WEBVTT - Surveillance: Ukraine Risks with Hormats 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.200 and of course on the Bloomberg Terminal. I have a 0:00:30.280 --> 0:00:33.479 summer reading list, but with the events going on, you 0:00:33.600 --> 0:00:36.680 need a late winter in spring reading list. And it's 0:00:36.760 --> 0:00:39.920 real stimple, so simple. I should say you need to 0:00:39.960 --> 0:00:45.159 read Angela's Stent and Elizabeth Economy. On Stent it's Putin's world, 0:00:45.320 --> 0:00:49.440 and for Elizabeth Economy it is the widely anticipated the world. 0:00:49.840 --> 0:00:53.599 According to China, her books have been definitive for decades. 0:00:53.760 --> 0:00:57.160 Dr Economy joins us this morning with the Hoover Institute. Liz, 0:00:57.200 --> 0:01:00.400 congratulations on the new effort. At the bottom of the book. 0:01:00.440 --> 0:01:04.720 After the Olympics, after Ukraine, you talk about the China reset. 0:01:05.080 --> 0:01:09.679 What is the reset towards the Party Congress? So yeah, 0:01:09.680 --> 0:01:12.360 the Party Congress, the twentie Party Congress is coming this 0:01:12.520 --> 0:01:17.440 fall October or perhaps November. Uh Hi Jinping will likely 0:01:17.480 --> 0:01:20.760 be reselected for his third term as General Secretary of 0:01:20.800 --> 0:01:24.639 the Communist Party. He has no amassed an enormous amount 0:01:24.640 --> 0:01:29.800 of institutional authority. Ruthless Lee rooted out his political enemies, 0:01:29.800 --> 0:01:32.319 whether in the Communist Party or you know, in the 0:01:32.360 --> 0:01:35.960 broader civil society. Uh, say a word against Hijin Ping 0:01:36.160 --> 0:01:40.920 and you will be disappeared for four years or eighteen years. Um. 0:01:41.120 --> 0:01:44.000 And so this will mark I think the beginning of 0:01:44.080 --> 0:01:46.640 the third term, uh for Stijn Ping, the third five 0:01:46.720 --> 0:01:49.640 year term. You know, he's got, as you say, he's 0:01:49.680 --> 0:01:52.320 got an ambitious agenda ahead of him. Um. You know 0:01:52.840 --> 0:01:55.480 again robust Chinese Communist Party at the fore from the 0:01:55.480 --> 0:02:01.360 political system, doubling per capita GDP by five, rostering the 0:02:01.560 --> 0:02:03.840 p l A. So got to see what he's able 0:02:03.880 --> 0:02:06.360 to do. It's all great, But to be honest, you've 0:02:06.400 --> 0:02:10.400 been absolutely original and saying he's more fragile domestically than 0:02:10.480 --> 0:02:14.919 we perceive. Do you stand by that absolutely? I mean, 0:02:14.960 --> 0:02:18.239 I think we can look just back to that first month, 0:02:18.720 --> 0:02:22.639 second month after the COVID pandemic broke out in China, Uh, 0:02:22.680 --> 0:02:25.040 and look at what happened on the internet when you had, 0:02:25.400 --> 0:02:28.040 you know, a week or so of freedom on the 0:02:28.080 --> 0:02:30.720 internet and you had you know, million people and more 0:02:30.760 --> 0:02:34.160 calling for freedom of speech and criticizing the government. Of 0:02:34.200 --> 0:02:36.720 course you didn't pain went and hunted them all down afterwards. 0:02:37.400 --> 0:02:40.080 But but I think we have to be uh, sort 0:02:40.080 --> 0:02:42.440 of a tune to the fact that just because we 0:02:42.440 --> 0:02:45.600 don't see dissent within the system, that it doesn't exist. 0:02:46.160 --> 0:02:49.680 Just because he's a mass institutional authority doesn't mean he 0:02:49.720 --> 0:02:52.920 has the full legitimacy that he would have if he 0:02:52.960 --> 0:02:56.400 were in you know, an electoral system. Uh. China is 0:02:56.600 --> 0:03:00.440 as polarized, even maybe more so than the United States, 0:03:00.960 --> 0:03:04.480 along gender lines, along ethnic lines. You have the battle 0:03:04.520 --> 0:03:08.000 between the entrepreneurs like Jack Ma, you know, who are 0:03:08.040 --> 0:03:11.360 being crushed right now, and the bureaucratic class, and you 0:03:11.480 --> 0:03:14.920 have this, you know, yawning gap in terms of income inequality. 0:03:15.080 --> 0:03:17.560 So I think it's you know, we we tend to 0:03:17.600 --> 0:03:21.240 focus on what she says, this grand vision of China 0:03:21.280 --> 0:03:24.679 proclaiming its centrality on the global stage. But you're very 0:03:24.760 --> 0:03:28.399 right to point to what's going on inside China, uh, 0:03:28.440 --> 0:03:31.520 and the kinds of challenges that she did. In basis, Elizabeth, 0:03:31.520 --> 0:03:34.480 doesn't matter if public sentiment is souring on j JM. Ping, 0:03:34.760 --> 0:03:38.800 or is Jim Ping's predominance over the entire region pretty 0:03:38.840 --> 0:03:41.480 much guaranteed regardless, And it just matters how hard Hell 0:03:41.520 --> 0:03:45.200 clamped down. So I think it does matter. Um, I 0:03:45.240 --> 0:03:48.160 think you know, it doesn't matter in the sense I don't. 0:03:48.200 --> 0:03:50.200 I'm not predicting that you're going to have, you know, 0:03:50.320 --> 0:03:53.800 mass protests on the Chinese street calling for the downfall 0:03:53.840 --> 0:03:55.680 of Sheet and Ping. But I think where it matters 0:03:55.760 --> 0:03:58.600 is that if you have enough Headman's white, a really 0:03:58.600 --> 0:04:02.800 slowing Chinese economy, the international pressures that are coming to 0:04:02.880 --> 0:04:06.720 bear on China currently right, He's he's you know, created 0:04:06.960 --> 0:04:09.600 so many of his own problems with regard to countries, 0:04:09.640 --> 0:04:12.920 for example, in Europe or in parts of Asia. So 0:04:12.960 --> 0:04:16.040 if you have these headwinds coming, you can have people 0:04:16.040 --> 0:04:19.119 in the Chinese elite, other leaders who aren't happy about 0:04:19.160 --> 0:04:22.640 the direction in which China is moving the country. Right again, 0:04:22.680 --> 0:04:24.880 this crack down on the sort of what's been the 0:04:24.920 --> 0:04:28.280 most innovative and creative part of the Chinese economy, right, 0:04:28.360 --> 0:04:32.640 the fintech sector. Uh, you can have that sentiment that 0:04:32.800 --> 0:04:36.760 broader of popular sentiment can feed into uh sort of 0:04:36.800 --> 0:04:39.600 the other leader's claim that something needs to change, that 0:04:39.720 --> 0:04:42.800 Chi needs to take a step back. So I think 0:04:42.800 --> 0:04:45.599 there can be a constellation of forces that could course change, 0:04:45.839 --> 0:04:48.599 not predicting it, but I think we have to again 0:04:48.640 --> 0:04:51.520 remain at the possibility at the same time. Right now 0:04:51.560 --> 0:04:54.520 we're looking at the mounting Russia Ukrainian conflict, and sort 0:04:54.560 --> 0:04:56.640 of on the on the heels of this, you get 0:04:56.680 --> 0:04:59.960 this tightening relationship between Vladimir Putin and Chiesi and pay 0:05:00.120 --> 0:05:03.400 and this idea that if Urashia is somehow caught off, 0:05:03.680 --> 0:05:06.280 cut off from the Western world, Ji Jumping could come 0:05:06.320 --> 0:05:11.400 to his rescue. How close is that alliance? You know, Look, 0:05:11.480 --> 0:05:16.000 Russia and China have had a long history of working together, 0:05:16.040 --> 0:05:18.800 for example and United Nations, and and really since two 0:05:18.800 --> 0:05:22.880 thousand and fourteen, you've seen the relationship become closer. Trade 0:05:22.960 --> 0:05:26.920 has increased slowly, but Russia remains a major arms supplier 0:05:26.960 --> 0:05:29.440 to China. They've increased the number and the scope of 0:05:29.480 --> 0:05:34.320 their joint military exercises. When She Jumping gave a speech 0:05:34.320 --> 0:05:36.400 in Moscow a couple of years back, he said that 0:05:36.400 --> 0:05:41.440 Plutin was his best friend in the international community. UH. 0:05:41.480 --> 0:05:44.240 And we saw, of course, yes, the joint statement during 0:05:44.240 --> 0:05:48.160 the Olympics where they basically call for a new world order. 0:05:48.680 --> 0:05:52.080 UH and so I think the relationship is close, doesn't 0:05:52.080 --> 0:05:55.039 mean that there aren't problems. Also, I think it bears 0:05:55.080 --> 0:05:59.760 noting that the China's ambassador to Ukraine last month put 0:06:00.120 --> 0:06:04.680 peace in Ukrainian newspaper saying that China supported Ukrainian sovereignty. 0:06:05.440 --> 0:06:08.279 So I do think China would probably come in and 0:06:08.400 --> 0:06:13.040 backfill for Russia economically to help out. But I don't 0:06:13.080 --> 0:06:16.120 think that there's sort of undelivered support for for any 0:06:16.120 --> 0:06:20.080 sort of Russian military action in Ukraine by by the Chinese. Um. 0:06:20.960 --> 0:06:24.240 I want to go back to the combination of Angela's 0:06:24.240 --> 0:06:27.960 stents work at brookings In and your work as well. 0:06:28.440 --> 0:06:32.080 Angela's stent talks about the risk. Then we end up 0:06:32.120 --> 0:06:37.280 going back to Yalta in a tripolar international relations where 0:06:37.279 --> 0:06:42.400 it is about America, Russia and a nascent China. Is 0:06:42.440 --> 0:06:45.479 that what China wants? I mean this, China want a 0:06:45.560 --> 0:06:49.000 new y Alta where it's just a triangulation and that's it. 0:06:50.640 --> 0:06:54.120 I don't. I don't think so. I think China views, uh, 0:06:54.320 --> 0:06:57.560 you know, it's rise on the global stage. Um, you know, 0:06:57.600 --> 0:07:00.200 it's hope is to surpass the United States. I think 0:07:00.240 --> 0:07:03.159 it looks at as at Russia largely as a junior 0:07:03.279 --> 0:07:04.760 partner in all of this. I mean, I think the 0:07:04.800 --> 0:07:08.120 Russian economy is about a tenth the size that of China, 0:07:08.640 --> 0:07:11.120 and so I don't in many respects, I don't think 0:07:11.120 --> 0:07:15.160 that China looks at Russia as a completely equal partner. Um. 0:07:15.200 --> 0:07:18.320 I think Jing's vision is focused, you know, squarely on 0:07:18.400 --> 0:07:22.080 the future of China and China's efforts to reclaim centrality 0:07:22.120 --> 0:07:25.080 on the global stage. You know, it's looking to redraw 0:07:25.120 --> 0:07:28.080 the map of the Asia Pacific, to push the United 0:07:28.120 --> 0:07:32.720 States out as the regional hedgemon, to invent Chinese values 0:07:33.160 --> 0:07:36.800 and policy preferences globally, to the to the extent that 0:07:36.880 --> 0:07:40.200 Russia supports China in that effort, to the extent that 0:07:40.240 --> 0:07:44.440 it bolsters China's efforts. I think China welcomes Russia's support, 0:07:44.680 --> 0:07:46.680 but I don't. I don't think it looks out at 0:07:46.680 --> 0:07:48.120 the world and thinks that they are going to be 0:07:48.120 --> 0:07:51.880 three equal you know, partners sitting around a table, Russia, China, 0:07:52.160 --> 0:07:55.040 and the United States, as always wanderful to hear from 0:07:55.040 --> 0:07:58.440 you the absolutely brilliant Elizabeth Economy of the Hoover Institute 0:07:58.440 --> 0:08:06.000 there right now, we are honored to bring you Robert 0:08:06.040 --> 0:08:10.760 Horbett's ambassador Hormats with titament of social advisors. I should say, 0:08:11.160 --> 0:08:15.880 in his work within various Republican and Democratic administrations, he 0:08:15.920 --> 0:08:19.080 has tart and feathered as a member of the Clinton clan. 0:08:19.440 --> 0:08:23.080 But what you don't know is Hormats has eleven thousand, 0:08:23.480 --> 0:08:27.960 two hundred pages five point six linear feet and the 0:08:28.040 --> 0:08:31.840 gerald Ford Library from his work with President four years ago. 0:08:31.920 --> 0:08:35.520 We're thrilled at Bob Hormats could join us this morning. Bob, 0:08:35.600 --> 0:08:38.720 I I look at your work over time, and I 0:08:38.760 --> 0:08:41.000 want to go back to you as a newly minuted 0:08:41.040 --> 0:08:44.720 freshman at Toughs University. And there was a small matter 0:08:44.800 --> 0:08:49.439 of the Cuban missile crisis only years before we allowed 0:08:49.559 --> 0:08:54.040 Krishcheff to save face. How do we allow Putin to 0:08:54.200 --> 0:08:58.719 save face? Well, I think if there's a way that 0:08:58.880 --> 0:09:03.760 putentn saved face, sits to recognize that the Russians, as 0:09:03.800 --> 0:09:11.199 Angela sent has said, have a deep historical affinity for Ukraine. 0:09:12.040 --> 0:09:15.640 It's very closely connected to the Russian Orthodox Church. A 0:09:15.640 --> 0:09:19.080 lot of Russian Ukrainian history are tied up with one another. 0:09:19.600 --> 0:09:23.880 And Russia perceives that it has a right to have 0:09:24.320 --> 0:09:29.440 an influence, if not control, over Ukraine. It's part of 0:09:29.559 --> 0:09:34.520 Russia's notion of having an expanded influence in the New era, 0:09:34.679 --> 0:09:39.280 just as the Soviet Union did in that region decades ago. 0:09:40.520 --> 0:09:44.400 I think that the thing that he wants, probably most 0:09:45.320 --> 0:09:49.199 is a very clear indication, if not a firm commitment, 0:09:49.800 --> 0:09:53.680 that Ukraine will not join NATO. How do we thread 0:09:53.720 --> 0:09:56.360 that needle? That's critical? How do we do that when 0:09:56.559 --> 0:10:01.040 the Secretary says we want an open door policy. I 0:10:01.080 --> 0:10:03.600 think you can do it in the way we've done 0:10:03.640 --> 0:10:06.000 it in the Middle East, in a curious way, and 0:10:06.040 --> 0:10:09.440 that is you're not definitive about it. You simply say 0:10:09.440 --> 0:10:12.280 there are no plans and no media plans, and no 0:10:12.440 --> 0:10:18.440 medium term plans for Ukraine joining NATO without giving up 0:10:18.880 --> 0:10:23.120 the right of the Ukrainians and a NATO to bring 0:10:23.200 --> 0:10:27.160 NATO bring Ukraine Indian NATO at some given points. So 0:10:27.640 --> 0:10:31.679 you don't make a definitive commitment not to have Ukrainian NATO, 0:10:31.880 --> 0:10:34.120 but you make it very clear that there are no 0:10:34.200 --> 0:10:38.400 plans in the immediate future to do so. Ukrainians have 0:10:38.520 --> 0:10:41.199 more or less said that, and NATO is more or 0:10:41.240 --> 0:10:44.200 less said that. Man enables him to go back to 0:10:44.360 --> 0:10:47.480 his people and say, look, this is not gonna happen 0:10:47.480 --> 0:10:50.720 anytime soon. Don't worry about it. It's probably not gonna 0:10:50.760 --> 0:10:54.400 happen at all without us giving up the right to 0:10:54.559 --> 0:10:58.000 have a joint if it wants to. Based on the 0:10:58.040 --> 0:11:00.720 diplomat the diplomatic tea leaves that were hearing out of 0:11:00.760 --> 0:11:03.160 all sides, does it make sense to you that there 0:11:03.240 --> 0:11:08.080 is a relative complacency in the oil market. No, it 0:11:08.120 --> 0:11:13.000 does not, because if there's any small chance of an invasion, 0:11:13.120 --> 0:11:15.800 and Tony blancoln Is more or less said that he 0:11:15.920 --> 0:11:19.640 thought there was a high probability that would be very 0:11:19.679 --> 0:11:23.560 disruptive of the of the oil and the gas markets both. 0:11:24.040 --> 0:11:27.440 Russia is a major supplier the pipeline. At least one 0:11:27.480 --> 0:11:30.760 of the two pipelines will probably be shut down. The 0:11:30.840 --> 0:11:35.040 notion that we would sell oil or gas to Western 0:11:35.080 --> 0:11:39.040 Europe in an inflationary environment, already in the United States 0:11:39.840 --> 0:11:44.800 should be concerned enough to be wary of what oil 0:11:44.840 --> 0:11:48.240 prices would do in the event of war. Well, but 0:11:48.360 --> 0:11:51.480 there is this argument that Russia does not want that, 0:11:51.480 --> 0:11:55.280 that Russia wants to maintain its dominance over oil supply 0:11:55.360 --> 0:11:58.560 and gas supply to Europe. How much does that get 0:11:59.040 --> 0:12:02.800 become an overly factored in aspect at a time when 0:12:02.960 --> 0:12:05.280 Vladimir Putin definitely seems like he has a point that 0:12:05.320 --> 0:12:10.040 he wants to make. Well, that's one of the dilemmas 0:12:10.080 --> 0:12:13.040 Russia has at this point, and that is Russia clearly 0:12:13.080 --> 0:12:15.640 wants to be a major supplier of gas and oil 0:12:15.720 --> 0:12:19.800 to Europe and a war would disrupt that, disrupt that 0:12:19.880 --> 0:12:25.560 quite since severely. Um So if when when Kutin makes 0:12:25.600 --> 0:12:28.839 his calculations about whether there should be a war, he's 0:12:28.840 --> 0:12:31.400 going to have to look at the Russian economy, which 0:12:31.480 --> 0:12:34.920 is no great shanks at this point and UH and 0:12:35.240 --> 0:12:38.800 and recognize that the oil market which is key to 0:12:38.880 --> 0:12:42.680 the Russian economy and the gas market, particularly oil is key, 0:12:42.760 --> 0:12:44.920 and that that would be disruptive and that would send 0:12:44.920 --> 0:12:50.160 them very negative blow to UH, to the Russian economy 0:12:50.400 --> 0:12:53.680 which he wants to bolster. So he culely once he 0:12:53.800 --> 0:12:55.800 he can't really have it both ways. If he's once 0:12:55.840 --> 0:12:58.800 have a war, he's going to have to suffer severe 0:12:58.840 --> 0:13:02.400 economic consequence is and those would come through disruption in 0:13:02.440 --> 0:13:05.120 the oil mark britiant and tremendous times. You want the 0:13:05.120 --> 0:13:08.360 shy with us as owis bub homats of tam And Advices. 0:13:14.040 --> 0:13:16.640 Kelsey Barrel has one of the toughest jobs on Wall Street. 0:13:16.880 --> 0:13:19.040 There's a guy named Michael. She's got a report too, 0:13:19.080 --> 0:13:22.080 and he is tough as nails. And that what what 0:13:22.120 --> 0:13:25.920 that means is pro acuity. We do not talk about 0:13:25.920 --> 0:13:33.040 overnight index swaps. That is massive, massive inside fixed income baseball. 0:13:33.280 --> 0:13:35.480 It's something you'd see in chapter twenty three of Frank 0:13:35.559 --> 0:13:38.520 for Bosey. Kelsey Barrel joins us now from JP Morgan 0:13:38.840 --> 0:13:42.079 Asset Management. And what you're focused on is not the 0:13:42.120 --> 0:13:45.839 spot overnight index swap, but out a couple of years 0:13:45.920 --> 0:13:49.400 translate from mere mortals. Yeah. Absolutely, So the oh I 0:13:49.480 --> 0:13:51.559 asked curve, what it shows us the forward, OH I 0:13:51.640 --> 0:13:53.800 asked curve is the path for the Fed funds rate 0:13:54.040 --> 0:13:58.360 not just this year but into And one of the 0:13:58.400 --> 0:14:01.120 things that is really into resting about the curve right 0:14:01.120 --> 0:14:03.800 now is it's actually started to invert. So the market 0:14:03.880 --> 0:14:08.640 is pricing in rate cuts. And this is unusual because, 0:14:08.920 --> 0:14:13.480 I mean, the economy is still extremely strong, five average 0:14:13.559 --> 0:14:16.720 job growth per month UM, yet we're seeing these cuts. 0:14:16.800 --> 0:14:19.960 And the bottom line is this will continue until the 0:14:20.000 --> 0:14:22.800 market has proven wrong. They need to see the cut happen. 0:14:23.160 --> 0:14:26.080 They need to see the economy not breakdown as a 0:14:26.120 --> 0:14:28.440 result of higher rates. That's the only way you get 0:14:28.440 --> 0:14:30.680 that higher terminal rate that everyone's talks. So, for you 0:14:30.760 --> 0:14:33.600 and me, our world stops Friday night at seven pm. 0:14:33.680 --> 0:14:35.880 That's okay, hold on, I'll have another drink, but I've 0:14:35.880 --> 0:14:39.640 got to read JP Morgan Weekly Prospects right now. Farole 0:14:39.720 --> 0:14:42.720 and company are going to publish tonight off the FED 0:14:42.880 --> 0:14:47.640 speak today? Can the FED Speak today move your world? Now? 0:14:48.040 --> 0:14:50.160 I don't think the Fed Speak is going to move 0:14:50.160 --> 0:14:52.480 the world. This is what I noticed from the minutes. 0:14:52.520 --> 0:14:54.360 And I know you don't like to read the minutes, 0:14:54.600 --> 0:14:57.000 but let me just tell you about what what is 0:14:57.480 --> 0:15:01.760 was not said in the minutes. Right did a research, Tom, 0:15:02.080 --> 0:15:04.840 she did a research. It's not about what they said, 0:15:04.840 --> 0:15:06.800 it's actually the words they didn't say. So let me 0:15:06.840 --> 0:15:12.240 tell you or the words they didn't say transitory. Transitory 0:15:12.320 --> 0:15:14.920 is completely gone from the lexicon to the two other 0:15:14.920 --> 0:15:19.120 words they didn't say, gradual or steadily or measured. They 0:15:19.160 --> 0:15:22.600 have completely refused to categorize this site. So you get 0:15:22.640 --> 0:15:24.840 out in front of Bruce Casman now and talking fifty 0:15:24.880 --> 0:15:27.760 beeves for sure. Yeah, if the market is allowing it. 0:15:28.120 --> 0:15:30.480 They're going to rock through that door. Well, Michael was there. 0:15:30.520 --> 0:15:32.360 I caught up with Bob earlier this week, causey he 0:15:32.400 --> 0:15:34.880 wants to say fifty. What he said Cowsey was interesting, 0:15:34.920 --> 0:15:36.840 and I know you two work really closely with each other. 0:15:37.160 --> 0:15:39.080 It's what happens if we don't get a fifty basis 0:15:39.080 --> 0:15:41.680 point hike. He actually thinks we get an adverse reaction 0:15:41.680 --> 0:15:43.760 because the market starts to believe they have not got 0:15:43.760 --> 0:15:46.440 control of this. What would you look for? Right, So, 0:15:46.480 --> 0:15:49.120 the market doesn't like to be surprised, and the Fed 0:15:49.160 --> 0:15:51.560 doesn't like to surprise the market. And so if the 0:15:51.600 --> 0:15:55.000 market is pricing in a high probability of fifty basis points, 0:15:55.360 --> 0:15:57.480 the Fed should take that opportunity to take it as 0:15:57.480 --> 0:15:59.960 a blessing and go with it. I mean, I think 0:16:00.080 --> 0:16:02.160 the thing here is that they want the market to 0:16:02.240 --> 0:16:04.960 follow the data, and the data over the last couple 0:16:05.000 --> 0:16:06.680 of weeks, we got the CPI report, we got the 0:16:06.680 --> 0:16:09.480 payrolls report with the backward divisions for the full year. 0:16:10.080 --> 0:16:12.920 All we're seeing is that the economy is still red hot. 0:16:13.200 --> 0:16:16.280 And unless Powell comes out and walks this market back, 0:16:16.520 --> 0:16:18.920 if the market is pricing fifty basis points the FED 0:16:18.960 --> 0:16:21.760 should walk through that door. Let's talk about credit strategy. Now, 0:16:22.000 --> 0:16:25.840 what is it councy? So in credit, we're still seeing 0:16:25.840 --> 0:16:28.800 some opportunities, but we really do want to start focusing 0:16:28.800 --> 0:16:32.040 on getting higher in quality and focusing on structures that 0:16:32.080 --> 0:16:37.560 are shorter duration, so that's things like securitized credit bank loans. 0:16:37.600 --> 0:16:39.360 And I'd also like to say, you know, we're looking 0:16:39.400 --> 0:16:42.280 at e M local this year, which is a really 0:16:42.280 --> 0:16:44.880 interesting one because you'd think with the central banks on 0:16:44.920 --> 0:16:47.320 the move, this would not be a good time for 0:16:47.640 --> 0:16:50.400 emerging market local debt, but actually it's been one of 0:16:50.440 --> 0:16:53.000 the only areas of the fixed income market that has 0:16:53.040 --> 0:16:56.680 had positive returns. And my observation here is that e 0:16:56.840 --> 0:16:59.920 M central banks, who were hiking like crazy in twenty 0:17:00.000 --> 0:17:03.480 twenty one, I've actually had the foresight and and the 0:17:03.520 --> 0:17:07.720 diligence that DM central banks didn't have UM, and we're 0:17:07.760 --> 0:17:10.280 the ones that were hiking rates now have the cushion 0:17:10.359 --> 0:17:13.360 and have been able to withstand more of this volatility 0:17:13.600 --> 0:17:16.080 UM this year with the d M central banks moving 0:17:16.119 --> 0:17:18.440 forward Kelsey. Until a couple of weeks ago, the FED 0:17:18.480 --> 0:17:21.119 has really dominated all headlines with respect to markets, and 0:17:21.160 --> 0:17:24.520 now we're being distracted or perhaps dominated by the Russia 0:17:24.600 --> 0:17:28.520 Ukraine conflict. There's been a huge divide into what the 0:17:28.520 --> 0:17:32.040 FED response would be and what the market response would 0:17:32.119 --> 0:17:36.720 be should the escalation continue to get worse. What's your 0:17:36.800 --> 0:17:38.639 view in terms of does it make it more likely 0:17:38.680 --> 0:17:41.959 for the FED to go and hike more quickly or less? Yeah, 0:17:42.080 --> 0:17:45.159 so in the very near term, we know that treasuries 0:17:45.200 --> 0:17:47.640 serve as a safe haven, a flight to quality. They 0:17:47.640 --> 0:17:49.800 go to the most liquid point on the curve, that's 0:17:49.800 --> 0:17:52.080 seven to ten year point. That's what's going to rally 0:17:52.200 --> 0:17:54.880 when there's a lot of uncertainty. But when I look 0:17:54.920 --> 0:17:57.160 at the minutes, going back to those minutes, they mentioned 0:17:57.160 --> 0:18:00.680 geopolitical tensions a number of times, and they only mentioned 0:18:00.720 --> 0:18:05.159 it in the context of higher inflation upside inflation risks. 0:18:05.480 --> 0:18:08.840 So I don't think that this conflict is going to 0:18:08.920 --> 0:18:12.480 stop the FED from removing accommodation. This is the key 0:18:12.520 --> 0:18:14.879 concern for a lot of people who are relying on 0:18:14.920 --> 0:18:17.359 the FED as a put and maybe not explicitly, and 0:18:17.400 --> 0:18:19.679 they realize that it's not going to be But what 0:18:19.840 --> 0:18:22.560 is the implication for a market that could potentially be 0:18:22.600 --> 0:18:25.520 torpedoed by an economy that's slowing in the face of 0:18:25.560 --> 0:18:28.120 these higher oil prices, in the face of faster inflation, 0:18:28.160 --> 0:18:31.600 but with the FED that does not respond. The FED 0:18:31.720 --> 0:18:34.159 is in a very challenging spot. I mean, we've been 0:18:34.200 --> 0:18:36.879 saying this for a while and it really hasn't gotten 0:18:36.920 --> 0:18:39.600 any better. So I think the FED is going to 0:18:39.720 --> 0:18:43.240 need to watch financial conditions closely. And you know, at 0:18:43.280 --> 0:18:47.119 this point, financial conditions are still very easy, um. And 0:18:47.160 --> 0:18:50.600 so they watch that. I know they watch credit spreads UM. 0:18:50.640 --> 0:18:53.960 And at this point, although they are wider on the year, UM, 0:18:54.000 --> 0:18:57.320 you know, there isn't an issue with companies being able 0:18:57.359 --> 0:18:59.960 to get the liquidity that they need during the Committee 0:19:00.040 --> 0:19:03.160 expects it will soon be appropriate to raise the target range. 0:19:03.200 --> 0:19:06.800 The Committee decided to have lunch beginning in February. The 0:19:06.800 --> 0:19:10.720 Committee will increase, It's all I'm reading. This is more 0:19:10.800 --> 0:19:13.520 boring than I expected. Cassie came out with the cold 0:19:13.560 --> 0:19:17.000 this year, um before almost everybody else, which was the 0:19:17.119 --> 0:19:19.960 CP will hike this year Council, you said it in 0:19:20.000 --> 0:19:22.439 early January. Then all of a sudden wake off the 0:19:22.480 --> 0:19:25.560 wake off the week, everybody started to join in. What 0:19:25.760 --> 0:19:28.280 changes for the FED this time around? When the e 0:19:28.400 --> 0:19:31.800 c B is set to get involved as well. So 0:19:31.880 --> 0:19:36.000 sell offs in US treasury yields are not generally sustainable 0:19:36.119 --> 0:19:39.239 unless they're global in nature, because what happens, and we 0:19:39.280 --> 0:19:43.560 saw this in for example, is that when the FED 0:19:43.600 --> 0:19:46.439 tries to go on its own, the dollar strengthens, that 0:19:46.520 --> 0:19:50.000 tightens financial conditions, and the Fed ultimately has to back down. 0:19:50.040 --> 0:19:52.640 The fact that all the central banks are moving together 0:19:53.200 --> 0:19:56.879 is very very powerful. So the ECB, sure, you know, 0:19:57.320 --> 0:19:59.920 they're they're still a long way behind the Fed. They 0:20:00.119 --> 0:20:02.000 they want to see wage growth, they have to end 0:20:02.119 --> 0:20:05.760 quee um before they focus on raising rates, but they're 0:20:05.840 --> 0:20:08.280 they're going to get there. And then I'll just say 0:20:08.359 --> 0:20:10.400 the next shoot a job and and you know this 0:20:10.480 --> 0:20:12.800 is still far out in the horizon, but this is 0:20:12.840 --> 0:20:14.879 these are the types of things that we're really thinking 0:20:14.880 --> 0:20:17.760 about further out in the futures. What happens with the 0:20:17.800 --> 0:20:20.640 b o J and their yield curve target, What happens 0:20:20.680 --> 0:20:23.920 when um Kuroda ends up moving out of the position 0:20:23.960 --> 0:20:26.440 and someone else comes in and we start to see 0:20:26.440 --> 0:20:30.320 inflation move higher. Because right now inflation there it's still negative, 0:20:30.359 --> 0:20:32.399 but there's a lot of distortions there, so we do 0:20:32.480 --> 0:20:36.280 actually think inflation is still low in Japan, but we 0:20:36.320 --> 0:20:39.760 could be getting closer to positive inflation fairly soon. Corona 0:20:39.840 --> 0:20:41.520 is the last man standing. What would track him a 0:20:41.520 --> 0:20:45.120 wife from all of VISCOUNC. So not in the near term, 0:20:45.200 --> 0:20:47.760 he's going to stay put. We just saw that the 0:20:47.760 --> 0:20:51.400 Bank of Japan continued to UH to defend their yield 0:20:51.440 --> 0:20:54.199 curve target, so they're not in any rush. Nothing is 0:20:54.200 --> 0:20:56.240 really putting the same pressure on them. You know, they 0:20:56.240 --> 0:20:59.760 still have negative inflation, whereas they don't need to deal 0:20:59.800 --> 0:21:03.040 with headline of seven eight percent inflation like the U 0:21:03.200 --> 0:21:06.080 s has. So they're not going to step away anytime soon. 0:21:06.320 --> 0:21:10.760 But when you think about what causes a more meaningful 0:21:10.840 --> 0:21:14.800 repricing and term premium across developed market nations, you you 0:21:14.840 --> 0:21:17.320 have to think behind beyond the US, and you have 0:21:17.400 --> 0:21:19.119 to think about the B O, J, the E, C, 0:21:19.280 --> 0:21:22.000 B and all of them moving together. Cassie, next time, 0:21:22.000 --> 0:21:25.280 one pm Friday, we will rate the minutes on blimberg 0:21:25.400 --> 0:21:29.720 Row Yote you know that read them on surveillance to 0:21:30.080 --> 0:21:32.600 J P. Muilgan Asset Management. Cassie, thank you very much. 0:21:38.280 --> 0:21:40.720 Let us get right to it. Andrew shoots with us, 0:21:41.080 --> 0:21:44.240 writing a wonderful summary of the Morgan Stanley View and 0:21:44.320 --> 0:21:48.280 this on cross asset analysis of course of London. Andrew, 0:21:48.280 --> 0:21:50.520 good morning, What will you write this weekend? I don't 0:21:50.520 --> 0:21:53.000 care about I'm gonna front run your clients right now. 0:21:53.280 --> 0:21:55.719 I want to know the theme that you're focused on 0:21:56.119 --> 0:21:59.320 as you write this weekend. Well, look at Yeah, I 0:21:59.359 --> 0:22:01.640 think the thing that been very focused on is this 0:22:01.760 --> 0:22:03.960 idea that the year could really be kind of the 0:22:04.040 --> 0:22:07.280 year of three acts or three parts. And I do 0:22:07.400 --> 0:22:09.480 think we're in the hardest part right now. You know, 0:22:09.560 --> 0:22:12.440 it's the first quarter where the growth uncertainty is the highest, 0:22:12.800 --> 0:22:15.600 where the inflation uncertainty is the highest, because inflation is 0:22:15.680 --> 0:22:17.760 high and it hasn't yet started to come down yet. 0:22:18.160 --> 0:22:20.560 Where the policy uncertainty is the highest, because we haven't 0:22:20.600 --> 0:22:23.240 yet had that very important March meeting where the FED 0:22:23.320 --> 0:22:24.600 is going to give us I think, quite a bit 0:22:24.600 --> 0:22:27.960 more detail about how it's thinking on policy and where 0:22:27.960 --> 0:22:31.200 the geopolitical risk is the highest. And so I think 0:22:31.240 --> 0:22:33.320 these are still major issues to the market. These are 0:22:33.320 --> 0:22:36.320 still reasons we're not advising investors to buy the dip, 0:22:36.440 --> 0:22:38.760 so to speak, but these are also factors that could 0:22:38.760 --> 0:22:41.520 look very different as we're thinking about you know, April 0:22:41.600 --> 0:22:43.919 and May, and I think that's also something that's important 0:22:43.920 --> 0:22:45.560 to keep in mind. Andrew, know how close do you 0:22:45.600 --> 0:22:48.159 work with Mike Wilson, And over the last few weeks, 0:22:48.240 --> 0:22:50.120