Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm m keene Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Let's
Speaker 1: bring Nick Bannenbrook Show. Wes found our Securities head of
Speaker 1: Currency Strategy could montage in the great to have you
Speaker 1: with us the morning the price and sensitive bias. This
Speaker 1: is such a distorted bond market, and if you try
Speaker 1: and rationalize what's happening with buns based on fundamentals alone,
Speaker 1: I just think you're wasting your time. I mean, you
Speaker 1: know what's going to happen in the secondary market. It
Speaker 1: doesn't matter what price these things are at, there's gonna
Speaker 1: be a buyer. Well, I do agree with Lisa. I
Speaker 1: think it was interesting just you know how little demand
Speaker 1: there was in this particular auction. But to your point,
Speaker 1: I think Mario is going to keep on buying both
Speaker 1: Lemonade plus these German bonds as well as some others.
Speaker 1: I think perhaps one of the interesting things, or maybe
Speaker 1: one of the reasons this auction didn't go quite so
Speaker 1: well as there's you know, there's now a lot more
Speaker 1: discussion about German stimulus possibly down coming down the pike,
Speaker 1: and so maybe there's some investors out there thinking they
Speaker 1: might get you know, a little bit cheaper if they
Speaker 1: just hold out for a little bit. So maybe there's
Speaker 1: a bit of buying opportunity just down the line. Well,
Speaker 1: but but this, really, John Ry, is a really good point.
Speaker 1: Is this a tipping point or is this just a
Speaker 1: typical auction where they can't sell everything and there isn't
Speaker 1: huge bit discovery issue I think to be fear and
Speaker 1: I don't follow the sort of the German bond actions
Speaker 1: as closely as as the US bond options. I don't
Speaker 1: think it is a tipping point. I mean, certainly, I
Speaker 1: don't think the ECB is changing their tune rates. Yield
Speaker 1: are going to remain very low, So I think this
Speaker 1: is more likely to be a one off. I suspect
Speaker 1: if they had another auction it we'd go a little
Speaker 1: bit better. But I certainly don't think it's a sea change.
Speaker 1: Do you think that there is an underestimation of inflation
Speaker 1: at this point? Um No, I don't think so. You know,
Speaker 1: getting a little bit of inflation here in the United States.
Speaker 1: The surprising thing when we had sort of just the
Speaker 1: mess of expansion of balance sheets and the printing of
Speaker 1: money from all of the central banks was that you
Speaker 1: didn't get any inflation at all, And that I think
Speaker 1: reflected just the sort of the massive sort of balance
Speaker 1: sheet recession that we had. And I think, you know,
Speaker 1: having now gone a whole decade and that inflation hasn't
Speaker 1: showed up. I don't think there is an underestimate exture
Speaker 1: of inflation at this point, wouldn't it just to build
Speaker 1: on the question of least So I just wonder whether
Speaker 1: the boat has loaded too much to the one side,
Speaker 1: just in terms of pessimism around growth, of pessimism around inflation.
Speaker 1: Have we gone too far too quickly to the one side? Um,
Speaker 1: that's a reasonable point. I think if I was going
Speaker 1: to say, you know, is there too much pisima pissimism
Speaker 1: on inflation, I'd be more balanced on that. But I
Speaker 1: certainly would argue that on the growth side, arguably, I
Speaker 1: think people are a little pessimistic. Sure, a lot of
Speaker 1: the central banks are largely out of room, but there
Speaker 1: is still a few, you know, governments out there with
Speaker 1: a little bit of fiscal space. I mean, I think
Speaker 1: if the monetary authority on the fiscal authorities were to
Speaker 1: work together a little bit more cooperatively, that we could,
Speaker 1: you know, see a bit of a bounce back and
Speaker 1: growth at a time. John, I love that you picked
Speaker 1: up exactly where I was going. My concern as I
Speaker 1: look at the markets is, especially given Norways throwing in
Speaker 1: the towel on beds on the higher rates, that there
Speaker 1: seems to be capitulation and a strong consensus building. And
Speaker 1: whenever there's a strong consensus building, there can be a
Speaker 1: widowmaker trade just sitting there waiting to happen. And I
Speaker 1: just have to wonder, you know, the strong consensus right now,
Speaker 1: rates lower, inflation, more abound, the ECB, Morrow draggy continuing
Speaker 1: to buy that lemonade untill he you know, turns blue.
Speaker 1: I'm just wondering, you know, is there any argument against that?
Speaker 1: And are we getting to the point where we could
Speaker 1: see a pretty violent reversal on very small news simply
Speaker 1: because there is the strong consensus. I think that there
Speaker 1: is a chance that you see, you know, a reaction
Speaker 1: to small news. The problem or the issue, I think
Speaker 1: is that that the chance of that sort of news
Speaker 1: occurring is quite low and sort of going back into
Speaker 1: the past, I can think of the Taper tantrum back
Speaker 1: in two thousand and thirteen. I think it was when
Speaker 1: Banankee started to prepare the markets for the end of
Speaker 1: the uh FEDS bombuying, and you can go all the
Speaker 1: way back to where there was that like massive, you know,
Speaker 1: very sharp tightening cycle. But I think if you look
Speaker 1: around all the central bankers, if anything, they're more likely
Speaker 1: to surprise us on the downside as they're not. No
Speaker 1: one seems to be turning around and talking about tightening,
Speaker 1: so that that that surprise that you're talking about, I
Speaker 1: think it's a very low probability. So without in mind,
Speaker 1: neck got to get your currency kill in G ten
Speaker 1: Right now, the dollar, a lot of people were looking
Speaker 1: for a week of dollar. It hasn't materialized in the
Speaker 1: way that people thought it would. What's your base case
Speaker 1: at the moment, we were looking for a week of
Speaker 1: dollar and as you say, it hasn't materialized, so a
Speaker 1: little disappointing for us. But for right now we're looking
Speaker 1: for more range trading. So for the euro, you know
Speaker 1: one ten to one twelve through most of the year,
Speaker 1: Here's here's the thing. If you look at all of
Speaker 1: the central banks, they're all they're all using the all
Speaker 1: cutting rates in New Zealand, Australia Fiddle Reserve ECB. They're
Speaker 1: also not cutting rates as much as everybody wants to.
Speaker 1: If you look at the market pricing, everybody's out of
Speaker 1: head of these central banks. So we'd sort of go
Speaker 1: back a good decade or so and think about the
Speaker 1: carry trade. You know, everyone's going down. I don't think
Speaker 1: the currencies are going to move that fast, So be
Speaker 1: short the low yielding currencies and and be long that
Speaker 1: the high yorlding currencies. That suggests selling the Euro, the
Speaker 1: Aussy and the Qui all against the US dollar stronger
Speaker 1: US dollarvan Yeah, I think I think in the near
Speaker 1: to him rangey. But yes, if you're going to see
Speaker 1: any move, it's going to be dollar stronger and particularly
Speaker 1: against you know, the growth inside of currencies, so Ozzy
Speaker 1: Kiwi and and a lot of the emerging markets. What
Speaker 1: about of virgin markets currencies. Um, you know, we've seen
Speaker 1: some excitement there, quite a lot of excitement to the
Speaker 1: downside or the upside. Argentina, Turkey, so excitement to excitement
Speaker 1: to the downside, Brazil hasn't been doing quite so well recently. Um.
Speaker 1: For for for now, I think that probably in the
Speaker 1: next probably the next few months, we'd probably see a
Speaker 1: little more downside for um, you know, for some of
Speaker 1: these emerging currencies. Although you know, if we get to
Speaker 1: a point where where yields which are already incredibly low,
Speaker 1: go even lower, um, maybe some of these emerging currencies
Speaker 1: do bitter later on. It's great to catch up, Nick Bannenbrook.
Speaker 1: They're dropping by the studio here in New York. Last
Speaker 1: FARNGA Securities head of Currency Strategy, join us now, Ralph
Speaker 1: Price A Bank America Merrill Lynch International Global head of
Speaker 1: Rage Strategy. Ralph, walk me through what you're looking for
Speaker 1: over the next couple of days. It's the events that
Speaker 1: you've highlighted, I guess from my perspective sitting in London.
Speaker 1: The one thing I would add that you didn't mention
Speaker 1: as the CB accounts, because we do also have a
Speaker 1: lot of question marks about what the European Central Bank
Speaker 1: will be doing in a light of much more evidence
Speaker 1: of a slowdown in Europe compared to what the setters
Speaker 1: had to deal with so far. But that's exactly it.
Speaker 1: It's a question mark over whether or not the said
Speaker 1: cast to qualify what the market clearly took us a
Speaker 1: very disappointing right cut in July UM and whether UM
Speaker 1: German Power follows that up with any more elucidating comments
Speaker 1: in Jackson Hall itself. Are we asking for too much
Speaker 1: to see that in the minutes later this afternoon, Ralph,
Speaker 1: Because as we know, it looks like a very divided
Speaker 1: f m C, and that division could grow a little
Speaker 1: bit louder when you sift through these minutes a little
Speaker 1: bit later. Yeah, I would be surprised that the minutes
Speaker 1: I used to pre signal anything meaningful, given that the
Speaker 1: chair is going to be speaking later on, and that
Speaker 1: the that Jackson Hall will provide maybe a more nuanced
Speaker 1: explanation of what what the debate is actually well about
Speaker 1: within the firm, c Ralph. Are you worried at all
Speaker 1: about positioning right now in rates? The fact that there
Speaker 1: seems to be capitulation that rates are going to stay
Speaker 1: where they are or go lower. I'm always worried about positioning. UM.
Speaker 1: It's one of the things we do is status, but
Speaker 1: the absolutely right positioning on our So this has been
Speaker 1: flagging as being near extremes in particularly for the US
Speaker 1: for some time. UM. But the when you when you
Speaker 1: sift through the numbers in a bit more detail, the
Speaker 1: reason why people are long is because they're looking for hedges. Um.
Speaker 1: You know, the equity market remains near their highs. Tenure
Speaker 1: Treasury notes are regularly flagged as being the most efficient
Speaker 1: risk of hedge and in our surveys, So that is
Speaker 1: one big reason why people are long. It's not that
Speaker 1: they necessarily actually expect the FED to follow through and
Speaker 1: all the weight cuts that are currently priced, but they
Speaker 1: need an instrument to protect them against something going horribly
Speaker 1: wrong further down the line and ten your notes are
Speaker 1: providing that hedge at least for now that perspective, sorry,
Speaker 1: but you said at least for now. And that's actually
Speaker 1: what I wanted to pick up on, which is, at
Speaker 1: what point are yield so low and it's positioning so
Speaker 1: extreme the treasuries don't provide that hedge. I think we're
Speaker 1: quite a bit away from that, um in the sense
Speaker 1: that if you look at what the market pricing for
Speaker 1: the said Actually it's so if you ask in detail,
Speaker 1: you know, what is it you actually expect the FED
Speaker 1: to do what you see is a fairly bimodal distribution.
Speaker 1: So there's a few, well, the majority of arrestors around
Speaker 1: actually expect the FED to do what they said that
Speaker 1: it would do, which is that mid cycle adjustment. But
Speaker 1: then there's a very significant minority of investors who fear
Speaker 1: that the said may have to revisit the zero lower
Speaker 1: bound than expect great cuts of a Hunland fifty based
Speaker 1: points or more. When you're face to that kind of
Speaker 1: bimodal distribution, interpreting what the market is pricing is actually
Speaker 1: quite difficult because it is essentially just putting a line
Speaker 1: through those way two extremes. You know, the world might
Speaker 1: be okay, it might not um but the fact of
Speaker 1: the matter remains that if you worry about the FAT
Speaker 1: having to revisit the zero lower bound, then then you
Speaker 1: knowes do provide a lot of upside. Europe, I think
Speaker 1: is a very different matter. And and to your question
Speaker 1: about at what point do we run out of out
Speaker 1: of hedges, well, the thirty auction this morning in Germany
Speaker 1: clearly was a signal that there isn't actually that much
Speaker 1: end demand from investors when you're asking them to pay
Speaker 1: up for someone else to look after their money for
Speaker 1: them for the next thirty years. Rough you thought on
Speaker 1: how the yield curve is responding to the easing that
Speaker 1: is set to come from the e c B and
Speaker 1: is coming from the Federal Reserve. Typically, what we'd expect
Speaker 1: to happen is a ball statement to start to come
Speaker 1: through the curve in treasuries as the Fed starts to
Speaker 1: cut interest rates. It's not happening, Ralph. Why is it
Speaker 1: not happening? Um, It's not happening for a variety of reasons.
Speaker 1: So UM in the U S. I think what what
Speaker 1: is interesting about the inversion is not the fact that
Speaker 1: has happened, but the fact that it took so long.
Speaker 1: It is very, very unusual for the yield curve to
Speaker 1: start inverting after the beginning of the easing cycle, which
Speaker 1: is what we faced last week. What that is is
Speaker 1: a very clear signal that the market leaves that the
Speaker 1: Fed is somewhat behind the curve. UM. So, the the
Speaker 1: issue we have is that this is not a normal
Speaker 1: rate cut cycle where the Fed actually deliberately raised rates
Speaker 1: to meaningfully above neutral, thereby slowing down an economy that
Speaker 1: would otherwise have been overheating. No, this is any nomy
Speaker 1: that was basically recovering, you know, somewhat above trend. Who
Speaker 1: Um is being tripped up by a global manufacturing cycle
Speaker 1: that has slowed very materially and therefore is facing meaningful
Speaker 1: storm clouds on the horizon without actually an awful lot
Speaker 1: of evidence of weakness in the domestic economy so far,
Speaker 1: and that results in this you know, very wide distribution
Speaker 1: of possible outcomes that is being priced in. But the
Speaker 1: clearest reflection of that and that hedge demand is basically
Speaker 1: a yield curve that inverts after the beginning of the
Speaker 1: easing cycle. Europe is a very different cattle of fish
Speaker 1: because they'll be dealing with a policy talk kit that
Speaker 1: is considerably more constrained than the central bank that has
Speaker 1: buying large run out of ammunition. If we're honest of
Speaker 1: a perspective, the path of these diosistance is lower and flatter.
Speaker 1: So Ralph John has been trying to put me on
Speaker 1: this spot all morning with respect to that German thirty
Speaker 1: year auction, and I've been dodging it, I think pretty effectively.
Speaker 1: But I want to put you on the spot instead. Uh,
Speaker 1: And you know, basically is it an inflection point. You
Speaker 1: were saying that the pushback, the lack of demand that
Speaker 1: we saw seems to be some resistance to accepting losses,
Speaker 1: essentially to lend money. Um do you think that we
Speaker 1: have reached an inflection point in German burns now? I don't,
Speaker 1: um So. We actually see bundeals lower into your end
Speaker 1: um and there's a few key UM differences that would
Speaker 1: tease out relative to where we were in twenty fifteen,
Speaker 1: where a porten You auction kind of marked the beginning
Speaker 1: of the end of the bund valley before the bund
Speaker 1: Tantrum kicked off in Earnest. In April um number one
Speaker 1: economic surprises actually continued to be very negative, whereas in
Speaker 1: fifteen we were looking back at at a fairly meaningful
Speaker 1: turnaround in UM. In the data flow equally, pms remain
Speaker 1: at much weaker levels. The economic risks also much more
Speaker 1: clear and present in the sense of Brexit, in the
Speaker 1: sense of the threat of water town US, the weakness
Speaker 1: in Chinese data that has yet to be reflected in
Speaker 1: European data, and so on and so forth. Relative value
Speaker 1: is also another key issue, um SO. From the perspective
Speaker 1: of an f X hedge investor UM. So if I
Speaker 1: put myself in the shoes as someone sitting in the
Speaker 1: US running an f X hedge benchmark, they're looking at
Speaker 1: ten y yields in in buns, not as minus you know,
Speaker 1: sixty seventy basis points, but actually as you know, plus
Speaker 1: one point nine percent plus one point eight percent, providing
Speaker 1: meaningful pickup relative to tenure notes because of the the
Speaker 1: pickup that is implicit in the in the FX hedge,
Speaker 1: whereas back in on that metric, bonds are actually a
Speaker 1: hundred basis points of rich relative to treasuries. So from
Speaker 1: that perspective, I think it's very very difficult to um
Speaker 1: make the case for a tantrum. I think what would
Speaker 1: cause a tantrum in buns and and create that big
Speaker 1: turning point for bund yields is a change in the
Speaker 1: native So if the trade will ends tomorrow, then yeah,
Speaker 1: we can sell off obviously, but it has to end
Speaker 1: credit the um. If you get a fiscal policy impulse
Speaker 1: out of Germany, and but that I don't mean what
Speaker 1: the current constitutional rules allow for, but actually something that
Speaker 1: most people would understand a fiscal impulse and is something
Speaker 1: that is big and meaningful, then that obviously could provide
Speaker 1: a very different backdrop. If the Chinese were to start
Speaker 1: stimulating in a way that actually creates positives below the
Speaker 1: effects for the rest of the world, so infrastructure investment
Speaker 1: as opposed to monetary policy using and currency deppreciation, then
Speaker 1: that could potentially also change the narrative. But I think
Speaker 1: we're a long way away from seeing any of those
Speaker 1: things material is anytime soon. So from that perspective, um,
Speaker 1: you know, you are faced with the risk of unanchored
Speaker 1: inflation expectations becoming ever more intentioned in Europe, and that's
Speaker 1: not going to provide a big upsite for for the
Speaker 1: long end of the curve. Really smart final thoughts there,
Speaker 1: Ralph Price of their Banks of American mardal Inch, International
Speaker 1: Global head of Race Strategy. The narrative just running away
Speaker 1: with it south that Germany is somehow putting together a
Speaker 1: package and will preemptively tackle some of the problems in
Speaker 1: Germany and Europe. At the moment, I don't see it's
Speaker 1: not happening. I hope it does. The optics are certainly encouraging.
Speaker 1: It's positive that this is part of the discussion. I
Speaker 1: hope it happens, But just realistically speaking, I don't see
Speaker 1: it happening right now. Let's find out what Jane fully
Speaker 1: thinks that Jane Folly Rubber, big head of Effect Strategy,
Speaker 1: joining us now from London. Jane, Let's get started with
Speaker 1: the German fiscal stimulus. This idea that potentially, maybe perhaps
Speaker 1: in a downturn, they could abandon their balanced budget policies.
Speaker 1: How realistic is it that Germany would actually engage in
Speaker 1: a meaningful fiscal stimulus early enough to stave off a
Speaker 1: downturn that is really painful? Well, I mean, you can
Speaker 1: see from the outside looking in that they would appear
Speaker 1: to be a certain logic. Germany's budget position, for instance,
Speaker 1: looks more healthy than it's another large country, So from
Speaker 1: that spectives you can see the logic building up. The
Speaker 1: reality in Germany, however, is that a lot of the
Speaker 1: fiscal power is localized um and that means that from
Speaker 1: a practical perspective, it may not be that it may
Speaker 1: not be very straightforward or simple to actually make the
Speaker 1: decisions that bring forward a lot of fiscal stimulus. So
Speaker 1: it could actually be quite a difficult proposition to actually
Speaker 1: see through. So there will be more pressure. We've seen Germany,
Speaker 1: of course, printer and negative GDP growth q and key
Speaker 1: growth for for the second quarter. If we see another
Speaker 1: negative print for the third quarter IU technical recession, then
Speaker 1: clearly that pressure will build up and therefore there will
Speaker 1: be increased pressure and perhaps more momentum within Germany to
Speaker 1: to to ease those fiscal uh per strings. But um,
Speaker 1: it's not necessarily the foregone conclusion that some of the
Speaker 1: the commentary in the markets in the last few days,
Speaker 1: few weeks would lead to believe. I think I'm struggling
Speaker 1: to understand as we look at the interest rate picture
Speaker 1: and as we look at what central banks are doing.
Speaker 1: Certainly the e c B is preparing another round of
Speaker 1: stimulus on there, and given the fact that Germany is
Speaker 1: unlikely to come out with fiscal stimulus, I'm trying to
Speaker 1: understand the relationship between the monetary policy and the f
Speaker 1: X rates where where things are actually trading. I mean,
Speaker 1: at what point do central banks lose power over currency
Speaker 1: exchange rates? Well, of course, um, it's for an exchange
Speaker 1: is not just driven by by effects rates. There is
Speaker 1: a cause, an awful lot of political influence, and I
Speaker 1: think this is very much the case in the detail
Speaker 1: in the in the trance sort of Brexit sort of era.
Speaker 1: There's a lot of political risk there. Now. You could
Speaker 1: take in the Eurozone, you could take the Italian situation
Speaker 1: now and ask the question, well, you know, is that
Speaker 1: a negative euro fractor? Well, you know the answer to
Speaker 1: that is, well, potentially it is. I mean today perhaps
Speaker 1: because we've seen the markets reactor quite well to the
Speaker 1: most recent news from Italy, and that's the assumption that
Speaker 1: there may not be a snap election in the next
Speaker 1: couple of months, that might be delayed until next year.
Speaker 1: And therefore, if we're not having a snap election in
Speaker 1: the next couple of months, we don't therefore have a
Speaker 1: big budgetary conflict right now between Italy and the EU.
Speaker 1: That's potentially further down the road. But it is all
Speaker 1: about politics, i would say, as well as the economy,
Speaker 1: as well as infra distrect differentials. But the central banks
Speaker 1: certainly have a big part to pay play in foreign exchange.
Speaker 1: And what we have now is of cause a big
Speaker 1: emphasis on the September ECB policy meeting and a lot
Speaker 1: of speculation that the the ECB will use and a
Speaker 1: word that was used in the President in the last
Speaker 1: week of the Zooker that they could do something quite significant.
Speaker 1: And I think that one of the reasons that the
Speaker 1: euro has been under pressure quite lately is this perception
Speaker 1: that this isn't all about how much interestrate caps are
Speaker 1: said can do over the next year or so, so
Speaker 1: actually about where else and who else could be doing
Speaker 1: these interest rate moves, And certainly I think the ECB
Speaker 1: is right up there in the market's consciousness in the
Speaker 1: next few weeks. Well, Jane, if they moved to tearing
Speaker 1: on the deposit rate, it opens a new range of
Speaker 1: possibilities up for just how low interest rates could go
Speaker 1: at the u c B. Have you got a base
Speaker 1: case for that, Jane, on how low things could go
Speaker 1: for ECB deposit rates. It's it's very difficult to make
Speaker 1: that judgment right now, clearly, because it's difficult to know
Speaker 1: how bad the global economy can be and at a
Speaker 1: time make those sorts of assumptions. You've got to try
Speaker 1: and make a prediction on how far can tradeables go,
Speaker 1: how far can the relationship deteriorate between China and the
Speaker 1: US overall, so there's an awful lot of what if, which,
Speaker 1: of course it always are in forecasting, but it does
Speaker 1: the ECB don't want to use tearing immediately, but certainly
Speaker 1: I think if conditions did worsen, they may have to.
Speaker 1: You have a situation um where we are talking about
Speaker 1: the potential of quantity division in Australia, where they're talking
Speaker 1: about in September the Swiss National Bank cutting its interest
Speaker 1: rates below where they already are and that's minus not
Speaker 1: point seven five percent. So you have, um the the
Speaker 1: discussion about world countries such as Sweden or Denmark have
Speaker 1: to pass on negative rates to to retail deposits for instance,
Speaker 1: So that there's there's a there's an enormous argument and
Speaker 1: debate about how low can this really go and and
Speaker 1: how effective can these sorts of policies be and what
Speaker 1: sort of damage can they do in terms of the
Speaker 1: damage to the models for banks in Europe and and
Speaker 1: also for inequalities, weld in equalities, etceters. So there's a
Speaker 1: there's a huge debate um and certainly you know tearing
Speaker 1: is out there on the agenda as of a possibility
Speaker 1: for the for the u c B, but it's very
Speaker 1: difficult right now to to call the whens and how
Speaker 1: locan this goes. Just the final question you Jane, you're
Speaker 1: a dollar. There was a hope that we finally break
Speaker 1: out of these really tight, narrow trading ranges, and we
Speaker 1: just seem to have established a new one in and
Speaker 1: around one eleven one twelve on the single currency against
Speaker 1: the green bag. Jane, do you see us breaking out
Speaker 1: of that range anytime soon? And where's the path at
Speaker 1: least for resistance right now? Well, you know, I always
Speaker 1: tended to be below the market forecast for quite a
Speaker 1: while on near a dollar, and I've had one ten
Speaker 1: pencil dinners as a as a as a forecast for
Speaker 1: the end of this year, and to be honest with
Speaker 1: some part of parts of this year, and I've I've
Speaker 1: I've been so far out of consensus. I thought, you know,
Speaker 1: do I have to change this? But you know, right now,
Speaker 1: you know, we're pretty close to one ten, and I
Speaker 1: think we do have to address the risks about potentially
Speaker 1: going lower. And I think the answers to whether or
Speaker 1: not we can break below one ten are very much
Speaker 1: in what happens to European grows, what happens in terms
Speaker 1: of the the ECB, and and whether or not the
Speaker 1: market does continue to believe that we could get that
Speaker 1: stimulus in Germany or not. Jane, always great to catch
Speaker 1: out with you. Jane Foley, the head of FIC Strategy
Speaker 1: at Raumba Bank, joining us Santa the City of London
Speaker 1: on global foreign exchange and global central banking. We're so
Speaker 1: lucky to have with us Brian Hook, us special representative
Speaker 1: for Iran and Senior Palsy advisor to Secretary of State
Speaker 1: Mike Pompeio, joining us here in our eleven three Oh studios. Um,
Speaker 1: thank you so much, representative for being with us. I
Speaker 1: just want to start with where where are we in
Speaker 1: terms of the discussion with Iran, with the latest being
Speaker 1: this crew tanker leaving Gibraltar. Well, the Iranian regime uses
Speaker 1: oil sales to fund terrorism, and they use it to
Speaker 1: fund proxies like Hezbollah and Hamas and the Hoothies and Yemen.
Speaker 1: They use it to fund their missile program which has
Speaker 1: done so much to cause bloodshed and suffering throughout the
Speaker 1: Middle East. So right now we have the Islamic Revolutionary
Speaker 1: Guard CORES, which is using oil tankers to try to
Speaker 1: move oil covertly, and this vessel was seized by Gibraltar.
Speaker 1: It was unfortunately released and we are now tracking the
Speaker 1: movements of that tanker to our hard to do everything
Speaker 1: we can to avoid it from achieving its destination. So
Speaker 1: what has been the impact on Iran from you know,
Speaker 1: our efforts to kind of choke off their one of
Speaker 1: their key revenue streams, that being oil exports. Well, it's
Speaker 1: been enormously successful. When the President got out of the
Speaker 1: Iran deal, and may have last year, Iran was exporting
Speaker 1: two point five million barrels of oil a day. You
Speaker 1: may have seen press reports in June and July that
Speaker 1: showed Iranian exports around one hundred thousand barrels of oil
Speaker 1: and this um is three percent of the world's oil supply.
Speaker 1: But we have been able to maintain a very stable
Speaker 1: oil market because we've done a good job of balancing
Speaker 1: our national security objectives UH and our economic interests. But um,
Speaker 1: we have taken places to Iran. We have taken Iran
Speaker 1: two places it's never been historically. Oil revenues are their
Speaker 1: largest source of export revenue, and so much of that
Speaker 1: is controlled by the Revolutionary Guard Corps and the Kuds
Speaker 1: Force which is active around the Middle East and all
Speaker 1: these Arab civil wars, and so by cutting off the oil,
Speaker 1: we are denying the regime the revenue that it needs
Speaker 1: to conduct a violent and expansionist foreign policy is the
Speaker 1: ultimate goal regime change. No, the ultimate goal is a
Speaker 1: change in regime's behavior. And one of the ways you
Speaker 1: can do that. I think it was SISTERO who said
Speaker 1: that money is the sinews of war. Iran has less
Speaker 1: money today than it did two and a half years ago,
Speaker 1: and we took office. The regime is weaker and its
Speaker 1: proxies are weaker as a consequence of our maximum economic
Speaker 1: pressure campaign. So if it's not regime change in terms
Speaker 1: of the actual personnel, but regime behavior change, at what
Speaker 1: point will there be enough behavioral change? What's the sort
Speaker 1: of threshold for saying, Okay, we can relax these sanctions
Speaker 1: and move forward with some diplomacy. Apart from this, well,
Speaker 1: the diplomacy option has been open for the last couple
Speaker 1: of years. The President and Secretary and the Secretary of
Speaker 1: State had made clear repeatedly that they would like to
Speaker 1: resolve our differences with Iran diplomatically. Iran has rejected diplomacy
Speaker 1: too many times. They rejected the diplomatic overtures of Japanese
Speaker 1: Prime Minister Abe when he visited Iran for the first
Speaker 1: time any Japanese Prime minister has ever visited Iran. Not
Speaker 1: only did the Supreme Leader of Iran reject his diplomacy,
Speaker 1: he then blew up a Japanese oil tanker for good measure.
Speaker 1: President McCrone has also um been on the receiving end
Speaker 1: of Iranian rejections, and so we're intensifying our sanctions. We
Speaker 1: are helping Iran to see that the that the costs
Speaker 1: of trying to pursue a nuclear program, a missile program,
Speaker 1: and regional aggression are simply too high. So pulling out
Speaker 1: of the Iran agreement initially by President Trump, many argued
Speaker 1: that that was destabilizing the region. What is your response
Speaker 1: to that? It was the Iran nuclear deal that has
Speaker 1: come at the expense of regional stability. And if you
Speaker 1: read the Iran Nuclear Deal all hundred and forty seven
Speaker 1: seven pages, in the beginning, it talks about how this
Speaker 1: deal will promote regional peace and stability. Iran used the
Speaker 1: sanctions relief and spent it on Assad in Syria, on
Speaker 1: Hezbollah in Lebanon, on its proxies in Iraq, on the
Speaker 1: Houthis and Yemen, and on Hamas. And as a consequence,
Speaker 1: the Iran Deal allowed the Iranian regime to achieve record
Speaker 1: levels of military spending and record levels of support for
Speaker 1: its proxies. Since we have taken office, UM, Iran's proxies
Speaker 1: are weaker. The first year we were in office, Iran's
Speaker 1: military budget went down ten percent, and then in the
Speaker 1: second year it went down twenty eight percent. We have
Speaker 1: had stories in the New York Times and the Washington
Speaker 1: Post doc commenting how American sanctions have weakened Iran's proxies.
Speaker 1: This is a good thing for the Middle East. How
Speaker 1: important is it to the administration to have coordination and
Speaker 1: cooperation with Europe? Oh, It's very important. I'm in almost
Speaker 1: regular daily contact with my counterparts in the UK, France
Speaker 1: and Germany. Yesterday we had a very good meeting with
Speaker 1: the Polish Foreign Minister. UM. We are I think the
Speaker 1: press has overstated our disagreements the Transatlantic rift that the
Speaker 1: press likes to report. We agree on much more than
Speaker 1: we disagree. When I'm in the room with the Brits
Speaker 1: and the French and the Germans, we share the same
Speaker 1: threat assessment about Iran, the regional aggression, the ballistic missile testing,
Speaker 1: the missile proliferation, UH the nuclear program. The world's leading
Speaker 1: sponsor of terrorism can never be allowed to have a
Speaker 1: nuclear weapon or even to come close to it. There's
Speaker 1: no disagreement there. We have tactical disagreements over the Iran
Speaker 1: nuclear deal. We have more leverage outside of the deal
Speaker 1: to prevent Iran from gtting a nuclear weapon then inside
Speaker 1: of it. That's a tactical disagreement, but we don't disagree
Speaker 1: on the end state. Thank you so much for being
Speaker 1: with us. Brian Hook, US Special representative for Iran and
Speaker 1: senior policy advisor to Secretary of State Mike Pompeo. We incredit,
Speaker 1: we appreciate your time. Thanks for listening to the Bloomberg
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keene before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio.