Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. Here's the take from
Speaker 2: Norman Raw, the former senior US Intelligence official and senior
Speaker 2: advisor a CSIS. He writes the following. If the US
Speaker 2: executives executes strikes on Iranian power plants, Civilian infrastructure would
Speaker 2: become a primary battlefield, and oil would reprice sharply for
Speaker 2: an extended disruption scenario. Norm joins us. Now for more, Norm,
Speaker 2: welcome to the program. Can you help set the stage?
Speaker 2: What are we set up for later this evening?
Speaker 3: Good morning, So three weeks into the conflict, a new
Speaker 3: battle space dynamic has been created. Despite the extraordinary campaign
Speaker 3: results of the United States and Israel, the Iranian government
Speaker 3: has survived, so the war has evolved from a golf
Speaker 3: shipping and gas infrastructure crisis into a deadline driven, strategic
Speaker 3: depth and civilian critical infrastructure contest that openly involves control
Speaker 3: of the straight upform moves with all energy systems, regional
Speaker 3: power infrastructure, desalination systems within a potential escalation envelope. Once
Speaker 3: these systems become explicit targets or even threat objects, you
Speaker 3: in essence have a situation where the market will now
Speaker 3: need to price in not only the crude and liquefied
Speaker 3: threat to natural gas, but also a reliability of electrical systems,
Speaker 3: water security repair times, and the higher probability of allied
Speaker 3: burden sharing of all of the Golf Cooperation Council partners.
Speaker 1: When the President puts out a statement and has this
Speaker 1: ultimatum about opening up the strait of Hormoves or he's
Speaker 1: going to go after power plants, do you think that
Speaker 1: statement would come from the President United States if he
Speaker 1: was unwilling to do so.
Speaker 4: No.
Speaker 3: I believe the President of the United States has a
Speaker 3: serious intent of taking a greater action against Iran. I
Speaker 3: also believe that US forces in the region are more
Speaker 3: than capable of executing the presidents of wishes, but they
Speaker 3: would prefer to undertake these actions when the conditions are
Speaker 3: most appropriate. Now they can do whatever the president requires.
Speaker 3: Fully opening the strait would require reduction of the Iran's UAVs,
Speaker 3: it's dr own threats, and probably undertaking more action against
Speaker 3: the strait of hormones as Iranian infrastructure, and waiting until
Speaker 3: we have the full contingent of additional marines and perhaps
Speaker 3: some additional air assets.
Speaker 1: Norm you've been in the room, the president will have
Speaker 1: a number of options in front of him. There's reporting
Speaker 1: over the weekend that he molls carg Island, a takeover
Speaker 1: of that island that's just some miles off the Iranian cost.
Speaker 1: Can you go through all the options right now you
Speaker 1: think are being presented to the president?
Speaker 3: Well, I prefer to avoid all the options, and that
Speaker 3: perhaps the Iranians are watching and giving them a school
Speaker 3: answer may not be the best of ideas, but it's
Speaker 3: likely that the Iran the president's overall approach is to
Speaker 3: convey to the Iranian government that they're about to lose
Speaker 3: control and the revenue from their most strategic asset, and
Speaker 3: that that idea is going to ripple through the strategic
Speaker 3: leadership of Iran's government and compel them to push for
Speaker 3: negotiations and to make concessions on several points, which is
Speaker 3: an essence to give up the idea of nuclear weaponization,
Speaker 3: the enhancement of their ballistic missile program, the could's force
Speaker 3: activities within the region, and to return these straight up
Speaker 3: hoo moves to international control vice their control none.
Speaker 2: There is some speculation that a ground operation could be imminent.
Speaker 2: Can we go into the ramd of speculations together and
Speaker 2: talk about the geography geography that you know, Well, how
Speaker 2: difficult would a ground operation be in a place like Iran?
Speaker 3: Well, I'm not sure the issue is of difficulty. US
Speaker 3: forces are extremely capable. All ground operations have a lethal
Speaker 3: component that no one should diminish the threat to US forces.
Speaker 3: I think you want to ask instead what the ultimate
Speaker 3: goal might be. What is the purpose? Are we trying
Speaker 3: to retain territory? Are we trying to send a message
Speaker 3: to Iran that we can take territory? We're trying to
Speaker 3: destroy key facilities. The question is what message are you
Speaker 3: trying to send to the Iranian leadership. We've already sent
Speaker 3: the message that we can destroy anything in Iran. We
Speaker 3: can control any physical space in Iran. We control the skies,
Speaker 3: which means we control the ground.
Speaker 2: Stay with us, mul Bloomberg surveillance coming up after this
Speaker 2: crude hovering around multi year highs. Michael Haig of Self Gen, writing,
Speaker 2: with each passing day, the market grows more strained with
Speaker 2: no resolution in sight, prices could climb towards one fifty
Speaker 2: a barrel in April. Michael joins us. Now for more. Michael,
Speaker 2: welcome to the program. Your note was one of the
Speaker 2: first notes I read to start the week. Scenario B.
Speaker 2: We're very close to what you call scenario B. What
Speaker 2: was scenario A and what do scenario B look like?
Speaker 4: Scenario A. First of all, good morning, thanks for having me.
Speaker 4: Scenario A was our basically scenario at the start of March.
Speaker 4: The market was pricing in a very quick resolution to
Speaker 4: this conflict. So our scenario A was that we see
Speaker 4: the streets opening up by the end of March, but
Speaker 4: prices getting up to one hundred and twenty five dollars
Speaker 4: a barrel. Looks like we're going to have to adjust
Speaker 4: that move to scenario B, where we have this conflict
Speaker 4: continuing through April and that brings oil solidly up to
Speaker 4: one hundred and fifty dollars a how.
Speaker 2: Michael, A. You know, pricing for longer. That's not just
Speaker 2: the short term story. That's a long term problem.
Speaker 4: Yeah. Unfortunately that seems to be the case because every
Speaker 4: day that goes by, oil taken of the production makes
Speaker 4: it harder to come back. Obviously, infrastructure gets more and
Speaker 4: more damaged. So yes, higher for longer. I'm afreed, Michael.
Speaker 4: This was an issue for the equity market.
Speaker 2: The issue I think a source of comfort was we
Speaker 2: had extreme vanquidation in the future's curve, and for people
Speaker 2: who aren't in your world, that just meant the front
Speaker 2: month of the future's curve was really elevated. But the
Speaker 2: market was pricing a short term problem and we had
Speaker 2: this steep drop off through the rest of the year.
Speaker 2: You see this plank out this morning. The opposite were
Speaker 2: starting to lift the back end of the curve, starting
Speaker 2: to price in the higher for longer scenario. Michael. This
Speaker 2: raises the question of demand destruction, so called demand elasticity.
Speaker 2: What are the realities for the energy market when does
Speaker 2: that destruction creep in?
Speaker 4: So well, there's one thing to not being able to
Speaker 4: ford oil because the price is too high, and the
Speaker 4: other thing is not being able to get the oil,
Speaker 4: and that's the bigger concern. So generally speaking, from a
Speaker 4: price perspective, and when we talk about demand elasticities, the
Speaker 4: oil market is fairly inelastic. That means that when prices
Speaker 4: go up, people really can't change their behavior that much.
Speaker 4: So given the fact we've had about a fifty percent
Speaker 4: increase in oil prices since the end of February, that
Speaker 4: would ordinarily mean from a price perspective, you would lose
Speaker 4: about one point two million barrels a day of oil
Speaker 4: demand as people can't afford it. If we go to
Speaker 4: the one hundred and fifty dollars scenario, then we'd be talking
Speaker 4: over three million barrels a day of oil demand destruction
Speaker 4: because of the price effect. But as I mentioned, it's
Speaker 4: not really just about the price. It's about that some
Speaker 4: countries can't get the oil. So you're already seeing airlines
Speaker 4: put on surcharges, cutting flights. You see refineries in China
Speaker 4: cutting their runs. You see ethanol crackers cutting their output
Speaker 4: because they can't get the feedstock. So there are some
Speaker 4: countries in Southeast Asia that maybe have fifteen to twenty
Speaker 4: days of oil and product in inventory. So we're going
Speaker 4: to get to a situation potentially where we get demand
Speaker 4: destruction because these countries can't operate as normal.
Speaker 1: Michael, to that point, we have sprs around the world.
Speaker 1: Different countries have their own strategic reserves when it comes
Speaker 1: to crude. Are you basically talking about the fact that
Speaker 1: we might have the crude but it's so dislocated in
Speaker 1: the market right now there's not going to be enough
Speaker 1: refining capacity to say turn that crew to diesel or
Speaker 1: jet fuel.
Speaker 2: Yeah.
Speaker 4: I mean we're talking seventeen million barrels a day that
Speaker 4: has been displaced. I mean, if you look back historically,
Speaker 4: we've basically had thirty geopolitical conflicts since the early nineteen seventies,
Speaker 4: and the next biggest disruption to supply was all the
Speaker 4: way back in nineteen seventy three when we had seven
Speaker 4: percent of oil being removed because of the Arab oil embargo.
Speaker 4: Now we're talking seventeen percent being removed. So it's a
Speaker 4: massive difference. So you know, all you need to do
Speaker 4: is take that seventeen million barrels and say how much
Speaker 4: can be redirected through pipeline. How much can be we
Speaker 4: offset through demand destruction, how much can come from the
Speaker 4: relief from Iranian sanctions on floating oil, et cetera, et cetera.
Speaker 4: And you add it all up and you still have
Speaker 4: a massive deficit of around eight nine million barrels a day.
Speaker 4: And that means that that can't get to the refined
Speaker 4: is in Singapore elsewhere they can't create the product, and
Speaker 4: that creates the issue for gasoline diesel, mainly in Asia.
Speaker 1: Michael, the way you talk, I'm thinking this is not
Speaker 1: going to be months. This sounds like a multi year recovery.
Speaker 1: Is that accurate?
Speaker 4: I don't think it would be as drastic as that,
Speaker 4: but I'm you know, as each month goes by, we're
Speaker 4: talking several more months to recover. The market's very resilient
Speaker 4: and it will bounce back, and there is plenty of
Speaker 4: oil out there in terms of spare capacity generally speaking,
Speaker 4: So you know, if by some miracle this was resolved
Speaker 4: tomorrow and all the oil came back into the market,
Speaker 4: we might lose like one or two million barrels a
Speaker 4: day because of the shut ins, because of infrastrut etc.
Speaker 4: But generally speaking, going into this, we were in a
Speaker 4: surplus of let's call it about three million barrels a day.
Speaker 4: So fingers crossed this doesn't go on through past April,
Speaker 4: because I think if we can get through that by
Speaker 4: the end of the year a year will be back
Speaker 4: to kind of normal.
Speaker 2: Michael, this is starting to creep into base metals. Let's
Speaker 2: just turn from energy to things like aluminum to comper.
Speaker 2: We're starting to see some big moves there as well.
Speaker 2: How far along do you think we are in the
Speaker 2: process of trying to understand how cyclic or the demand
Speaker 2: for those metals actually is at a time when a
Speaker 2: lot of people are getting built up on these secular
Speaker 2: tail when it's coming out of technology.
Speaker 4: Well, I think, I mean, let's let's think about copper here.
Speaker 4: I mean, we said before this conflict that there was
Speaker 4: some unusual demand situations going on in those metals markets
Speaker 4: given the growth of AI, etc. But also because of
Speaker 4: strategic stomppiling because of military spending. So I see a
Speaker 4: very bright future for those metals from that perspective, because
Speaker 4: coming out of this conflict, I still believe there'll be
Speaker 4: a push to do more strategic stockpiling four things like
Speaker 4: copper and aluminium just like we have for oil. We'll
Speaker 4: see more military spending that's very metal intensive. So you know,
Speaker 4: despite the fact that they get pulled down because equity
Speaker 4: get pulled down, I think I think their future is
Speaker 4: pretty bright.
Speaker 2: Can we finish on gold? Michael? Twenty percent move so
Speaker 2: far this month? Huge, huge move. What do you think
Speaker 2: is behind that move? Is it just an interest rate
Speaker 2: move driving people out of gold? Is there something else
Speaker 2: of ply.
Speaker 4: So, I think what's going on there is that we
Speaker 4: don't have any central bank buying right now. I don't
Speaker 4: think there's any appetite to do that where countries are
Speaker 4: squarely focused on getting through this energy crisis. I wouldn't
Speaker 4: be surprised to hear reports that some central banks have
Speaker 4: sold gold in order to subsize some of the energy
Speaker 4: issues that they have in their countries. So it's been
Speaker 4: a big pause I think in that buying. That's mainly
Speaker 4: the reason why we've seen it sell off. ETF flows
Speaker 4: by themselves couldn't explain the dramatic decline in the gold
Speaker 4: price that we've seen recently. Of course, some of it
Speaker 4: is fundamentally bas based on interest rate expectations, et cetera.
Speaker 4: But again, a bit like the base metal complex. I
Speaker 4: think once we get through this oil situation, with goal
Speaker 4: prices where they are right now, I would imagine central
Speaker 4: banks resuming they're buying.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: This bond markets some wild moves earlier on this morning,
Speaker 2: yields three four percent at the front end of the curve,
Speaker 2: past yield we've seen since last summer three eighty five. Now,
Speaker 2: because we've pulled back following those headlines, we're down five
Speaker 2: basis points on the session we priced out the easing.
Speaker 2: At one point we were talking about price again, rate
Speaker 2: hikes at the Federal Reserve. Let's have that conversation right
Speaker 2: now with the Federal Reserve, Governor Stephen Mara and the
Speaker 2: lone voice dissenting at last week's FMC meeting, continuing his
Speaker 2: push for interest rate cuts. Governor Maron joins us now
Speaker 2: for more. Steve, good to see you, good morning, Thanks
Speaker 2: for havving me back. Governor, Where do we begin with
Speaker 2: these headlines right here? As a policy maker, as an official,
Speaker 2: when things are moving this fast, what do you do?
Speaker 5: Well? Look, we've had already handsome whiplash this morning, and
Speaker 5: I think that underlines that we shouldn't be making policy
Speaker 5: based on short term headlines, right. We should wait for
Speaker 5: all the information to come in before really changing our outlook.
Speaker 5: And I think it's just still premature to have a
Speaker 5: clear view about what this is going to look like
Speaker 5: as you look twelve months out, and because of monetary
Speaker 5: policy lags, we really need to be looking a year
Speaker 5: to a year and a half out, and there's just
Speaker 5: not enough information yet about what that looks like.
Speaker 2: Communication in the near term, of course, matters. The chairman
Speaker 2: in the news conference last week really vowing to anchor
Speaker 2: inflation expectations. Do you think that's a worthwhile pursuit at
Speaker 2: this point?
Speaker 5: I do. Look, you know, traditional central banking Federal Reserve
Speaker 5: wisdom is that oil shocks head headline inflation, but they
Speaker 5: don't really pass that much into core as by as
Speaker 5: much as they do as they do into headline and
Speaker 5: the two ways that you would want to respond to,
Speaker 5: and so therefore you typically look through an oil shock. Now,
Speaker 5: the two excepts would be if inflation expectations beyond the
Speaker 5: first year start to move higher. That hasn't happened thus far.
Speaker 5: Inflation expectations for the first year out have moved higher,
Speaker 5: of course, but as I look at the CBI swop
Speaker 5: market beyond the first year, there hasn't been that much movement.
Speaker 5: Medium term five year, five year, longer term five year
Speaker 5: five year forward expectations have actually been coming down lately,
Speaker 5: so there's no evidence of that. The other reason why
Speaker 5: you would want to respond to an oil shock is
Speaker 5: if you saw a wage price spiral, if you saw
Speaker 5: wages responding to oil price increases, gas price increases, that
Speaker 5: could result in the type of reinforcing inflation dynamics that
Speaker 5: you want to forestall. Now Again, thus far, there's little
Speaker 5: evidence of that. In fact, wage pressures have been declining
Speaker 5: for the last few years on a steady, steady, steady basis,
Speaker 5: so that's also something that I don't really see right now.
Speaker 2: So the market, the labor market is just not strong
Speaker 2: enough to worry about it.
Speaker 5: I think the labor markets still could use additional support
Speaker 5: from montary policy, and that's why I dissented last meeting,
Speaker 5: as I have continued to send for all previous meetings.
Speaker 2: How lonely were you at that committee meeting just last
Speaker 2: week voting for a twenty five basis point reduction in
Speaker 2: the face of an energy shock. How robust was the
Speaker 2: conversation around the table.
Speaker 5: Look, I think a lot of people around the table,
Speaker 5: like me, were hesitant to draw conclusions from the oil
Speaker 5: from the oil and news thus far, because as I
Speaker 5: said before, we have to look twelve to eighteen months out,
Speaker 5: not what happened to the oil price yesterday. And so
Speaker 5: looking twelve to eighteen months out, there's still not enough
Speaker 5: clarity to think that montery policy itself should adjust in
Speaker 5: response to what's happened.
Speaker 2: Well, check out the old futures curve that has changed.
Speaker 2: I've just had one eye on December over the last
Speaker 2: three weeks or something that's gone from the sixties and
Speaker 2: threatening to break out into the nineties at one point
Speaker 2: earlier on this morning. That's a change. That's a real
Speaker 2: step up now it has.
Speaker 5: And I boosted my you know, in the summery of
Speaker 5: economic projections, I boosted my inflation dot for the end
Speaker 5: of the year to two point seven percent, reflecting that
Speaker 5: in part, right, so there is some expectation of higher
Speaker 5: headline inflation. However, I said before, I think it's way
Speaker 5: too early to draw conclusions that it's bleeding beyond headline
Speaker 5: inflation in a way that matters for monteria policy. Don't
Speaker 5: forget higher oil prices also depressed demand. Right, They take
Speaker 5: money out of the pockets of consumers that we spending
Speaker 5: on other goods and services and redirects it towards gas
Speaker 5: and other energy costs, and that depresses demand and causes
Speaker 5: unemployment to move a little bit higher. That offsets some
Speaker 5: of the increase in inflation.
Speaker 2: Your colleagues. This morning, Gustin goes to be at the
Speaker 2: Chicago Fed speaking to the press, saying, we could see
Speaker 2: a circumstance where we'd need to raise interest rates. How
Speaker 2: high is the bar to raise interest rates? What kind
Speaker 2: of circumstances would you personally need to see?
Speaker 5: Yeah, so I just laid out a couple of them before.
Speaker 2: Right.
Speaker 5: If it looks like the oil like the oil shock,
Speaker 5: is bleeding into inflation expectations beyond the first year, then
Speaker 5: you get really concerned about second rand effects. Or it
Speaker 5: looks like you're starting to cause a wage price spiral,
Speaker 5: then you get really concerned about second rend effects. First
Speaker 5: round effects are not something you traditionally respond to as
Speaker 5: a central bank. Now I'll say one thing beyond that,
Speaker 5: which is that these oil shocks have been things that
Speaker 5: this FED has looked through for a long time, right,
Speaker 5: it would be highly unusual for the FED to start
Speaker 5: looking through them now. And when you think about what
Speaker 5: happened in twenty twenty one and twenty twenty two, we
Speaker 5: did have negative supply shocks like the oil shock from
Speaker 5: the Russia Ukraine invasion. But in my view, part of
Speaker 5: the reason why it was able to reverb right through
Speaker 5: the economy the way it did was because policy settings
Speaker 5: of the time were very different. Monetary policy and fiscal
Speaker 5: policy were at all time historical accommodative levels. We were
Speaker 5: doing one hundred and twenty billion dollars a month of KIWI.
Speaker 5: We were doing two trillion dollars fiscal packages at a time.
Speaker 5: That's not the case right now. We're not hitting the
Speaker 5: gas on demand that would interact with the higher oil
Speaker 5: price in a way that we reverberate these prices through
Speaker 5: the economy. Now, that's not the case at all.
Speaker 1: But right now we're just seeing price spike on paper market.
Speaker 1: But what's happening in the physical market is actually avoid
Speaker 1: We are seeing not just shut ins, but some of
Speaker 1: these installations going to take years to rebuild. At what
Speaker 1: point does that start to potentially de anchor inflation expectations.
Speaker 5: Yes, so you'd want to see you'd want to see
Speaker 5: the oil price shocks start to reverberate through supply chains
Speaker 5: and pushing up prices.
Speaker 1: More broadly, we are there in terms of airlines diesel.
Speaker 1: That means that it's going to do more expensive in
Speaker 1: terms of some goods and services that are delivered by truck.
Speaker 5: Yeah, there's been a few instances, but you want to
Speaker 5: see that in a broad based way that starts to
Speaker 5: bleed in core inflation and boost it and boosted in
Speaker 5: a way that's sort of not just a one off time,
Speaker 5: but you start to see really second round effects that
Speaker 5: are concerning for the longer term. And if that starts
Speaker 5: to happen, then you start to get concerned about inflation.
Speaker 5: And I think that that is what you did see
Speaker 5: happen in twenty one twenty two, and thus far I
Speaker 5: don't see it happening on a broad basis. Now it
Speaker 5: could happen, right, but thus far it hasn't happened on
Speaker 5: a broad basis. You get some usyncratic stories like airline
Speaker 5: prices that are more directly tied to jet fuel, but
Speaker 5: beyond that you haven't really seen it, and I think
Speaker 5: part of the reason why is because we're not hitting
Speaker 5: on the gas. We're not hitting the gas on demand,
Speaker 5: We're not boosting demand with all time record accommodative policy
Speaker 5: in a way that would allow pricing to accommodate a
Speaker 5: supply shock like that.
Speaker 2: It's fair to say that I think a lot of
Speaker 2: FED watchers watching this right now, and I'm getting some
Speaker 2: reaction from them in real time, agree with you that
Speaker 2: this isn't the environment to high grate. The opposite, though,
Speaker 2: is a difficult argument to make. Is it the right
Speaker 2: time to cut interest rates this quickly, this soon?
Speaker 1: Yeah?
Speaker 5: So, as I said before, traditionally you would look through
Speaker 5: an oil price shock like this, which means that my
Speaker 5: policy outlook from before or is unchanged, and my policy
Speaker 5: outlook from before would be gradual cuts of interest rates.
Speaker 5: I had about six cuts for the year at the
Speaker 5: last step in December. I reduced that to four cuts
Speaker 5: for the year in response to the inflation data right
Speaker 5: that we received between the two between the two projection periods.
Speaker 5: So I'm maintaining my outlook that I had change.
Speaker 2: For Give me for jumping in, but the balance of
Speaker 2: risks around the outlook should change. That should change off
Speaker 2: the back of energy shock. Isn't that a fair summary
Speaker 2: of where we should be?
Speaker 5: Well, the balance service does change, but I think it's
Speaker 5: actually changed on both sides equally. The inflation risks have
Speaker 5: got a little more concerning, but the unemployment risks have
Speaker 5: gotten more concerning too, because the negative supply shock that
Speaker 5: is the oil price is also a negative demand shock.
Speaker 5: You're taking money out of goods and services that are
Speaker 5: not energy that would have been spent on those goods
Speaker 5: and services anyway. And I viewed the labor market as
Speaker 5: continuing its gradual softening trend in the last three years.
Speaker 5: That trend has been in place for three years. I've
Speaker 5: seen nothing that would convince me the trend is stopped.
Speaker 2: Right.
Speaker 5: That's a very very powerful medium term trend that's been
Speaker 5: in place for several years now. And taking money out
Speaker 5: of goods services that's not energy to devote a higher
Speaker 5: energy process is exactly the type of thing that worries
Speaker 5: me that trend might accelerate. So the balance of risk changed,
Speaker 5: but I think it got worse on both sides. I
Speaker 5: don't think it changed asymmetrically.
Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best
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