WEBVTT - Surveillance: U.S.-China Talks with Blackwill 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz jay Leie, we bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance, an Apple podcast, SoundCloud, Bloomberg 0:00:23.360 --> 0:00:29.720 dot Com, and of course, on the Bloomberg Terminal. Robert 0:00:29.720 --> 0:00:33.199 Blackwill a senior fellow at the Council on Foreign Relations 0:00:33.240 --> 0:00:36.640 and Bloomberg opinion columnist Robert Let's stout here, how do 0:00:36.680 --> 0:00:40.800 you convince a foreign country of the responsibility that comes 0:00:40.800 --> 0:00:45.559 with great power? Well, I don't think you convince a 0:00:45.640 --> 0:00:49.440 foreign country or most any of uh, buddy else by 0:00:49.880 --> 0:00:54.040 hectoring them or constantly lecturing them. I hope the President 0:00:54.120 --> 0:00:59.160 will begin the conversation with she by essentially saying, UH, 0:00:59.360 --> 0:01:02.480 we have a problem here. Uh. We may see the 0:01:02.600 --> 0:01:06.959 situation Ukraine somewhat differently, but we both both want to 0:01:07.280 --> 0:01:10.880 first have a cease fire and then find uh an 0:01:10.920 --> 0:01:14.000 equitable way to end this war. And I hope you'll 0:01:14.040 --> 0:01:18.280 start like that and not start with your on the 0:01:18.319 --> 0:01:23.559 wrong side of history or uh with threats. It seems like, Robert, 0:01:23.600 --> 0:01:26.000 we have a superpower on the global stage that has 0:01:26.040 --> 0:01:29.959 a very different interpretation of the responsibility that comes with power. 0:01:30.240 --> 0:01:32.279 And Robert, I wonder if this is something you see 0:01:32.440 --> 0:01:35.560 repeating again and again over time, or whether a situation 0:01:35.600 --> 0:01:38.600 evolves within China where they start to change, they start 0:01:38.640 --> 0:01:43.720 to change their approach. Well. Uh, First of all, Uh, 0:01:43.760 --> 0:01:46.759 I wouldn't put it quite as you did. Uh. China 0:01:46.880 --> 0:01:50.840 has a different interpretation of its vital national interests than 0:01:51.000 --> 0:01:55.080 we wish it did. And essentially, I believe the Chinese 0:01:55.200 --> 0:01:59.560 leadership things that the United States is determined to stop 0:01:59.680 --> 0:02:03.560 its rise, to contain it, if you will, and they 0:02:03.600 --> 0:02:08.720 see everything through beginning with she that optic. And so 0:02:08.880 --> 0:02:11.560 what we have to do, I think is, first of all, 0:02:11.639 --> 0:02:15.359 while of course remaining strong and resolute and defending our 0:02:15.440 --> 0:02:18.360 national interests, we have to try to persuade them that 0:02:18.520 --> 0:02:21.839 isn't the case. And that's the context in which this 0:02:21.919 --> 0:02:26.359 conversation will have happened this morning. I would remark that 0:02:26.520 --> 0:02:31.359 yesterday the Chinese government issued a statement saying they hope 0:02:31.440 --> 0:02:35.400 that this conversation, which will happen in a little over 0:02:35.440 --> 0:02:38.320 half an hour between the two leaders, will be an 0:02:38.320 --> 0:02:43.600 opportunity to try to begin the improvement generally of the U. S. 0:02:43.720 --> 0:02:48.279 China relationship. So I hope that's in fact the perspective 0:02:48.360 --> 0:02:52.240 the President has, while of course making the points that 0:02:53.200 --> 0:02:59.520 China UH will if it seeks to support Russia to 0:02:59.560 --> 0:03:04.160 get a on the sanctions, will UH itself have a 0:03:04.200 --> 0:03:07.600 serious cost. Ambassador, do you think that it's realistic for 0:03:07.760 --> 0:03:11.000 China to want to send weapons, to want to send 0:03:11.080 --> 0:03:17.280 military support to Russia. Well, again, we don't know, I 0:03:17.320 --> 0:03:21.480 believe whether that's actually happened. We have a leak from 0:03:22.520 --> 0:03:24.639 or lead perhaps even on the record from the U. S. 0:03:24.680 --> 0:03:31.160 Intelligence community UH that Russia asked for UH such weapons. 0:03:31.919 --> 0:03:33.640 We don't I think, have a leak of what the 0:03:33.720 --> 0:03:39.200 Chinese response was. But certainly if it makes a decision 0:03:39.800 --> 0:03:43.960 to UH supply Russia with weapons in the context of 0:03:44.000 --> 0:03:48.040 this war, it will be a further, very serious blow 0:03:48.240 --> 0:03:54.040 again on US China relations, the most serious one in many, 0:03:54.080 --> 0:03:58.040 many years. Ambassador. I noticed a line in one of 0:03:58.040 --> 0:04:00.560 your recent Bloomberg opinion pieces that released stuck out to me. 0:04:00.640 --> 0:04:03.200 Russia will remain a threat so long as Putin leads it. 0:04:03.400 --> 0:04:07.440 China will remain a challenge irrespective of its leader. That 0:04:07.560 --> 0:04:10.280 is a much longer term view, And how do you 0:04:10.320 --> 0:04:14.920 think the immediate need to focus on Eastern Europe detracts 0:04:14.960 --> 0:04:20.360 from a longer term strategic pivot towards China towards Asia. Well, 0:04:20.640 --> 0:04:24.640 my colleague Richard Fontane and I wrote a recent uh 0:04:24.800 --> 0:04:29.000 op ed for Bloomberg exactly on this subject. Uh. There 0:04:29.120 --> 0:04:33.240 was a bipartisan agreement in Washington one if a few 0:04:33.320 --> 0:04:38.040 one might say, sadly UH that uh United States should 0:04:38.120 --> 0:04:43.040 reorient its foreign policy toward Asia. That of course, has 0:04:43.080 --> 0:04:46.800 been turned on its head by the recent events in 0:04:47.000 --> 0:04:53.720 Ukraine and the brutal Russian invasion of Ukraine. Now I 0:04:53.760 --> 0:04:58.080 think without any doubt, we're going to have to moderate that, uh, 0:04:58.240 --> 0:05:01.520 that pivot to Asia. It will be slower and less 0:05:01.640 --> 0:05:06.440 encompassing because we have to first stabilize Europe along with 0:05:06.520 --> 0:05:10.440 our allies, and that will mean more US troops in 0:05:10.520 --> 0:05:13.960 Europe forward deployed in the Eastern Europe. And we have 0:05:14.120 --> 0:05:17.599 to I think, do more in the Middle East. Uh. 0:05:17.880 --> 0:05:22.720 Since the Obama administration Middle East frenzy, United States have 0:05:22.880 --> 0:05:26.279 been uh convinced we're leaving the Middle East. We have 0:05:26.440 --> 0:05:29.360 to disabuse them of that notion. And it's only if 0:05:29.400 --> 0:05:33.000 we can have stability in the Middle East and in 0:05:33.040 --> 0:05:36.440 Europe to a much greater extent than at present. Will 0:05:36.480 --> 0:05:40.080 we be able to make a full fledged pivot to Asia. 0:05:40.520 --> 0:05:42.039 We'll be just a fund of question from me looking 0:05:42.040 --> 0:05:45.120 ahead to next week and the talks. You've been inside 0:05:45.160 --> 0:05:47.920 government many times, you understand the inner workings of events 0:05:48.000 --> 0:05:50.680 like this. You need to arrive in Europe next week 0:05:50.680 --> 0:05:53.640 with some deliverables for the President of the United States 0:05:53.640 --> 0:05:56.680 to meet with foreign leaders next week, and what do 0:05:56.680 --> 0:05:59.640 you think they would be. Well, first of all, we 0:05:59.680 --> 0:06:02.960 have to what happens between now and then, and Russia 0:06:03.080 --> 0:06:07.640 seems to be escalating. Uh. They attacked the viv for 0:06:07.680 --> 0:06:12.159 the first time overnight. UH. If that continues, and let's 0:06:12.920 --> 0:06:15.679 keep in mind the danger of Russian use of chemical 0:06:15.760 --> 0:06:19.800 weapons against Ukrainian cities, then obviously there will be an 0:06:19.920 --> 0:06:25.440 escalation in our reaction. But I think the primary in 0:06:25.480 --> 0:06:30.360 the absence of that, the primary UH presidential objective will 0:06:30.400 --> 0:06:35.039 be to keep this alliance together UH to UH UH. 0:06:35.080 --> 0:06:38.840 And it's been remarkable. I think most people did not 0:06:39.000 --> 0:06:42.680 believe the alliance would act as resolutely as it has 0:06:42.800 --> 0:06:47.360 to this tragedy. To keep them together and to prepare 0:06:47.440 --> 0:06:52.720 for UH next steps that Russia putin might take in 0:06:52.839 --> 0:07:01.800 order to further the destruction of Ukrainian cities. Incredibly incredibly united, Robert, 0:07:01.800 --> 0:07:03.440 We're lucky to have you with us this morning. Thank you, 0:07:03.480 --> 0:07:06.400 sir Robert Blackpool. There on the talks between China and 0:07:06.440 --> 0:07:14.960 the United States. My Shoemac of the global head of 0:07:15.000 --> 0:07:17.760 Race Strategy at Wells Fargo joins us. Now, Mike, if 0:07:17.760 --> 0:07:19.760 you've been surprised by how much weight we've had it 0:07:19.840 --> 0:07:21.080 to the front end of the yield curve, and he 0:07:21.200 --> 0:07:24.120 surprised to some degree how easily we've shaken off some 0:07:24.160 --> 0:07:28.280 of the comments of this fed this week. I haven't surprised. 0:07:28.520 --> 0:07:31.080 It's been just amazing, frankly, to watch the action at 0:07:31.080 --> 0:07:33.600 the front end of the US and it's it's driven 0:07:33.640 --> 0:07:36.360 by so many factors, have fed other central banks to 0:07:36.440 --> 0:07:38.560 degree in The inflation outlook at the front end has 0:07:38.560 --> 0:07:41.480 been incredibly volatile. I'm sure you'ld up a time and 0:07:41.560 --> 0:07:44.480 we thought they the people on by our expectations, there's 0:07:44.480 --> 0:07:47.320 not much. The curve is starting to get messy, Mike. 0:07:47.400 --> 0:07:49.760 Seven year year olds above tens saw a bit of that, 0:07:49.800 --> 0:07:52.280 with five threes almost coming there threatening to do that 0:07:52.720 --> 0:07:56.160 yesterday morning. The yield curve is starting to invert. It's 0:07:56.200 --> 0:07:59.040 flatter at the long end, twos tens twenty three basis 0:07:59.080 --> 0:08:02.440 points to thirties. Let's call it fifty two down four 0:08:02.480 --> 0:08:04.760 basis points today. Again, how do you think that evolves 0:08:04.800 --> 0:08:07.840 in the coming months, Mike, it's flatter still if you 0:08:07.920 --> 0:08:10.240 look at the forward grades. Johnal Price, let's say twos 0:08:10.280 --> 0:08:12.640 tends to be completely flat and three or four months 0:08:12.640 --> 0:08:15.320 something along those lines, I think you could actually invert 0:08:15.440 --> 0:08:17.760 before then. We've been telling clients you've got to think 0:08:17.840 --> 0:08:20.440 outside the box of bit here. This is an incredibly 0:08:20.520 --> 0:08:23.600 unusual situation. The inflation backdrop as you need in the 0:08:23.680 --> 0:08:27.080 last thirty or forty years. It's possible twos tends inverts 0:08:27.120 --> 0:08:29.560 to the tune of fifty basis points or more by 0:08:29.600 --> 0:08:31.040 the end of the year. But as far as the 0:08:31.080 --> 0:08:35.520 path forward flatter, more painful for a lot of institutions. So, Mike, 0:08:35.559 --> 0:08:37.840 a lot of people are wondering whether an inverted yield 0:08:37.880 --> 0:08:40.800 curve still means a recession. And I'll go a step further. 0:08:41.080 --> 0:08:44.000 Does an inverted yield curve in and of itself cause 0:08:44.160 --> 0:08:47.680 a recession? As we were talking about the potential earlier today, 0:08:47.760 --> 0:08:51.000 what's your view on this, I'd say no to both lisas. 0:08:51.000 --> 0:08:53.440 So there is a very good relationship between curve shape 0:08:53.440 --> 0:08:57.160 and future economic growth. Let's say prior to the financial crisis. 0:08:57.160 --> 0:09:00.040 Since then, central banks have been so active buying on 0:09:00.120 --> 0:09:03.000 so you've really broken that way. So the ability of 0:09:03.040 --> 0:09:05.839 the curve shapeless, say to predict t DP growth out 0:09:05.840 --> 0:09:08.079 twelve months eighteen months sets diminished a lot, So I 0:09:08.080 --> 0:09:10.600 wouldn't worry so much about the predictive power. But I 0:09:10.600 --> 0:09:13.040 think the second question is really interesting in terms of 0:09:13.720 --> 0:09:17.160 does a flatter curve felt cause recession? And it probably 0:09:17.160 --> 0:09:20.280 contributes in particular when you think about the financial sector. 0:09:20.920 --> 0:09:24.680 If your basic businesses barley along and you say, well, 0:09:24.920 --> 0:09:26.920 what can I do? Or you want to I want 0:09:26.920 --> 0:09:29.440 to borrow along, you want to lend short more flipping around, 0:09:29.520 --> 0:09:31.400 you can't really do much of the curve is flat, 0:09:31.480 --> 0:09:34.040 so that intermediation function doesn't work for it well, and 0:09:34.120 --> 0:09:36.960 I think that takes away a lot of profitability opportunities 0:09:36.960 --> 0:09:39.320 for banks and even for the shadow things. So flatter 0:09:39.360 --> 0:09:42.040 curve is tough for financials and therefore it's tough for 0:09:42.040 --> 0:09:44.520 the whole system. And there's also an additional yield curve 0:09:44.600 --> 0:09:47.200 that Tom Saturas of Strateigues, who was on our show 0:09:47.240 --> 0:09:49.880 earlier this morning, was talking about that if you see 0:09:50.200 --> 0:09:54.080 the FED funds rate get higher than that two year rate, 0:09:54.360 --> 0:09:56.960 that that actually hurts the people who need it the most, 0:09:57.240 --> 0:10:00.400 and what you get is a causative effect on main street. 0:10:00.400 --> 0:10:03.680 I'm wondering from your from your perspective, whether you agree 0:10:03.720 --> 0:10:05.720 with that, with you think the FED should back off 0:10:05.760 --> 0:10:08.800 from raising rates as much as perhaps they're talking about 0:10:08.800 --> 0:10:13.000 and lean more heavily on the balance sheet. No, I don't. Actually, 0:10:13.000 --> 0:10:15.840 when you think about the let's say the inflation backdrop 0:10:15.920 --> 0:10:17.600 right now, it's terrible. And I think if you talk 0:10:17.679 --> 0:10:19.280 to most people out there in the US, and we 0:10:19.320 --> 0:10:22.160 all do this in our daily lives, inflation is everywhere 0:10:22.240 --> 0:10:24.360 you can't really avoid. So what the FED needs to 0:10:24.360 --> 0:10:27.600 do very simply to step up and fight inflation. That's 0:10:27.679 --> 0:10:30.200 very abundant from an economic perspective, it's very far from 0:10:30.200 --> 0:10:33.240 the political perspective. That's what the FED needs to get 0:10:33.280 --> 0:10:35.520 done is to fight inflation. Put that genie back in 0:10:35.600 --> 0:10:38.120 the bottle. So he needs to raise the funds rate 0:10:38.120 --> 0:10:40.080 a number of time acts. You can't focus simply on 0:10:40.120 --> 0:10:42.280 the balance sheet. Balance sheets a nice add on, but 0:10:42.760 --> 0:10:45.839 it really has to leave the FED funds in my opinion. Well, 0:10:45.880 --> 0:10:48.160 let's talk further about the balance sheet, with which Jerome 0:10:48.200 --> 0:10:50.840 pal did not really get to do much on Wednesday. 0:10:50.880 --> 0:10:52.760 Maybe he will more next week when we hear from 0:10:52.800 --> 0:10:57.000 him twice, but he basically equated that runoff to the 0:10:57.040 --> 0:11:00.720 equivalent of a hike. How do you view it, Mike, Yeah, 0:11:00.760 --> 0:11:02.800 I think the FED struggles in terms of that equation. 0:11:03.040 --> 0:11:05.360 From my perspective, it's a little bit different. Basa will 0:11:05.400 --> 0:11:08.160 compare apples to bananas, doesn't take that much sense. But 0:11:08.240 --> 0:11:10.840 what the balance sheet does, in our view, is really 0:11:10.840 --> 0:11:14.640 addresses risk appetite very directly. So if you think about 0:11:14.679 --> 0:11:16.880 the basic trade during the year of quantity of easy, 0:11:16.880 --> 0:11:19.640 and it's pretty simple. When in central banks buy more 0:11:19.679 --> 0:11:21.959 bonds and you're supposed to buy more stocks. That's worked 0:11:21.960 --> 0:11:24.800 really well. Now if you flip it, you'd say, well, okay, 0:11:24.880 --> 0:11:27.080 if the FED and other central banks are reading in 0:11:27.120 --> 0:11:29.760 the balance sheet, that's probably a pretty big negative for 0:11:29.880 --> 0:11:32.000 risk assets. So I think that stands out and the 0:11:32.080 --> 0:11:34.440 FED can take some froth out of that market. The 0:11:34.480 --> 0:11:36.760 other thing I suspect the FED and other central banks 0:11:36.760 --> 0:11:39.880 are trying to accomplish is to limit that neel curb 0:11:39.920 --> 0:11:43.040 inversion limited that flattening. So if the FED backs away 0:11:43.080 --> 0:11:46.079 from buying tenuere treasury, it's twenty of your treasuries, etcetera. 0:11:46.480 --> 0:11:49.160 You should all else equals. See those yields go up, 0:11:49.320 --> 0:11:53.400 so that should help limit the downside from the flatter curve. Well, 0:11:53.440 --> 0:11:55.719 if you say QT could be a sizeable negative for 0:11:55.840 --> 0:11:59.520 risk assets, do you think risk assets are appropriately pricing that? 0:12:01.480 --> 0:12:03.839 I suspect probably not. I think that when you look 0:12:03.880 --> 0:12:07.040 at the risk asset landscape right now, it's been driven 0:12:07.120 --> 0:12:10.480 primarily by the overall idea that yes, central banks will 0:12:10.520 --> 0:12:12.520 tight and that's a bat then and secondly it forced 0:12:12.520 --> 0:12:16.480 the big commodity spike. So balance sheet probably is number three, 0:12:16.679 --> 0:12:18.920 and at least from my perspective, I think that the 0:12:19.080 --> 0:12:21.880 risk markets have not fully priced it. So which was 0:12:21.920 --> 0:12:24.680 asked to which risk market? Excuse me? It is a 0:12:24.679 --> 0:12:31.160 Friday is most underpriced for this potential risk. It's hard 0:12:31.160 --> 0:12:33.520 depending on onely. So, but when you think about risk 0:12:33.600 --> 0:12:36.280 appetite across the board, I'd say I would focus on 0:12:36.320 --> 0:12:38.960 the central banks and the most involved QT. So the 0:12:39.000 --> 0:12:42.120 FED probably leads the way, followed by banking with Banker Canada. 0:12:42.160 --> 0:12:46.040 So within those markets, whether it's high yield bonds of equities, 0:12:46.040 --> 0:12:48.040 tough to sort of parce those differences. But I would 0:12:48.080 --> 0:12:50.679 go to the dice or parts of risk. So within 0:12:51.280 --> 0:12:53.440 markets do you want to focus on and you think 0:12:53.480 --> 0:12:55.720 the risk is more susceptible to the high end? I 0:12:55.720 --> 0:12:58.679 think it is the the assets that typically the higher 0:12:58.760 --> 0:13:02.080 data most likely to be most impacted by this cut 0:13:02.080 --> 0:13:04.640 back and balancy. The reason why I ask Michael is 0:13:04.679 --> 0:13:07.560 because there's a lot of disagreement about how much momentum 0:13:07.600 --> 0:13:10.960 there is in the US economy, withstand the potential for 0:13:11.040 --> 0:13:13.800 two point eight percent FED funds rate, withstand some of 0:13:13.800 --> 0:13:16.280 the rate hikes that you and others are saying is 0:13:16.320 --> 0:13:19.280 absolutely necessary in order to curtail what you see as 0:13:19.360 --> 0:13:23.760 dangerous inflationary pressures. So at this point, do you think 0:13:23.920 --> 0:13:26.840 that the FED can actually orchestrate a soft landing at 0:13:26.880 --> 0:13:30.880 a time when they're diverging viewpoints and diverging data points 0:13:30.920 --> 0:13:34.600 underpitting the economy. It'll be very difficult to pull off 0:13:34.600 --> 0:13:36.480 the soft landing, I think least so it was always 0:13:36.480 --> 0:13:38.160 going to be a challenge when you think about the 0:13:38.240 --> 0:13:40.400 massive amount of stimulus in the system, over the last 0:13:40.440 --> 0:13:43.760 couple of years, both monetary and fiscal, the rebound from 0:13:43.800 --> 0:13:47.199 COVID on top of that commodities play. That's an incredibly 0:13:47.240 --> 0:13:49.680 big ask to talk about a soft landing, so it 0:13:49.720 --> 0:13:51.920 was always going to be tough. I think it's gotten 0:13:52.000 --> 0:13:54.839 much cover. The chance of it happening probably is following 0:13:54.920 --> 0:13:57.160 by the day. So it's a fifty fifty. Maybe it's 0:13:57.160 --> 0:13:59.679 probably not much better than that. All right, Mike, We've 0:13:59.679 --> 0:14:02.679 talked to out risk assets, we've talked about the bond market. 0:14:02.679 --> 0:14:05.000 Can I just get your thoughts quickly on the dollar, which, 0:14:05.280 --> 0:14:07.920 in light of everything we heard from the Fed this week, 0:14:08.000 --> 0:14:12.160 is heading forward its biggest weekly declined since early February. Yeah, 0:14:12.200 --> 0:14:15.000 we think that's a mistake. We're actually valuables and it's interesting. 0:14:15.000 --> 0:14:17.160 You can think about this from two perspectives. Really, if 0:14:17.160 --> 0:14:19.800 you look back over the last the last couple of 0:14:19.840 --> 0:14:21.760 years and also just over the last couple of months, 0:14:21.760 --> 0:14:24.240 the dollar has emerged as the top safety, so that 0:14:24.240 --> 0:14:27.080 should be a win if the Ukrainian situation intensifies, which 0:14:27.120 --> 0:14:29.840 seems likely over the next month or two. And secondly, 0:14:29.880 --> 0:14:33.640 if you focus on really only meat and potatoes types 0:14:33.680 --> 0:14:36.280 of things in effects it's interest rate differentials, and I 0:14:36.280 --> 0:14:39.840 would say that the Laiciam Marbue there's more potential for 0:14:39.880 --> 0:14:43.200 the market to increase its expectations for hiking from the 0:14:43.240 --> 0:14:46.040 FED than there is from the ECB, probably from the 0:14:46.080 --> 0:14:48.720 Bank of Angels that also should benefit the dollars were 0:14:48.720 --> 0:14:51.760 actually very positive in a stollar right now. My Shoemaker, 0:14:52.000 --> 0:14:55.240 thank you fantastic coal earn this year on the pond market. 0:14:55.320 --> 0:15:02.400 My Shoemaker there of last f commits, Sky joined us 0:15:02.400 --> 0:15:06.640 now chief research strategist to Alpha Simplex Katy three this year. 0:15:06.680 --> 0:15:09.560 Can we just work through that? What would happen if 0:15:09.600 --> 0:15:12.040 they try to raise the FED funds to three percent 0:15:12.200 --> 0:15:16.240 this year? Oh, that's a hard one because the truth 0:15:16.360 --> 0:15:18.720 is I would love to do that and raise the 0:15:18.720 --> 0:15:22.760 FED funds rate to three percent, but that has repercussions 0:15:22.800 --> 0:15:25.280 and it needs a little bit of balance in terms 0:15:25.280 --> 0:15:29.880 of not affecting growth and causing disruption in the market. 0:15:29.960 --> 0:15:32.440 So I think the Fed is probably choosing to be 0:15:32.480 --> 0:15:35.320 a little bit more conservative and kind of ease into 0:15:35.360 --> 0:15:37.760 this new decision and how to actually move into a 0:15:37.800 --> 0:15:40.800 regime of raising rates. So I think there's a difference 0:15:40.880 --> 0:15:45.520 between what might one might want and what is actually achievable, 0:15:45.640 --> 0:15:49.600 um in sort of short order, achievable without the disruptions 0:15:49.600 --> 0:15:51.920 that you talk about. Is this basically the modern form, 0:15:52.320 --> 0:15:54.360 the new form of a FED put that they will 0:15:54.400 --> 0:15:57.040 move much more slowly than perhaps they would want to, 0:15:57.160 --> 0:16:00.000 simply because they do not want to incur a huge 0:16:00.080 --> 0:16:03.600 losses and the equity markets, yes, because I think the 0:16:03.680 --> 0:16:07.320 challenges Remember, as rates rise, we have sort of industries 0:16:07.360 --> 0:16:11.320 that have more duration exposure. We have potential tightening of credit, 0:16:11.440 --> 0:16:15.080 we have other issues that could cause businesses to be 0:16:15.080 --> 0:16:17.680 a little more squeezed with higher rates, And so I 0:16:17.720 --> 0:16:21.400 think the challenge is balancing between not affecting growth and 0:16:21.520 --> 0:16:26.400 encouraging encouraging good economic practice, but at the same time 0:16:26.800 --> 0:16:30.160 not disrupting the market. I mean traditionally, whenever the market 0:16:30.880 --> 0:16:33.520 has been faced with the rate hike, we usually have 0:16:33.600 --> 0:16:35.280 sort of a sell off in some way. So I 0:16:35.320 --> 0:16:38.840 was pretty impressed that the market was relatively calm this 0:16:38.880 --> 0:16:42.240 week about this decision, but maybe that's because everybody knew 0:16:42.240 --> 0:16:45.160 it was coming well. Impressed though, at the same time, Katie, 0:16:45.160 --> 0:16:48.400 we did see a changed tone from a FED chair J. Powell, 0:16:48.400 --> 0:16:51.280 even indicating balance sheet reduction as soon as May. I'm 0:16:51.320 --> 0:16:55.360 just wondering are we actually reacting to the words? Are 0:16:55.360 --> 0:16:58.720 we actually reacting to the press conference? Are we reacting 0:16:58.760 --> 0:17:00.640 to the FED that we have known over the past 0:17:00.680 --> 0:17:03.240 ten years, which is one that is beholden to a 0:17:03.280 --> 0:17:07.919 certain common markets. Yeah, I mean that's a good question. 0:17:08.000 --> 0:17:10.679 I mean, I think we've been asking the same question 0:17:10.760 --> 0:17:13.000 all last year. Are we ever going to see this 0:17:13.080 --> 0:17:15.879 type of move on our side? What we do see 0:17:16.000 --> 0:17:19.840 is sort of the technical signals that show that rising 0:17:19.960 --> 0:17:23.160 rates are coming, and sort of the trend themselves really 0:17:23.200 --> 0:17:26.080 sort of has been indicative that we're going to see 0:17:26.080 --> 0:17:28.320 these rising rates in the long term. I think the 0:17:28.400 --> 0:17:31.399 real challenges them sort of shifting regimes and sort of 0:17:31.440 --> 0:17:34.280 being more actionable. And I think that's something that we 0:17:34.320 --> 0:17:36.320 really still have to see and I think you indicated 0:17:36.359 --> 0:17:38.360 that in the sense that we've kind of seen them 0:17:38.359 --> 0:17:41.320 being a little bit more complacent in this area. UM. 0:17:41.440 --> 0:17:43.840 But I think when you're dealing with inflation at the 0:17:43.920 --> 0:17:46.320 level we're seeing right now, the pressure is going to 0:17:46.400 --> 0:17:49.160 come from a lot more places, um, and that will 0:17:49.160 --> 0:17:52.159 push them more. Katie. The market's knew coming into this 0:17:52.240 --> 0:17:55.159 year about those inflationary pressures and the likelihood of tighter 0:17:55.160 --> 0:17:58.360 monetary policy resulting from that. What it couldn't have anticipated 0:17:58.440 --> 0:18:01.960 was a war in Eastern in Europe. Do you think 0:18:01.960 --> 0:18:04.960 the market is still under pricing the risks around both 0:18:04.960 --> 0:18:07.880 of those things happening simultaneously as we see the smp 0:18:07.880 --> 0:18:10.160 F I founded coming off it's best three days since November. 0:18:12.080 --> 0:18:14.479 That's a good question because I think most people are 0:18:14.520 --> 0:18:17.360 asking themselves this right now. But the truth is, from 0:18:17.400 --> 0:18:20.439 our cross asset perspective, we really see that some of 0:18:20.480 --> 0:18:24.879 the trends going into the Ukraine crisis really just extended. 0:18:25.359 --> 0:18:27.679 So what that means is we saw an extension of 0:18:27.720 --> 0:18:31.560 current themes, inflation theme actually extending even further, and we 0:18:31.640 --> 0:18:35.439 had massive moves, particularly in the energy markets. So some 0:18:35.560 --> 0:18:38.000 of us are thinking that there may be some consolidation 0:18:38.040 --> 0:18:40.800 at this point, meaning that some of the concern and 0:18:40.840 --> 0:18:44.120 some of the supply chain issues are priced in UM, 0:18:44.200 --> 0:18:46.600 but there is still definitely room because as you know, 0:18:46.840 --> 0:18:52.639 geopolitical uncertainty is very difficult to predict, and things can 0:18:52.760 --> 0:18:56.640 change quickly and in different directions than we would like UM. 0:18:56.840 --> 0:18:58.560 So what I would say is we may not be 0:18:58.640 --> 0:19:00.840 pricing it all in, but that may be just because 0:19:00.880 --> 0:19:03.080 it's hard to know how to do that, Kat just 0:19:03.200 --> 0:19:05.920 quickly just finally on the FED, if we can finish there. 0:19:06.240 --> 0:19:08.119 At least when I were talking about this with Tom 0:19:08.280 --> 0:19:11.720 earlier this week, this felt like the December FED mating 0:19:12.200 --> 0:19:14.160 what cham and Pau said everything he needed to send 0:19:14.160 --> 0:19:17.040 the news conference, and people didn't really listen to it, 0:19:17.119 --> 0:19:19.440 and then they reacted to it when the same thing 0:19:19.480 --> 0:19:21.840 came out in the minutes, as if the minutes was 0:19:21.920 --> 0:19:24.119 some kind of hawky surprise. Do you think was setting 0:19:24.240 --> 0:19:28.720 up for the same kind of thing again? Oh? Yeah, 0:19:28.840 --> 0:19:31.399 I mean to be honest with you, I wish I 0:19:31.480 --> 0:19:34.399 knew the answer to that question. I think most people 0:19:34.560 --> 0:19:37.840 are really sort of in a period where they're not 0:19:38.600 --> 0:19:41.040 reacting much right now. I feel like the market has 0:19:41.119 --> 0:19:44.639 moved already um. And the key question is does the 0:19:44.680 --> 0:19:48.480 market already anticipate that um? And so I'd say that 0:19:49.080 --> 0:19:52.119 we're seeing some consolidation, some of the positioning kind of 0:19:52.160 --> 0:19:56.040 coming off for certain trades. Interesting suggests that people, so 0:19:56.080 --> 0:19:58.480 you saw that flattener kind of turned into a steepener 0:19:58.920 --> 0:20:00.760 a little bit this week, which means that people had 0:20:00.800 --> 0:20:03.640 betted on this move or a bet on this move, 0:20:03.720 --> 0:20:06.240 and now they saw it. So there's a little consolidation. 0:20:06.600 --> 0:20:09.800 What I'd say is short term respite, a little bit 0:20:09.840 --> 0:20:12.480 of back and forth, and then more focused on the 0:20:12.520 --> 0:20:15.240 next time we have an opportunity for hike. Kenny, Thank 0:20:15.240 --> 0:20:24.359 you Kenny Kaminsky of Alpha Simplex. Christian Majo joined us 0:20:24.359 --> 0:20:27.240 now the head of Portfolio Strategy of TV Securities. Kristen, 0:20:27.280 --> 0:20:31.040 can we start there with Saudi Arabia over the murder 0:20:31.520 --> 0:20:34.360 of Kashagi? You remember people stepped back from Saudi Arabia 0:20:34.359 --> 0:20:36.160 and then they were back in React twelve months later. 0:20:36.600 --> 0:20:38.520 This feel is different for a lot of people. Do 0:20:38.520 --> 0:20:41.159 you agree with Blue Bay there that line that Russia 0:20:41.200 --> 0:20:43.480 will be in the isolated wilderness for a long time 0:20:43.520 --> 0:20:46.359 to come. A regime change in Russia is probably a 0:20:46.440 --> 0:20:51.679 prerequisite for reinvestment for many. Yeah, I think I agree 0:20:51.720 --> 0:20:55.080 with that statement that two situations are really different because 0:20:55.240 --> 0:20:58.760 the solely case was against one single person, while here 0:20:59.119 --> 0:21:01.960 we're talking about a whole nation and I'm talking about 0:21:02.080 --> 0:21:06.200 Ukraine being involved. But there will probably be some money 0:21:06.240 --> 0:21:09.040 coming back, probably some money will not leave at all. 0:21:09.160 --> 0:21:12.840 But the problem is, even when you remove sanctions, um, 0:21:13.200 --> 0:21:16.399 what's the reputational risk of being associated to a regime 0:21:16.480 --> 0:21:19.840 that by many as being considered to be a murderous 0:21:19.920 --> 0:21:23.040 and genocidal one. So, Christian, what is the contagion risk 0:21:23.240 --> 0:21:26.360 to other emerging markets, given the fact that this isn't 0:21:26.400 --> 0:21:28.520 going away, certainly not in the financial world for a 0:21:28.520 --> 0:21:32.040 long time. Well, first of all, we see contagion right 0:21:32.040 --> 0:21:37.720 now through conversion and through UH commodity prices. Commodity prices 0:21:38.119 --> 0:21:41.720 were already on the upside, but they are definitely um 0:21:41.760 --> 0:21:47.560 getting pushed much higher because Russia is a great commodity producer, energy, 0:21:47.760 --> 0:21:53.200 agricultural medals. So that's not going to go away immediately 0:21:53.240 --> 0:21:57.160 because we have just too many supply side disruptions involved 0:21:57.200 --> 0:22:01.000 in this conflict. Then you can have default, the Russian 0:22:01.000 --> 0:22:05.160 default that everybody is talking about, and that's another risk. Well, 0:22:05.320 --> 0:22:07.800 but the market views that as a lesser risk today 0:22:07.800 --> 0:22:10.280 than it did yesterday. Christian on the news that Russia 0:22:10.320 --> 0:22:13.040 sent that a hundred seventeen million dollar payment to JP Morgan, 0:22:13.080 --> 0:22:14.760 who then sent it on to City. We don't know 0:22:14.800 --> 0:22:17.040 where it went after City, and yet we've seen Russian 0:22:17.040 --> 0:22:22.119 CDs coming in substantially. Is the market being over confident? No, 0:22:22.480 --> 0:22:26.320 you're right. The point is, UH, what you're talking about 0:22:26.520 --> 0:22:29.119