1 00:00:00,040 --> 00:00:06,720 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:11,640 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,480 --> 00:00:18,680 Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day 4 00:00:18,720 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,400 --> 00:00:24,880 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,920 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,280 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,919 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,000 --> 00:00:36,879 Speaker 2: Terminal and the Bloomberg Business App. Here's the take from 10 00:00:36,920 --> 00:00:40,160 Speaker 2: Norman Raw, the former senior US Intelligence official and senior 11 00:00:40,200 --> 00:00:43,360 Speaker 2: advisor a CSIS. He writes the following. If the US 12 00:00:43,360 --> 00:00:48,240 Speaker 2: executives executes strikes on Iranian power plants, Civilian infrastructure would 13 00:00:48,280 --> 00:00:51,760 Speaker 2: become a primary battlefield, and oil would reprice sharply for 14 00:00:51,760 --> 00:00:55,160 Speaker 2: an extended disruption scenario. Norm joins us. Now for more, Norm, 15 00:00:55,240 --> 00:00:57,520 Speaker 2: welcome to the program. Can you help set the stage? 16 00:00:57,600 --> 00:00:59,800 Speaker 2: What are we set up for later this evening? 17 00:01:01,280 --> 00:01:04,040 Speaker 3: Good morning, So three weeks into the conflict, a new 18 00:01:04,080 --> 00:01:09,560 Speaker 3: battle space dynamic has been created. Despite the extraordinary campaign 19 00:01:09,880 --> 00:01:13,120 Speaker 3: results of the United States and Israel, the Iranian government 20 00:01:13,160 --> 00:01:15,919 Speaker 3: has survived, so the war has evolved from a golf 21 00:01:15,959 --> 00:01:20,480 Speaker 3: shipping and gas infrastructure crisis into a deadline driven, strategic 22 00:01:20,560 --> 00:01:26,520 Speaker 3: depth and civilian critical infrastructure contest that openly involves control 23 00:01:26,560 --> 00:01:29,800 Speaker 3: of the straight upform moves with all energy systems, regional 24 00:01:29,880 --> 00:01:35,640 Speaker 3: power infrastructure, desalination systems within a potential escalation envelope. Once 25 00:01:35,720 --> 00:01:40,760 Speaker 3: these systems become explicit targets or even threat objects, you 26 00:01:40,800 --> 00:01:43,400 Speaker 3: in essence have a situation where the market will now 27 00:01:43,920 --> 00:01:46,520 Speaker 3: need to price in not only the crude and liquefied 28 00:01:46,959 --> 00:01:51,200 Speaker 3: threat to natural gas, but also a reliability of electrical systems, 29 00:01:51,360 --> 00:01:55,960 Speaker 3: water security repair times, and the higher probability of allied 30 00:01:55,960 --> 00:01:59,200 Speaker 3: burden sharing of all of the Golf Cooperation Council partners. 31 00:02:00,280 --> 00:02:02,680 Speaker 1: When the President puts out a statement and has this 32 00:02:02,840 --> 00:02:05,880 Speaker 1: ultimatum about opening up the strait of Hormoves or he's 33 00:02:05,920 --> 00:02:08,760 Speaker 1: going to go after power plants, do you think that 34 00:02:08,800 --> 00:02:10,800 Speaker 1: statement would come from the President United States if he 35 00:02:10,880 --> 00:02:12,480 Speaker 1: was unwilling to do so. 36 00:02:14,120 --> 00:02:14,200 Speaker 4: No. 37 00:02:14,360 --> 00:02:16,520 Speaker 3: I believe the President of the United States has a 38 00:02:16,560 --> 00:02:20,919 Speaker 3: serious intent of taking a greater action against Iran. I 39 00:02:20,960 --> 00:02:24,680 Speaker 3: also believe that US forces in the region are more 40 00:02:24,720 --> 00:02:29,359 Speaker 3: than capable of executing the presidents of wishes, but they 41 00:02:29,400 --> 00:02:32,840 Speaker 3: would prefer to undertake these actions when the conditions are 42 00:02:32,880 --> 00:02:36,200 Speaker 3: most appropriate. Now they can do whatever the president requires. 43 00:02:37,040 --> 00:02:42,120 Speaker 3: Fully opening the strait would require reduction of the Iran's UAVs, 44 00:02:42,160 --> 00:02:45,799 Speaker 3: it's dr own threats, and probably undertaking more action against 45 00:02:46,120 --> 00:02:50,600 Speaker 3: the strait of hormones as Iranian infrastructure, and waiting until 46 00:02:50,639 --> 00:02:54,160 Speaker 3: we have the full contingent of additional marines and perhaps 47 00:02:54,200 --> 00:02:55,600 Speaker 3: some additional air assets. 48 00:02:56,120 --> 00:02:59,000 Speaker 1: Norm you've been in the room, the president will have 49 00:02:59,040 --> 00:03:01,240 Speaker 1: a number of options in front of him. There's reporting 50 00:03:01,280 --> 00:03:04,600 Speaker 1: over the weekend that he molls carg Island, a takeover 51 00:03:05,080 --> 00:03:08,400 Speaker 1: of that island that's just some miles off the Iranian cost. 52 00:03:08,440 --> 00:03:10,240 Speaker 1: Can you go through all the options right now you 53 00:03:10,240 --> 00:03:12,359 Speaker 1: think are being presented to the president? 54 00:03:13,760 --> 00:03:15,960 Speaker 3: Well, I prefer to avoid all the options, and that 55 00:03:16,040 --> 00:03:18,320 Speaker 3: perhaps the Iranians are watching and giving them a school 56 00:03:18,360 --> 00:03:21,280 Speaker 3: answer may not be the best of ideas, but it's 57 00:03:21,480 --> 00:03:24,680 Speaker 3: likely that the Iran the president's overall approach is to 58 00:03:24,720 --> 00:03:27,359 Speaker 3: convey to the Iranian government that they're about to lose 59 00:03:27,400 --> 00:03:30,560 Speaker 3: control and the revenue from their most strategic asset, and 60 00:03:30,560 --> 00:03:34,000 Speaker 3: that that idea is going to ripple through the strategic 61 00:03:34,080 --> 00:03:37,640 Speaker 3: leadership of Iran's government and compel them to push for 62 00:03:38,680 --> 00:03:42,480 Speaker 3: negotiations and to make concessions on several points, which is 63 00:03:42,520 --> 00:03:47,000 Speaker 3: an essence to give up the idea of nuclear weaponization, 64 00:03:48,160 --> 00:03:53,720 Speaker 3: the enhancement of their ballistic missile program, the could's force 65 00:03:53,840 --> 00:03:56,960 Speaker 3: activities within the region, and to return these straight up 66 00:03:56,960 --> 00:04:00,520 Speaker 3: hoo moves to international control vice their control none. 67 00:04:00,520 --> 00:04:03,600 Speaker 2: There is some speculation that a ground operation could be imminent. 68 00:04:03,920 --> 00:04:06,440 Speaker 2: Can we go into the ramd of speculations together and 69 00:04:06,520 --> 00:04:09,440 Speaker 2: talk about the geography geography that you know, Well, how 70 00:04:09,440 --> 00:04:12,360 Speaker 2: difficult would a ground operation be in a place like Iran? 71 00:04:13,880 --> 00:04:17,000 Speaker 3: Well, I'm not sure the issue is of difficulty. US 72 00:04:17,000 --> 00:04:21,560 Speaker 3: forces are extremely capable. All ground operations have a lethal 73 00:04:21,600 --> 00:04:24,880 Speaker 3: component that no one should diminish the threat to US forces. 74 00:04:25,000 --> 00:04:27,440 Speaker 3: I think you want to ask instead what the ultimate 75 00:04:27,560 --> 00:04:30,279 Speaker 3: goal might be. What is the purpose? Are we trying 76 00:04:30,320 --> 00:04:33,800 Speaker 3: to retain territory? Are we trying to send a message 77 00:04:33,800 --> 00:04:36,440 Speaker 3: to Iran that we can take territory? We're trying to 78 00:04:36,520 --> 00:04:40,440 Speaker 3: destroy key facilities. The question is what message are you 79 00:04:40,480 --> 00:04:43,440 Speaker 3: trying to send to the Iranian leadership. We've already sent 80 00:04:43,480 --> 00:04:46,240 Speaker 3: the message that we can destroy anything in Iran. We 81 00:04:46,279 --> 00:04:50,520 Speaker 3: can control any physical space in Iran. We control the skies, 82 00:04:50,560 --> 00:04:52,160 Speaker 3: which means we control the ground. 83 00:04:53,040 --> 00:04:56,600 Speaker 2: Stay with us, mul Bloomberg surveillance coming up after this 84 00:05:05,800 --> 00:05:09,680 Speaker 2: crude hovering around multi year highs. Michael Haig of Self Gen, writing, 85 00:05:09,720 --> 00:05:12,680 Speaker 2: with each passing day, the market grows more strained with 86 00:05:12,800 --> 00:05:15,800 Speaker 2: no resolution in sight, prices could climb towards one fifty 87 00:05:15,880 --> 00:05:18,880 Speaker 2: a barrel in April. Michael joins us. Now for more. Michael, 88 00:05:18,880 --> 00:05:21,200 Speaker 2: welcome to the program. Your note was one of the 89 00:05:21,240 --> 00:05:23,960 Speaker 2: first notes I read to start the week. Scenario B. 90 00:05:24,440 --> 00:05:26,760 Speaker 2: We're very close to what you call scenario B. What 91 00:05:26,839 --> 00:05:29,400 Speaker 2: was scenario A and what do scenario B look like? 92 00:05:30,680 --> 00:05:33,440 Speaker 4: Scenario A. First of all, good morning, thanks for having me. 93 00:05:33,760 --> 00:05:37,159 Speaker 4: Scenario A was our basically scenario at the start of March. 94 00:05:37,560 --> 00:05:40,800 Speaker 4: The market was pricing in a very quick resolution to 95 00:05:40,880 --> 00:05:45,480 Speaker 4: this conflict. So our scenario A was that we see 96 00:05:45,480 --> 00:05:47,960 Speaker 4: the streets opening up by the end of March, but 97 00:05:48,160 --> 00:05:50,320 Speaker 4: prices getting up to one hundred and twenty five dollars 98 00:05:50,360 --> 00:05:52,960 Speaker 4: a barrel. Looks like we're going to have to adjust 99 00:05:52,960 --> 00:05:56,000 Speaker 4: that move to scenario B, where we have this conflict 100 00:05:56,000 --> 00:06:00,120 Speaker 4: continuing through April and that brings oil solidly up to 101 00:06:00,200 --> 00:06:01,520 Speaker 4: one hundred and fifty dollars a how. 102 00:06:01,680 --> 00:06:04,320 Speaker 2: Michael, A. You know, pricing for longer. That's not just 103 00:06:04,320 --> 00:06:06,960 Speaker 2: the short term story. That's a long term problem. 104 00:06:08,160 --> 00:06:11,200 Speaker 4: Yeah. Unfortunately that seems to be the case because every 105 00:06:11,279 --> 00:06:17,640 Speaker 4: day that goes by, oil taken of the production makes 106 00:06:17,680 --> 00:06:20,080 Speaker 4: it harder to come back. Obviously, infrastructure gets more and 107 00:06:20,160 --> 00:06:23,640 Speaker 4: more damaged. So yes, higher for longer. I'm afreed, Michael. 108 00:06:23,680 --> 00:06:25,320 Speaker 4: This was an issue for the equity market. 109 00:06:25,400 --> 00:06:27,680 Speaker 2: The issue I think a source of comfort was we 110 00:06:27,720 --> 00:06:31,200 Speaker 2: had extreme vanquidation in the future's curve, and for people 111 00:06:31,200 --> 00:06:33,000 Speaker 2: who aren't in your world, that just meant the front 112 00:06:33,040 --> 00:06:35,159 Speaker 2: month of the future's curve was really elevated. But the 113 00:06:35,160 --> 00:06:37,440 Speaker 2: market was pricing a short term problem and we had 114 00:06:37,440 --> 00:06:39,320 Speaker 2: this steep drop off through the rest of the year. 115 00:06:39,320 --> 00:06:41,560 Speaker 2: You see this plank out this morning. The opposite were 116 00:06:41,560 --> 00:06:43,800 Speaker 2: starting to lift the back end of the curve, starting 117 00:06:43,839 --> 00:06:47,159 Speaker 2: to price in the higher for longer scenario. Michael. This 118 00:06:47,279 --> 00:06:51,599 Speaker 2: raises the question of demand destruction, so called demand elasticity. 119 00:06:51,920 --> 00:06:54,320 Speaker 2: What are the realities for the energy market when does 120 00:06:54,320 --> 00:06:55,640 Speaker 2: that destruction creep in? 121 00:06:56,839 --> 00:07:00,000 Speaker 4: So well, there's one thing to not being able to 122 00:07:00,120 --> 00:07:02,520 Speaker 4: ford oil because the price is too high, and the 123 00:07:02,560 --> 00:07:04,760 Speaker 4: other thing is not being able to get the oil, 124 00:07:04,800 --> 00:07:08,320 Speaker 4: and that's the bigger concern. So generally speaking, from a 125 00:07:08,360 --> 00:07:11,520 Speaker 4: price perspective, and when we talk about demand elasticities, the 126 00:07:11,600 --> 00:07:14,600 Speaker 4: oil market is fairly inelastic. That means that when prices 127 00:07:14,600 --> 00:07:17,960 Speaker 4: go up, people really can't change their behavior that much. 128 00:07:18,040 --> 00:07:20,200 Speaker 4: So given the fact we've had about a fifty percent 129 00:07:20,320 --> 00:07:24,560 Speaker 4: increase in oil prices since the end of February, that 130 00:07:24,600 --> 00:07:27,360 Speaker 4: would ordinarily mean from a price perspective, you would lose 131 00:07:27,400 --> 00:07:30,400 Speaker 4: about one point two million barrels a day of oil 132 00:07:30,480 --> 00:07:34,040 Speaker 4: demand as people can't afford it. If we go to 133 00:07:34,080 --> 00:07:37,480 Speaker 4: the one hundred and fifty dollars scenario, then we'd be talking 134 00:07:37,600 --> 00:07:40,600 Speaker 4: over three million barrels a day of oil demand destruction 135 00:07:40,760 --> 00:07:43,280 Speaker 4: because of the price effect. But as I mentioned, it's 136 00:07:43,320 --> 00:07:45,440 Speaker 4: not really just about the price. It's about that some 137 00:07:45,480 --> 00:07:48,840 Speaker 4: countries can't get the oil. So you're already seeing airlines 138 00:07:49,000 --> 00:07:52,360 Speaker 4: put on surcharges, cutting flights. You see refineries in China 139 00:07:52,680 --> 00:07:56,880 Speaker 4: cutting their runs. You see ethanol crackers cutting their output 140 00:07:56,920 --> 00:07:59,360 Speaker 4: because they can't get the feedstock. So there are some 141 00:07:59,400 --> 00:08:02,320 Speaker 4: countries in Southeast Asia that maybe have fifteen to twenty 142 00:08:02,360 --> 00:08:05,320 Speaker 4: days of oil and product in inventory. So we're going 143 00:08:05,360 --> 00:08:07,720 Speaker 4: to get to a situation potentially where we get demand 144 00:08:07,760 --> 00:08:10,920 Speaker 4: destruction because these countries can't operate as normal. 145 00:08:11,240 --> 00:08:13,679 Speaker 1: Michael, to that point, we have sprs around the world. 146 00:08:13,720 --> 00:08:16,440 Speaker 1: Different countries have their own strategic reserves when it comes 147 00:08:16,520 --> 00:08:18,960 Speaker 1: to crude. Are you basically talking about the fact that 148 00:08:19,000 --> 00:08:22,240 Speaker 1: we might have the crude but it's so dislocated in 149 00:08:22,280 --> 00:08:24,120 Speaker 1: the market right now there's not going to be enough 150 00:08:24,160 --> 00:08:26,960 Speaker 1: refining capacity to say turn that crew to diesel or 151 00:08:27,080 --> 00:08:27,600 Speaker 1: jet fuel. 152 00:08:29,520 --> 00:08:29,760 Speaker 2: Yeah. 153 00:08:29,800 --> 00:08:32,080 Speaker 4: I mean we're talking seventeen million barrels a day that 154 00:08:32,280 --> 00:08:34,800 Speaker 4: has been displaced. I mean, if you look back historically, 155 00:08:35,240 --> 00:08:39,440 Speaker 4: we've basically had thirty geopolitical conflicts since the early nineteen seventies, 156 00:08:39,480 --> 00:08:42,599 Speaker 4: and the next biggest disruption to supply was all the 157 00:08:42,600 --> 00:08:44,840 Speaker 4: way back in nineteen seventy three when we had seven 158 00:08:44,880 --> 00:08:48,360 Speaker 4: percent of oil being removed because of the Arab oil embargo. 159 00:08:48,880 --> 00:08:51,680 Speaker 4: Now we're talking seventeen percent being removed. So it's a 160 00:08:51,720 --> 00:08:54,080 Speaker 4: massive difference. So you know, all you need to do 161 00:08:54,160 --> 00:08:56,720 Speaker 4: is take that seventeen million barrels and say how much 162 00:08:56,760 --> 00:09:00,599 Speaker 4: can be redirected through pipeline. How much can be we 163 00:09:01,600 --> 00:09:05,920 Speaker 4: offset through demand destruction, how much can come from the 164 00:09:05,960 --> 00:09:09,440 Speaker 4: relief from Iranian sanctions on floating oil, et cetera, et cetera. 165 00:09:09,480 --> 00:09:11,280 Speaker 4: And you add it all up and you still have 166 00:09:11,320 --> 00:09:14,280 Speaker 4: a massive deficit of around eight nine million barrels a day. 167 00:09:14,600 --> 00:09:16,760 Speaker 4: And that means that that can't get to the refined 168 00:09:16,880 --> 00:09:20,040 Speaker 4: is in Singapore elsewhere they can't create the product, and 169 00:09:20,040 --> 00:09:24,520 Speaker 4: that creates the issue for gasoline diesel, mainly in Asia. 170 00:09:24,640 --> 00:09:27,120 Speaker 1: Michael, the way you talk, I'm thinking this is not 171 00:09:27,120 --> 00:09:30,119 Speaker 1: going to be months. This sounds like a multi year recovery. 172 00:09:30,320 --> 00:09:31,040 Speaker 1: Is that accurate? 173 00:09:32,800 --> 00:09:35,079 Speaker 4: I don't think it would be as drastic as that, 174 00:09:35,160 --> 00:09:37,240 Speaker 4: but I'm you know, as each month goes by, we're 175 00:09:37,280 --> 00:09:41,840 Speaker 4: talking several more months to recover. The market's very resilient 176 00:09:41,880 --> 00:09:44,000 Speaker 4: and it will bounce back, and there is plenty of 177 00:09:44,080 --> 00:09:47,319 Speaker 4: oil out there in terms of spare capacity generally speaking, 178 00:09:47,840 --> 00:09:51,520 Speaker 4: So you know, if by some miracle this was resolved 179 00:09:51,880 --> 00:09:55,280 Speaker 4: tomorrow and all the oil came back into the market, 180 00:09:55,320 --> 00:09:57,400 Speaker 4: we might lose like one or two million barrels a 181 00:09:57,480 --> 00:10:00,439 Speaker 4: day because of the shut ins, because of infrastrut etc. 182 00:10:01,000 --> 00:10:04,200 Speaker 4: But generally speaking, going into this, we were in a 183 00:10:04,240 --> 00:10:07,000 Speaker 4: surplus of let's call it about three million barrels a day. 184 00:10:07,080 --> 00:10:11,400 Speaker 4: So fingers crossed this doesn't go on through past April, 185 00:10:11,400 --> 00:10:15,040 Speaker 4: because I think if we can get through that by 186 00:10:15,080 --> 00:10:17,400 Speaker 4: the end of the year a year will be back 187 00:10:17,440 --> 00:10:18,240 Speaker 4: to kind of normal. 188 00:10:18,400 --> 00:10:20,840 Speaker 2: Michael, this is starting to creep into base metals. Let's 189 00:10:20,880 --> 00:10:23,880 Speaker 2: just turn from energy to things like aluminum to comper. 190 00:10:24,000 --> 00:10:26,280 Speaker 2: We're starting to see some big moves there as well. 191 00:10:26,360 --> 00:10:27,640 Speaker 2: How far along do you think we are in the 192 00:10:27,679 --> 00:10:30,800 Speaker 2: process of trying to understand how cyclic or the demand 193 00:10:30,800 --> 00:10:32,599 Speaker 2: for those metals actually is at a time when a 194 00:10:32,640 --> 00:10:34,640 Speaker 2: lot of people are getting built up on these secular 195 00:10:34,679 --> 00:10:36,160 Speaker 2: tail when it's coming out of technology. 196 00:10:38,360 --> 00:10:41,200 Speaker 4: Well, I think, I mean, let's let's think about copper here. 197 00:10:41,360 --> 00:10:43,720 Speaker 4: I mean, we said before this conflict that there was 198 00:10:43,920 --> 00:10:48,480 Speaker 4: some unusual demand situations going on in those metals markets 199 00:10:48,480 --> 00:10:50,960 Speaker 4: given the growth of AI, etc. But also because of 200 00:10:51,000 --> 00:10:54,599 Speaker 4: strategic stomppiling because of military spending. So I see a 201 00:10:54,679 --> 00:10:57,560 Speaker 4: very bright future for those metals from that perspective, because 202 00:10:57,880 --> 00:11:00,960 Speaker 4: coming out of this conflict, I still believe there'll be 203 00:11:01,120 --> 00:11:04,160 Speaker 4: a push to do more strategic stockpiling four things like 204 00:11:04,200 --> 00:11:07,800 Speaker 4: copper and aluminium just like we have for oil. We'll 205 00:11:07,840 --> 00:11:11,920 Speaker 4: see more military spending that's very metal intensive. So you know, 206 00:11:12,000 --> 00:11:14,319 Speaker 4: despite the fact that they get pulled down because equity 207 00:11:14,440 --> 00:11:16,640 Speaker 4: get pulled down, I think I think their future is 208 00:11:16,679 --> 00:11:17,240 Speaker 4: pretty bright. 209 00:11:17,360 --> 00:11:20,200 Speaker 2: Can we finish on gold? Michael? Twenty percent move so 210 00:11:20,240 --> 00:11:23,200 Speaker 2: far this month? Huge, huge move. What do you think 211 00:11:23,280 --> 00:11:25,679 Speaker 2: is behind that move? Is it just an interest rate 212 00:11:25,720 --> 00:11:27,880 Speaker 2: move driving people out of gold? Is there something else 213 00:11:27,920 --> 00:11:28,280 Speaker 2: of ply. 214 00:11:30,080 --> 00:11:31,680 Speaker 4: So, I think what's going on there is that we 215 00:11:31,679 --> 00:11:33,480 Speaker 4: don't have any central bank buying right now. I don't 216 00:11:33,480 --> 00:11:35,839 Speaker 4: think there's any appetite to do that where countries are 217 00:11:35,920 --> 00:11:40,880 Speaker 4: squarely focused on getting through this energy crisis. I wouldn't 218 00:11:40,920 --> 00:11:44,640 Speaker 4: be surprised to hear reports that some central banks have 219 00:11:44,720 --> 00:11:47,000 Speaker 4: sold gold in order to subsize some of the energy 220 00:11:47,360 --> 00:11:49,600 Speaker 4: issues that they have in their countries. So it's been 221 00:11:49,760 --> 00:11:53,040 Speaker 4: a big pause I think in that buying. That's mainly 222 00:11:53,040 --> 00:11:55,160 Speaker 4: the reason why we've seen it sell off. ETF flows 223 00:11:56,000 --> 00:11:59,000 Speaker 4: by themselves couldn't explain the dramatic decline in the gold 224 00:11:59,040 --> 00:12:01,559 Speaker 4: price that we've seen recently. Of course, some of it 225 00:12:01,640 --> 00:12:05,280 Speaker 4: is fundamentally bas based on interest rate expectations, et cetera. 226 00:12:05,840 --> 00:12:09,000 Speaker 4: But again, a bit like the base metal complex. I 227 00:12:09,040 --> 00:12:12,520 Speaker 4: think once we get through this oil situation, with goal 228 00:12:12,600 --> 00:12:14,760 Speaker 4: prices where they are right now, I would imagine central 229 00:12:14,760 --> 00:12:15,920 Speaker 4: banks resuming they're buying. 230 00:12:16,480 --> 00:12:29,240 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. 231 00:12:29,240 --> 00:12:32,080 Speaker 2: This bond markets some wild moves earlier on this morning, 232 00:12:32,200 --> 00:12:34,160 Speaker 2: yields three four percent at the front end of the curve, 233 00:12:34,400 --> 00:12:37,280 Speaker 2: past yield we've seen since last summer three eighty five. Now, 234 00:12:37,320 --> 00:12:40,000 Speaker 2: because we've pulled back following those headlines, we're down five 235 00:12:40,040 --> 00:12:42,360 Speaker 2: basis points on the session we priced out the easing. 236 00:12:42,400 --> 00:12:44,839 Speaker 2: At one point we were talking about price again, rate 237 00:12:44,920 --> 00:12:47,800 Speaker 2: hikes at the Federal Reserve. Let's have that conversation right 238 00:12:47,800 --> 00:12:49,800 Speaker 2: now with the Federal Reserve, Governor Stephen Mara and the 239 00:12:49,800 --> 00:12:53,720 Speaker 2: lone voice dissenting at last week's FMC meeting, continuing his 240 00:12:53,800 --> 00:12:56,440 Speaker 2: push for interest rate cuts. Governor Maron joins us now 241 00:12:56,480 --> 00:12:58,280 Speaker 2: for more. Steve, good to see you, good morning, Thanks 242 00:12:58,320 --> 00:13:00,360 Speaker 2: for havving me back. Governor, Where do we begin with 243 00:13:00,440 --> 00:13:03,600 Speaker 2: these headlines right here? As a policy maker, as an official, 244 00:13:03,640 --> 00:13:05,720 Speaker 2: when things are moving this fast, what do you do? 245 00:13:06,600 --> 00:13:09,880 Speaker 5: Well? Look, we've had already handsome whiplash this morning, and 246 00:13:09,920 --> 00:13:12,640 Speaker 5: I think that underlines that we shouldn't be making policy 247 00:13:12,679 --> 00:13:15,679 Speaker 5: based on short term headlines, right. We should wait for 248 00:13:15,720 --> 00:13:18,880 Speaker 5: all the information to come in before really changing our outlook. 249 00:13:18,880 --> 00:13:21,240 Speaker 5: And I think it's just still premature to have a 250 00:13:21,320 --> 00:13:23,280 Speaker 5: clear view about what this is going to look like 251 00:13:23,360 --> 00:13:25,920 Speaker 5: as you look twelve months out, and because of monetary 252 00:13:25,920 --> 00:13:27,760 Speaker 5: policy lags, we really need to be looking a year 253 00:13:27,840 --> 00:13:29,960 Speaker 5: to a year and a half out, and there's just 254 00:13:30,360 --> 00:13:32,040 Speaker 5: not enough information yet about what that looks like. 255 00:13:32,040 --> 00:13:34,480 Speaker 2: Communication in the near term, of course, matters. The chairman 256 00:13:34,520 --> 00:13:37,320 Speaker 2: in the news conference last week really vowing to anchor 257 00:13:37,360 --> 00:13:40,960 Speaker 2: inflation expectations. Do you think that's a worthwhile pursuit at 258 00:13:41,000 --> 00:13:41,400 Speaker 2: this point? 259 00:13:41,800 --> 00:13:44,760 Speaker 5: I do. Look, you know, traditional central banking Federal Reserve 260 00:13:45,160 --> 00:13:48,840 Speaker 5: wisdom is that oil shocks head headline inflation, but they 261 00:13:48,880 --> 00:13:51,520 Speaker 5: don't really pass that much into core as by as 262 00:13:51,640 --> 00:13:54,200 Speaker 5: much as they do as they do into headline and 263 00:13:54,400 --> 00:13:56,840 Speaker 5: the two ways that you would want to respond to, 264 00:13:56,920 --> 00:13:59,400 Speaker 5: and so therefore you typically look through an oil shock. Now, 265 00:13:59,440 --> 00:14:03,240 Speaker 5: the two excepts would be if inflation expectations beyond the 266 00:14:03,280 --> 00:14:06,199 Speaker 5: first year start to move higher. That hasn't happened thus far. 267 00:14:06,240 --> 00:14:08,600 Speaker 5: Inflation expectations for the first year out have moved higher, 268 00:14:08,600 --> 00:14:10,640 Speaker 5: of course, but as I look at the CBI swop 269 00:14:10,640 --> 00:14:13,320 Speaker 5: market beyond the first year, there hasn't been that much movement. 270 00:14:13,520 --> 00:14:16,120 Speaker 5: Medium term five year, five year, longer term five year 271 00:14:16,160 --> 00:14:19,120 Speaker 5: five year forward expectations have actually been coming down lately, 272 00:14:19,400 --> 00:14:21,480 Speaker 5: so there's no evidence of that. The other reason why 273 00:14:21,520 --> 00:14:23,280 Speaker 5: you would want to respond to an oil shock is 274 00:14:23,320 --> 00:14:25,320 Speaker 5: if you saw a wage price spiral, if you saw 275 00:14:25,400 --> 00:14:29,360 Speaker 5: wages responding to oil price increases, gas price increases, that 276 00:14:29,360 --> 00:14:32,040 Speaker 5: could result in the type of reinforcing inflation dynamics that 277 00:14:32,080 --> 00:14:34,920 Speaker 5: you want to forestall. Now Again, thus far, there's little 278 00:14:35,000 --> 00:14:37,560 Speaker 5: evidence of that. In fact, wage pressures have been declining 279 00:14:37,800 --> 00:14:40,840 Speaker 5: for the last few years on a steady, steady, steady basis, 280 00:14:40,960 --> 00:14:43,120 Speaker 5: so that's also something that I don't really see right now. 281 00:14:43,200 --> 00:14:45,040 Speaker 2: So the market, the labor market is just not strong 282 00:14:45,160 --> 00:14:46,160 Speaker 2: enough to worry about it. 283 00:14:46,760 --> 00:14:49,120 Speaker 5: I think the labor markets still could use additional support 284 00:14:49,120 --> 00:14:51,920 Speaker 5: from montary policy, and that's why I dissented last meeting, 285 00:14:51,920 --> 00:14:54,280 Speaker 5: as I have continued to send for all previous meetings. 286 00:14:54,320 --> 00:14:57,080 Speaker 2: How lonely were you at that committee meeting just last 287 00:14:57,080 --> 00:14:59,480 Speaker 2: week voting for a twenty five basis point reduction in 288 00:14:59,520 --> 00:15:01,880 Speaker 2: the face of an energy shock. How robust was the 289 00:15:01,880 --> 00:15:03,440 Speaker 2: conversation around the table. 290 00:15:03,600 --> 00:15:05,360 Speaker 5: Look, I think a lot of people around the table, 291 00:15:05,480 --> 00:15:09,040 Speaker 5: like me, were hesitant to draw conclusions from the oil 292 00:15:09,200 --> 00:15:11,120 Speaker 5: from the oil and news thus far, because as I 293 00:15:11,120 --> 00:15:13,320 Speaker 5: said before, we have to look twelve to eighteen months out, 294 00:15:13,480 --> 00:15:16,120 Speaker 5: not what happened to the oil price yesterday. And so 295 00:15:16,200 --> 00:15:18,520 Speaker 5: looking twelve to eighteen months out, there's still not enough 296 00:15:18,760 --> 00:15:22,160 Speaker 5: clarity to think that montery policy itself should adjust in 297 00:15:22,200 --> 00:15:23,040 Speaker 5: response to what's happened. 298 00:15:23,040 --> 00:15:25,120 Speaker 2: Well, check out the old futures curve that has changed. 299 00:15:25,240 --> 00:15:27,360 Speaker 2: I've just had one eye on December over the last 300 00:15:27,440 --> 00:15:29,680 Speaker 2: three weeks or something that's gone from the sixties and 301 00:15:29,720 --> 00:15:32,120 Speaker 2: threatening to break out into the nineties at one point 302 00:15:32,160 --> 00:15:34,520 Speaker 2: earlier on this morning. That's a change. That's a real 303 00:15:34,520 --> 00:15:36,119 Speaker 2: step up now it has. 304 00:15:35,880 --> 00:15:37,880 Speaker 5: And I boosted my you know, in the summery of 305 00:15:37,920 --> 00:15:40,320 Speaker 5: economic projections, I boosted my inflation dot for the end 306 00:15:40,360 --> 00:15:42,480 Speaker 5: of the year to two point seven percent, reflecting that 307 00:15:42,560 --> 00:15:45,040 Speaker 5: in part, right, so there is some expectation of higher 308 00:15:45,040 --> 00:15:47,840 Speaker 5: headline inflation. However, I said before, I think it's way 309 00:15:47,880 --> 00:15:51,000 Speaker 5: too early to draw conclusions that it's bleeding beyond headline 310 00:15:51,000 --> 00:15:53,560 Speaker 5: inflation in a way that matters for monteria policy. Don't 311 00:15:53,600 --> 00:15:56,640 Speaker 5: forget higher oil prices also depressed demand. Right, They take 312 00:15:56,680 --> 00:15:58,640 Speaker 5: money out of the pockets of consumers that we spending 313 00:15:58,640 --> 00:16:01,560 Speaker 5: on other goods and services and redirects it towards gas 314 00:16:01,560 --> 00:16:04,520 Speaker 5: and other energy costs, and that depresses demand and causes 315 00:16:04,560 --> 00:16:07,040 Speaker 5: unemployment to move a little bit higher. That offsets some 316 00:16:07,120 --> 00:16:08,280 Speaker 5: of the increase in inflation. 317 00:16:08,120 --> 00:16:10,000 Speaker 2: Your colleagues. This morning, Gustin goes to be at the 318 00:16:10,080 --> 00:16:12,360 Speaker 2: Chicago Fed speaking to the press, saying, we could see 319 00:16:12,360 --> 00:16:15,560 Speaker 2: a circumstance where we'd need to raise interest rates. How 320 00:16:15,640 --> 00:16:18,040 Speaker 2: high is the bar to raise interest rates? What kind 321 00:16:18,080 --> 00:16:20,760 Speaker 2: of circumstances would you personally need to see? 322 00:16:20,880 --> 00:16:22,560 Speaker 5: Yeah, so I just laid out a couple of them before. 323 00:16:22,640 --> 00:16:22,800 Speaker 2: Right. 324 00:16:22,920 --> 00:16:25,280 Speaker 5: If it looks like the oil like the oil shock, 325 00:16:25,360 --> 00:16:28,160 Speaker 5: is bleeding into inflation expectations beyond the first year, then 326 00:16:28,200 --> 00:16:30,680 Speaker 5: you get really concerned about second rand effects. Or it 327 00:16:30,720 --> 00:16:32,680 Speaker 5: looks like you're starting to cause a wage price spiral, 328 00:16:32,760 --> 00:16:35,000 Speaker 5: then you get really concerned about second rend effects. First 329 00:16:35,040 --> 00:16:37,360 Speaker 5: round effects are not something you traditionally respond to as 330 00:16:37,360 --> 00:16:40,200 Speaker 5: a central bank. Now I'll say one thing beyond that, 331 00:16:41,080 --> 00:16:43,520 Speaker 5: which is that these oil shocks have been things that 332 00:16:43,520 --> 00:16:46,200 Speaker 5: this FED has looked through for a long time, right, 333 00:16:46,360 --> 00:16:48,480 Speaker 5: it would be highly unusual for the FED to start 334 00:16:48,480 --> 00:16:50,240 Speaker 5: looking through them now. And when you think about what 335 00:16:50,240 --> 00:16:53,160 Speaker 5: happened in twenty twenty one and twenty twenty two, we 336 00:16:53,200 --> 00:16:55,800 Speaker 5: did have negative supply shocks like the oil shock from 337 00:16:55,840 --> 00:16:58,560 Speaker 5: the Russia Ukraine invasion. But in my view, part of 338 00:16:58,560 --> 00:17:00,360 Speaker 5: the reason why it was able to reverb right through 339 00:17:00,360 --> 00:17:02,760 Speaker 5: the economy the way it did was because policy settings 340 00:17:02,800 --> 00:17:05,200 Speaker 5: of the time were very different. Monetary policy and fiscal 341 00:17:05,240 --> 00:17:09,399 Speaker 5: policy were at all time historical accommodative levels. We were 342 00:17:09,400 --> 00:17:11,480 Speaker 5: doing one hundred and twenty billion dollars a month of KIWI. 343 00:17:11,800 --> 00:17:14,359 Speaker 5: We were doing two trillion dollars fiscal packages at a time. 344 00:17:14,600 --> 00:17:17,000 Speaker 5: That's not the case right now. We're not hitting the 345 00:17:17,000 --> 00:17:20,600 Speaker 5: gas on demand that would interact with the higher oil 346 00:17:20,600 --> 00:17:22,600 Speaker 5: price in a way that we reverberate these prices through 347 00:17:22,640 --> 00:17:24,440 Speaker 5: the economy. Now, that's not the case at all. 348 00:17:24,480 --> 00:17:28,520 Speaker 1: But right now we're just seeing price spike on paper market. 349 00:17:28,560 --> 00:17:31,040 Speaker 1: But what's happening in the physical market is actually avoid 350 00:17:31,160 --> 00:17:33,840 Speaker 1: We are seeing not just shut ins, but some of 351 00:17:33,840 --> 00:17:36,679 Speaker 1: these installations going to take years to rebuild. At what 352 00:17:36,760 --> 00:17:40,880 Speaker 1: point does that start to potentially de anchor inflation expectations. 353 00:17:41,200 --> 00:17:43,520 Speaker 5: Yes, so you'd want to see you'd want to see 354 00:17:43,840 --> 00:17:47,320 Speaker 5: the oil price shocks start to reverberate through supply chains 355 00:17:47,320 --> 00:17:48,240 Speaker 5: and pushing up prices. 356 00:17:48,240 --> 00:17:51,240 Speaker 1: More broadly, we are there in terms of airlines diesel. 357 00:17:51,359 --> 00:17:53,439 Speaker 1: That means that it's going to do more expensive in 358 00:17:53,480 --> 00:17:55,919 Speaker 1: terms of some goods and services that are delivered by truck. 359 00:17:56,160 --> 00:17:57,840 Speaker 5: Yeah, there's been a few instances, but you want to 360 00:17:57,880 --> 00:17:59,639 Speaker 5: see that in a broad based way that starts to 361 00:17:59,640 --> 00:18:01,960 Speaker 5: bleed in core inflation and boost it and boosted in 362 00:18:01,960 --> 00:18:03,440 Speaker 5: a way that's sort of not just a one off time, 363 00:18:03,480 --> 00:18:05,320 Speaker 5: but you start to see really second round effects that 364 00:18:05,760 --> 00:18:07,680 Speaker 5: are concerning for the longer term. And if that starts 365 00:18:07,680 --> 00:18:09,960 Speaker 5: to happen, then you start to get concerned about inflation. 366 00:18:10,320 --> 00:18:12,600 Speaker 5: And I think that that is what you did see 367 00:18:12,600 --> 00:18:14,879 Speaker 5: happen in twenty one twenty two, and thus far I 368 00:18:14,880 --> 00:18:16,879 Speaker 5: don't see it happening on a broad basis. Now it 369 00:18:16,920 --> 00:18:19,439 Speaker 5: could happen, right, but thus far it hasn't happened on 370 00:18:19,440 --> 00:18:21,959 Speaker 5: a broad basis. You get some usyncratic stories like airline 371 00:18:22,000 --> 00:18:25,000 Speaker 5: prices that are more directly tied to jet fuel, but 372 00:18:25,400 --> 00:18:27,480 Speaker 5: beyond that you haven't really seen it, and I think 373 00:18:27,480 --> 00:18:29,720 Speaker 5: part of the reason why is because we're not hitting 374 00:18:29,720 --> 00:18:32,200 Speaker 5: on the gas. We're not hitting the gas on demand, 375 00:18:32,240 --> 00:18:35,440 Speaker 5: We're not boosting demand with all time record accommodative policy 376 00:18:35,640 --> 00:18:38,320 Speaker 5: in a way that would allow pricing to accommodate a 377 00:18:38,320 --> 00:18:39,080 Speaker 5: supply shock like that. 378 00:18:39,200 --> 00:18:40,480 Speaker 2: It's fair to say that I think a lot of 379 00:18:40,480 --> 00:18:42,919 Speaker 2: FED watchers watching this right now, and I'm getting some 380 00:18:42,960 --> 00:18:45,520 Speaker 2: reaction from them in real time, agree with you that 381 00:18:45,560 --> 00:18:48,400 Speaker 2: this isn't the environment to high grate. The opposite, though, 382 00:18:48,480 --> 00:18:50,520 Speaker 2: is a difficult argument to make. Is it the right 383 00:18:50,560 --> 00:18:53,920 Speaker 2: time to cut interest rates this quickly, this soon? 384 00:18:54,400 --> 00:18:54,600 Speaker 1: Yeah? 385 00:18:54,800 --> 00:18:57,000 Speaker 5: So, as I said before, traditionally you would look through 386 00:18:57,000 --> 00:18:58,720 Speaker 5: an oil price shock like this, which means that my 387 00:18:58,760 --> 00:19:01,320 Speaker 5: policy outlook from before or is unchanged, and my policy 388 00:19:01,359 --> 00:19:04,399 Speaker 5: outlook from before would be gradual cuts of interest rates. 389 00:19:04,440 --> 00:19:06,680 Speaker 5: I had about six cuts for the year at the 390 00:19:06,760 --> 00:19:09,560 Speaker 5: last step in December. I reduced that to four cuts 391 00:19:09,560 --> 00:19:12,440 Speaker 5: for the year in response to the inflation data right 392 00:19:12,480 --> 00:19:15,960 Speaker 5: that we received between the two between the two projection periods. 393 00:19:16,119 --> 00:19:19,560 Speaker 5: So I'm maintaining my outlook that I had change. 394 00:19:19,920 --> 00:19:21,600 Speaker 2: For Give me for jumping in, but the balance of 395 00:19:21,680 --> 00:19:25,080 Speaker 2: risks around the outlook should change. That should change off 396 00:19:25,080 --> 00:19:27,359 Speaker 2: the back of energy shock. Isn't that a fair summary 397 00:19:27,400 --> 00:19:28,080 Speaker 2: of where we should be? 398 00:19:28,320 --> 00:19:30,320 Speaker 5: Well, the balance service does change, but I think it's 399 00:19:30,320 --> 00:19:32,680 Speaker 5: actually changed on both sides equally. The inflation risks have 400 00:19:32,720 --> 00:19:34,720 Speaker 5: got a little more concerning, but the unemployment risks have 401 00:19:34,760 --> 00:19:37,680 Speaker 5: gotten more concerning too, because the negative supply shock that 402 00:19:37,800 --> 00:19:40,040 Speaker 5: is the oil price is also a negative demand shock. 403 00:19:40,280 --> 00:19:42,439 Speaker 5: You're taking money out of goods and services that are 404 00:19:42,480 --> 00:19:44,240 Speaker 5: not energy that would have been spent on those goods 405 00:19:44,240 --> 00:19:46,719 Speaker 5: and services anyway. And I viewed the labor market as 406 00:19:46,760 --> 00:19:49,720 Speaker 5: continuing its gradual softening trend in the last three years. 407 00:19:49,880 --> 00:19:51,640 Speaker 5: That trend has been in place for three years. I've 408 00:19:51,680 --> 00:19:53,760 Speaker 5: seen nothing that would convince me the trend is stopped. 409 00:19:53,920 --> 00:19:54,040 Speaker 2: Right. 410 00:19:54,119 --> 00:19:56,800 Speaker 5: That's a very very powerful medium term trend that's been 411 00:19:56,840 --> 00:19:59,640 Speaker 5: in place for several years now. And taking money out 412 00:19:59,680 --> 00:20:02,440 Speaker 5: of goods services that's not energy to devote a higher 413 00:20:02,520 --> 00:20:05,000 Speaker 5: energy process is exactly the type of thing that worries 414 00:20:05,040 --> 00:20:07,880 Speaker 5: me that trend might accelerate. So the balance of risk changed, 415 00:20:07,920 --> 00:20:09,560 Speaker 5: but I think it got worse on both sides. I 416 00:20:09,560 --> 00:20:11,080 Speaker 5: don't think it changed asymmetrically. 417 00:20:11,920 --> 00:20:15,480 Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best 418 00:20:15,520 --> 00:20:18,840 Speaker 2: in markets, economics, and geopolitics. You can watch the show 419 00:20:18,880 --> 00:20:21,840 Speaker 2: live on Bloomberg TV weekday mornings from six am to 420 00:20:21,960 --> 00:20:25,720 Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify, 421 00:20:25,880 --> 00:20:28,080 Speaker 2: or anywhere else you listen, and as always, on the 422 00:20:28,119 --> 00:20:30,560 Speaker 2: Bloomberg Terminal and the Bloomberg Business app.