, you're going to
Speaker 7: see major reroutings.
Speaker 4: In fact, In fact, Flexport's.
Speaker 7: One of the largest providers of ocean freight in the world,
Speaker 7: and we built this new product called Atlas. It's Atlas
Speaker 7: dot flexport dot com where you can monitor all the
Speaker 7: ships in real time and see where they're sailing. And
Speaker 7: so it's actually going to be a big challenge for
Speaker 7: us to see can we keep this thing up today
Speaker 7: as the ships get diverted, as services are less reliable.
Speaker 7: We have seen that movie before, so yeah, I would
Speaker 7: expect to see it the services start to degrade and
Speaker 7: be more difficult to operate run.
Speaker 2: You've got great visibility on these things, so says Domino
Speaker 2: start to fall. Are you thinking about secondary bottlenecks that
Speaker 2: might emerge as well?
Speaker 4: And where might they emerge?
Speaker 7: Yes, I mentioned a few of those in unexpected places
Speaker 7: like congestion, but you can see pricing be a global
Speaker 7: phenomenon here.
Speaker 4: Ocean freight prices.
Speaker 7: We already we're right in the middle of contracting season.
Speaker 4: It's just starting to kicked off.
Speaker 7: And all the ocean carriers have told us this week,
Speaker 7: not all, but most of the ocean carriers and I
Speaker 7: think it'll be all pretty soon, have told us that
Speaker 7: all previous discussions on ocean freight contracts for this year
Speaker 7: out the window, that there's too much uncertainty, and they
Speaker 7: expect prices to go way up from where they are today.
Speaker 7: We're already hearing rumors of five thousand dollars a container
Speaker 7: from China to the US East Coast, which that's almost
Speaker 7: that's more than double where it's been for the last
Speaker 7: few months. So yeah, we're already seeing big spikes and
Speaker 7: that will lead to all kinds of secondary effects.
Speaker 2: Right, some of that, as you know, it might just
Speaker 2: be a reflection of extended transit times as well. Could
Speaker 2: you give us an idea as some of this traffic
Speaker 2: reroutes what the extension to transit times might be for say,
Speaker 2: traffic between Europe and Asia.
Speaker 7: Yeah, well, then in the ocean market, it's really just
Speaker 7: what which of these strings these services call in.
Speaker 4: Jebalali's the ninth largest port in the world.
Speaker 7: Abu Dhabi has a large poor there's several other important
Speaker 7: ports within the inside the Strait of Barmouth, So the
Speaker 7: first thing is okay, which services call there. Those are
Speaker 7: going to be heavily disrupted in because they're gonna have
Speaker 7: to stop and unload all of those containers. One of
Speaker 7: the Ocean CEOs I talked to you said they were
Speaker 7: going to unload it Oman. But of course the port
Speaker 7: of Oman got hit with a missal yesterday to a
Speaker 7: ship near Oman. So it's really difficult to say exactly
Speaker 7: how each carrier is going to reroute things, but that
Speaker 7: will for sure lead to service issues.
Speaker 4: Let's not forget the air freight market.
Speaker 7: Whereas the Middle East is a major hub for air freight,
Speaker 7: we estimate around eighteen percent of all the global cargo
Speaker 7: capacity for air freight has been taken offline just temporarily.
Speaker 4: We haven't seen planes get shot down.
Speaker 7: But temporarily, and a lot of you know, you have
Speaker 7: Emirates and Cuts are at the hot All of these
Speaker 7: are major cargo airlines that operate in that region, and
Speaker 7: Asia to Europe flights tend to go over either stop
Speaker 7: in the Middle East or fly directly over Iran, so
Speaker 7: just big disruptions to the air freight market as well,
Speaker 7: and there it's a relatively capacity constrained market. In general,
Speaker 7: you can see huge spikes in price from a small
Speaker 7: disruption and capacity.
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