WEBVTT - Surveillance: Ukraine War with Bolton 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along 0:00:09.240 --> 0:00:13.200 with Jonathan Ferroll and Lisa Abramowitz Jaily. We bring you 0:00:13.320 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.960 --> 0:00:23.840 Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com 0:00:23.920 --> 0:00:28.760 and of course on the Bloomberg terminal. It is a 0:00:28.880 --> 0:00:30.680 joint up right now to speak to one of the 0:00:30.760 --> 0:00:33.839 lightning rods of an international relations and our study of 0:00:33.840 --> 0:00:38.240 our relationships worldwide, and that is John Bolton, of course, 0:00:38.240 --> 0:00:41.680 Ambassador Bolton, with so many tours of duty and always 0:00:41.680 --> 0:00:45.559 someone looking at the force and power of Russia, give 0:00:45.640 --> 0:00:48.680 us a measurement on this Monday morning, John, of the 0:00:48.760 --> 0:00:53.640 force and power of Mr Putin, Well, he suffered some 0:00:53.840 --> 0:00:57.960 severe setback so far in almost six weeks of war 0:00:58.000 --> 0:01:01.400 in Ukraine. There's no doubt about it. The Russians obviously 0:01:01.440 --> 0:01:05.640 miscalculated the extent of Ukraine's resistance, which has been heroic, 0:01:06.200 --> 0:01:09.520 and they miscalculated the capability of their own military, which 0:01:09.520 --> 0:01:12.640 has had one failure after another from the strategic level 0:01:12.720 --> 0:01:16.600 on down the simple logistics like food and gasoline. Now, 0:01:16.640 --> 0:01:19.520 all that said, they still control a considerable amount of 0:01:19.600 --> 0:01:23.200 Ukrainian territory, and it looks like they're trying to get 0:01:23.200 --> 0:01:28.200 their act together, regroup, pursue more sensible objectives. I'll have 0:01:28.240 --> 0:01:32.000 a piece up dot com a little bit later this morning. 0:01:32.319 --> 0:01:35.320 It says, I think what the men Many are also saying, 0:01:35.319 --> 0:01:38.880 they're going to go after the russiphile areas of southern 0:01:38.880 --> 0:01:42.600 and eastern Ukraine. And let's remember when we come when 0:01:42.600 --> 0:01:45.520 we come to negotiations, which we're not in seriously yet, 0:01:45.560 --> 0:01:48.279 but when we come to it, the more land Russia holds, 0:01:48.440 --> 0:01:49.880 the harder it's going to be to get them to 0:01:49.880 --> 0:01:52.520 give it up. John Boldon, I want your perspective, as 0:01:52.520 --> 0:01:55.520 we talked to admnstra Vetas as well, about what has 0:01:55.520 --> 0:01:59.400 been underreported in my opinion, which is the land grab 0:01:59.440 --> 0:02:03.880 along the Black Sea. What should be the American response 0:02:04.240 --> 0:02:08.959 to the territory taken down to Odessa? Right? I think 0:02:09.000 --> 0:02:12.280 this is a central part of what Putin's objectives have 0:02:12.400 --> 0:02:14.680 been in which, frankly, if he had focused on the 0:02:14.720 --> 0:02:16.799 south and the east at the beginning of the war 0:02:16.840 --> 0:02:21.440 in February, he might already have putin once the entire 0:02:21.560 --> 0:02:23.519 north coast of the Black Sea. I don't think there's 0:02:23.520 --> 0:02:26.680 any question about that. Even so, Deatha wants all that 0:02:26.840 --> 0:02:30.360 territory because he thinks it's strategically critical to Russia and 0:02:30.480 --> 0:02:34.120 because it will landlock Ukraine. So either things that have 0:02:34.160 --> 0:02:37.080 been coming through Odessa into Ukraine now will have to 0:02:37.120 --> 0:02:40.000 pass through Russian tolls and pay for it. Are they 0:02:40.000 --> 0:02:44.000 gonna have to completely switch their trading routes through Poland 0:02:44.040 --> 0:02:47.440 and Hungary and other Eastern European countries. It will give 0:02:47.720 --> 0:02:51.079 putin enormous strategic leverage over Ukraine. And as I say, 0:02:51.120 --> 0:02:53.760 why he didn't go after it first, I don't understand. 0:02:53.880 --> 0:02:56.760 I want to turn Inbassador Bolton to the reality. You 0:02:56.840 --> 0:02:59.600 came out of Yale. You worked with David Keane, you 0:02:59.680 --> 0:03:02.079 worked the no no relation to me, I should point 0:03:02.080 --> 0:03:06.600 out you you worked with with a Rush, a Republican 0:03:07.160 --> 0:03:10.960 party that wasn't afraid to project. Then you work for 0:03:11.000 --> 0:03:15.760 Donald Trump, who had his unique isolation As Tendencies described 0:03:15.800 --> 0:03:23.200 the new American isolationism described the new GOP isolationism, well, 0:03:23.240 --> 0:03:26.440 I think there's always been a strand of isolationism in 0:03:26.480 --> 0:03:29.200 the Republican Party. I think it's actually broader in the 0:03:29.200 --> 0:03:32.119 Democratic Party. It takes a somewhat different form. They think 0:03:32.120 --> 0:03:35.360 the world is going to be saved by multilateral organizations 0:03:35.400 --> 0:03:38.000 like the United Nations. That's kind of delusional. But the 0:03:38.080 --> 0:03:42.200 Republican delusion is that none of this overseas, none of 0:03:42.240 --> 0:03:45.080 this in Ukraine has anything to do with us. I 0:03:45.440 --> 0:03:48.240 think it has everything to do with us. Our way 0:03:48.280 --> 0:03:51.760 of life depends on interest scattered all over the world, 0:03:51.760 --> 0:03:54.680 and the isolationists and the Republican Party don't see that, 0:03:54.760 --> 0:03:57.600 don't see anything worth defending. They'd find out when they 0:03:57.640 --> 0:04:00.920 began to disappear. But I am actually hopeful. I think 0:04:00.960 --> 0:04:05.440 the isolationist strand in the Republican Party has shrunk almost 0:04:05.480 --> 0:04:09.800 back to historic low levels. I think Biden's catastrophic withdrawal 0:04:09.840 --> 0:04:13.720 from Afghanistan last summer was a major factor there. And 0:04:13.760 --> 0:04:17.200 I think if you look at Republican views on assistance 0:04:17.240 --> 0:04:20.200 to Ukraine and the current conflict, you can almost see 0:04:20.240 --> 0:04:23.760 those two events pushing the party back to its real 0:04:23.800 --> 0:04:28.599 Reaganite foundations for the contemporary world. So, what would be 0:04:28.640 --> 0:04:31.480 an appropriate response from the United States, or for Europe 0:04:31.520 --> 0:04:34.240 for that matter, for alleged war crimes in Busha and 0:04:34.279 --> 0:04:38.760 other cities in Ukraine. Look, this is there's there's little 0:04:38.839 --> 0:04:41.680 doubt based on the evidence we had of real barbarity 0:04:41.720 --> 0:04:43.760 on the part of the Russians. But look, it's nothing 0:04:43.800 --> 0:04:46.200 new for them that this. They've done the Sinceria, they 0:04:46.240 --> 0:04:49.440 did it in Czechnia. Uh and so we shouldn't have 0:04:49.480 --> 0:04:52.080 been surprised by it. But I'll tell you something, none 0:04:52.080 --> 0:04:55.480 of this intimidates Vladimir Putin or the Siloviki, the men 0:04:55.560 --> 0:04:58.800 of power around him. These are the hard men of history. 0:04:58.880 --> 0:05:02.560 You can threaten them with crimes prosecutions all you want, 0:05:02.600 --> 0:05:04.760 it's not going to slow him down in the slightest 0:05:05.160 --> 0:05:08.320 I think I've written on this extensively for over twenty years. 0:05:08.880 --> 0:05:13.719 These International Criminal Court the type operations do not deter 0:05:13.960 --> 0:05:18.000 these things from happening, and they're very rarely able to 0:05:18.080 --> 0:05:20.960 administer punishment. That this this will have to come when 0:05:21.040 --> 0:05:24.480 Russians get control of their government again and take actions 0:05:24.520 --> 0:05:27.120 if they desire to, against the people who committed the 0:05:27.160 --> 0:05:30.600 crimes in their name. Okay, So if Latimer Putin has 0:05:30.640 --> 0:05:32.800 proven time and again that he is not capable of 0:05:32.800 --> 0:05:36.159 being deterred, that deterrence tactics to this point have not worked, 0:05:36.800 --> 0:05:39.280 what will he respond to? Does use the force need 0:05:39.360 --> 0:05:40.800 to be on the table. And when the U S 0:05:40.880 --> 0:05:43.120 and other countries like the UK today for example, saying 0:05:43.160 --> 0:05:44.640 that they don't want to escalate, they don't want to 0:05:44.640 --> 0:05:49.120 be escalatory, what would escalation actually look like? How far 0:05:49.279 --> 0:05:52.240 can they take it? Well? I think Putin would have 0:05:52.279 --> 0:05:55.359 responded to adequate deterrence, but he hasn't seen any of it. 0:05:55.720 --> 0:05:58.599 You know, there's a lot of nattering by leaders of 0:05:58.680 --> 0:06:01.960 NATO countries about United the Alliances and so on, and 0:06:02.080 --> 0:06:04.400 yet we can't get the leader of the Free world 0:06:04.440 --> 0:06:09.240 to agree to transfer of Polish MiGs to Doukrainian Air Force. 0:06:09.279 --> 0:06:11.599 He said again yesterday it would be World War three, 0:06:11.640 --> 0:06:15.240 which it certainly would not. The West clearly failed. This 0:06:15.320 --> 0:06:17.839 is a shame that we will have to bear in 0:06:17.960 --> 0:06:21.919 not being able to determin who starting this evasion. John, 0:06:21.920 --> 0:06:24.200 that was very rude and undiplomatic of you, as you've 0:06:24.240 --> 0:06:28.479 been called before. Let's drive a conversation for to what 0:06:28.560 --> 0:06:32.360 to do now? Are you advocating at the Secretary of 0:06:32.440 --> 0:06:36.080 State needs to take the Bolton rute and undiplomatic and 0:06:36.120 --> 0:06:39.200 be more assertive, more aggressive or can we have a 0:06:39.279 --> 0:06:43.640 grace to our diplomacy? Is we force what America wants? 0:06:44.839 --> 0:06:48.120 Look I think we have. We have been plenty graceful 0:06:48.200 --> 0:06:51.159 with our allies, and we're still not getting them to 0:06:51.200 --> 0:06:53.320 do enough. And we're not doing enough either. I think 0:06:53.320 --> 0:06:56.440 if you listen to some Europeans, the British in particular, 0:06:57.080 --> 0:07:00.560 uh that they say we're constantly being dragged long by 0:07:00.640 --> 0:07:04.840 Europeans like themselves urging us to do more, or pressure 0:07:04.960 --> 0:07:08.440 from both the House and the Senate Democrat and Republican like. 0:07:09.320 --> 0:07:13.080 The fact is, if Putin retains territory after this is over, 0:07:13.360 --> 0:07:16.280 he has won and and and his effort to re 0:07:16.520 --> 0:07:20.080 establish Russian hegemony and maybe even sovereignty in the space 0:07:20.080 --> 0:07:24.080 of the four Soviet Union has been very paid. I 0:07:24.360 --> 0:07:25.760 don't mean to cut you off, but this is too 0:07:25.840 --> 0:07:28.480 important John right now. And that is a new domino 0:07:28.640 --> 0:07:32.640 theory moving from Russia west. Are you suggesting there could 0:07:32.640 --> 0:07:35.880 be a domino theory here if he takes part a 0:07:36.000 --> 0:07:40.360 bit some of Ukraine. Yeah, he already has some after 0:07:40.400 --> 0:07:43.680 the fourteen invasion, to which we did not respond effectively, 0:07:43.680 --> 0:07:46.360 and he's obviously going to try and get more. He's 0:07:46.400 --> 0:07:49.680 got plenty of other targets beside NATO countries within the 0:07:49.720 --> 0:07:52.200 space of the former Soviet Union. But if you ask 0:07:52.520 --> 0:07:55.920 the polls, if you ask Estonia, lad Via, Lithuania, they 0:07:55.920 --> 0:07:59.160 are deeply afraid that that they're very high on the 0:07:59.240 --> 0:08:03.160 Russian card a list and an ineffective, indeed feckless Western 0:08:03.240 --> 0:08:08.360 response will simply encourage Prutin. Okay, so that's looking west. 0:08:08.480 --> 0:08:11.360 What about to its other border with China, Mr Bolton, 0:08:11.480 --> 0:08:13.960 what role do you think China is playing actively or 0:08:14.000 --> 0:08:17.320 inactively here? Well? I wrote in the Wall Street Journal 0:08:17.320 --> 0:08:19.320 a couple of weeks ago. I think Russian China haven't 0:08:19.360 --> 0:08:22.160 on top here. It's not a full up alliance, but 0:08:22.200 --> 0:08:24.720 it's an understanding. I think China has Russia is back 0:08:24.760 --> 0:08:27.720 in this conflict, and they'll expect Russia is back when 0:08:27.720 --> 0:08:30.840 they launched their aggressive actions, whether it's against Taiwan or 0:08:30.840 --> 0:08:34.040 more in the South China See or elsewhere along their 0:08:34.080 --> 0:08:37.160 periphery in the Indo Pacific. Right now. I think what 0:08:37.240 --> 0:08:40.880 the Chinese are doing is making their financial institutions available 0:08:40.920 --> 0:08:44.560 to sanction Russian banks and others to ineffect launder that 0:08:44.720 --> 0:08:47.840 moment back into the financial system. And I think although 0:08:47.920 --> 0:08:51.960 China already purchases significant amounts of Russian oil and gas, 0:08:52.120 --> 0:08:55.280 they'll be happy to purchase or uh if if we 0:08:55.360 --> 0:08:58.120 had an effective embargo, which we don't. So these are 0:08:58.120 --> 0:09:01.760 the kinds of relationships. It doesn't require military assistance from China. 0:09:01.960 --> 0:09:05.679 Economic assistance is very important, and you've got other major 0:09:05.720 --> 0:09:11.079 countries like India, which, according to press reports, quadruple its 0:09:11.080 --> 0:09:13.800 purchases of Russian oil in February. John, I gotta get 0:09:13.840 --> 0:09:17.679 this into too important. In this conversation, you mentioned we 0:09:17.720 --> 0:09:20.439 should not worry of World War three, and perhaps we 0:09:20.520 --> 0:09:24.120 should not worry of Mr Putin and his nuclear abilities. 0:09:24.559 --> 0:09:27.760 How do we manage that? How do we develop a 0:09:27.880 --> 0:09:31.920 confidence that we will not find some form of World 0:09:31.920 --> 0:09:34.720 War Well, I'm not saying we shouldn't worry about it, 0:09:34.720 --> 0:09:37.160 of course we should. But right now we failed to 0:09:37.200 --> 0:09:40.400 deter Putin, and he's deterring us uh. And I think 0:09:40.440 --> 0:09:42.520 if he can get what he wants for free without 0:09:42.559 --> 0:09:46.800 effective Allied response, he's going to be encouraged to do more. 0:09:46.880 --> 0:09:49.880 I think providing the Polish mixes is actually a pretty 0:09:49.920 --> 0:09:53.480 small piece here. We're now in a race of time 0:09:53.559 --> 0:09:56.439 with the Russians. We've got to get more military assistance 0:09:56.480 --> 0:09:59.000 to the Ukrainians. We should be doing a lot more. 0:09:59.120 --> 0:10:01.400 I think a lot abo pctions we had are off 0:10:01.400 --> 0:10:04.160 the table. Biden gave them away in early December when 0:10:04.160 --> 0:10:08.160 he took American force away as an option. By the way, 0:10:08.120 --> 0:10:11.600 I got absolutely nothing for that. So we're constrained by 0:10:11.640 --> 0:10:13.680 what's going before us. But I think we should be 0:10:13.720 --> 0:10:18.200 absolutely clear here. If we allowed Russia to get a 0:10:18.360 --> 0:10:21.199 major part of its objectives in Ukraine, we have suffered 0:10:21.200 --> 0:10:24.760 a significant defeat. John Bolton, thank you so much, John, 0:10:24.840 --> 0:10:29.160 Thank you for having always thoughtful and controversial to say. 0:10:29.559 --> 0:10:36.240 At least Lori Calvacina has had the courage to be 0:10:36.400 --> 0:10:39.480 in the markets. She's done it small cap, large cap 0:10:39.480 --> 0:10:43.760 at RBC Capital Markets. But far more, John, Lori Calvacina 0:10:44.160 --> 0:10:47.880 has done sector analysis of what to do and just 0:10:47.960 --> 0:10:51.400 as much what not to do. Joins us now, Tom, 0:10:51.400 --> 0:10:53.600 thank you Lori. Let's start with that energy code that's 0:10:53.600 --> 0:10:56.240 not at twenty one. Get along overweight. You like the 0:10:56.280 --> 0:10:58.960 sector he left the sector That one has popped big 0:10:59.000 --> 0:11:02.040 time through twenty one, three two. Then in the last 0:11:02.080 --> 0:11:04.240 week you've made a move. Can you walk us through it, 0:11:04.280 --> 0:11:08.680 just piece by piece? What led you to this point? Sure? So. Look, 0:11:08.760 --> 0:11:11.000 our job as a strategist is to really connect the 0:11:11.040 --> 0:11:13.400 macro and the micro and so let's start with the macro. 0:11:13.640 --> 0:11:15.760 We had this sense that we really wanted to reduce 0:11:15.760 --> 0:11:17.960 some exposure to the value trade, and that's really for 0:11:18.000 --> 0:11:20.440 two reasons. Number One, the FED we have passed an 0:11:20.480 --> 0:11:23.360 important mile marker. When the FED lifts off. We typically 0:11:23.360 --> 0:11:25.800 see value outperform ahead of that, but growth take back 0:11:25.920 --> 0:11:30.160 leadership afterwards. Secondly, economic forecasts are coming down. Tom Porcelli 0:11:30.240 --> 0:11:31.800 just took his number to two and a half percent, 0:11:31.840 --> 0:11:34.040 which is trend, and consensus is looking for two point 0:11:34.040 --> 0:11:37.400 three percent next year. And we typically see value outperform 0:11:37.480 --> 0:11:39.640 and a hot or above at trend economy, but growth 0:11:39.640 --> 0:11:42.640 outperforms when the economy is running cool, so we think 0:11:42.679 --> 0:11:45.080 markets are really ready to start shifting back to growth. 0:11:45.280 --> 0:11:47.200 And in fact, in mid March we started to see 0:11:47.200 --> 0:11:50.480 growth outperformed value. So that's the macro, and when we 0:11:50.520 --> 0:11:53.760 thought about how we wanted to reduce that value exposure, 0:11:54.160 --> 0:11:56.200 we turned to our analyst survey, which is something that 0:11:56.200 --> 0:11:58.440 we do once a quarter and just completed last week. 0:11:58.760 --> 0:12:01.360 Back in December. When we did this survey, my Energy team, 0:12:01.360 --> 0:12:05.160 which had been bullish and highly bullish throughout all, was 0:12:05.280 --> 0:12:08.080 number one in terms of their performance assessments over the 0:12:08.120 --> 0:12:10.640 next six to twelve months, and the survey we just completed, 0:12:10.679 --> 0:12:12.960 they fell the number four. Now I'm not saying they're bearished, 0:12:12.960 --> 0:12:15.679 but their enthusiasm clearly fell it much and we had 0:12:15.679 --> 0:12:18.680 a sense that between that and financial's energy was really 0:12:18.679 --> 0:12:21.439 the better place to reduce that value exposure, just given 0:12:21.440 --> 0:12:23.640 those bottom up and puts from our analysts. So learning 0:12:23.640 --> 0:12:25.880 help us understand. Also then the next logical question, and 0:12:25.920 --> 0:12:28.040 this sequence of questions that will have with you this morning, 0:12:28.440 --> 0:12:31.800 why maintain the overweight un financials given the growth slowed 0:12:31.800 --> 0:12:35.560 down that you seem to be talking about. So I 0:12:35.600 --> 0:12:38.559 think we're, you know, when we're thinking about that economic forecast, 0:12:38.600 --> 0:12:41.400 we're making the assumption that we're heading for a below 0:12:41.480 --> 0:12:44.520 trend type economic backdrop, but not a recession. And I 0:12:44.559 --> 0:12:46.559 do leave that call to Tom for Shelley, and he 0:12:46.600 --> 0:12:48.240 will tell you that the risks have grown, but he 0:12:48.280 --> 0:12:50.640 hasn't really pulled into been pulled into that yet as 0:12:50.720 --> 0:12:53.920 his base case. I do think financials have been suffering 0:12:54.720 --> 0:12:57.520 from that growing sense of recession fears. And I think 0:12:57.559 --> 0:13:00.480 as the market really sort of transitions and sort of 0:13:00.520 --> 0:13:02.640 settles into this idea that we're just going to hit 0:13:02.720 --> 0:13:05.720 growth significantly, but not really enter a recession. You could 0:13:05.720 --> 0:13:08.840 actually see some relief on the financial side. Also. Frankly, John, 0:13:08.880 --> 0:13:11.160 I think that heading into this reporting season, the sentiment 0:13:11.160 --> 0:13:14.120 on financials has been pretty dour. That's the complete opposite 0:13:14.120 --> 0:13:16.120 of what we saw ahead of the last reporting season 0:13:16.160 --> 0:13:17.959 when they had really been flying and got you know, 0:13:18.040 --> 0:13:19.920 kind of pulled back down. I think we have a 0:13:19.920 --> 0:13:22.079 better set up going into this reporting season just from 0:13:22.080 --> 0:13:25.800 a sentiment perspective, Laura, the zeitgeist is that earnings grow 0:13:26.440 --> 0:13:29.600 and then they don't. That the market goes up and 0:13:29.640 --> 0:13:33.600 then it doesn't, That nominal GDP is pretty good, and 0:13:33.640 --> 0:13:37.280 then it's not. How do you determine that tip point 0:13:37.440 --> 0:13:42.040 when earnings turn low single digit or dare I say negative? 0:13:43.760 --> 0:13:45.880 So it's a great question, Tom, and I will tell 0:13:45.920 --> 0:13:48.640 you that as a forecaster and someone who builds a 0:13:48.679 --> 0:13:51.680 lot of back tests and regressions, earnings have simply gotten 0:13:51.760 --> 0:13:55.000 much harder to forecast. And there are models that we've build, 0:13:55.040 --> 0:13:57.640 inputs that we've looked at over time, things liking that 0:13:57.760 --> 0:14:01.199 labor costs, for example, which have been brilliant at forecasting 0:14:01.240 --> 0:14:03.960 earnings in the past um but haven't worked as well 0:14:03.960 --> 0:14:05.480 when we look over the past few years, and I'm 0:14:05.480 --> 0:14:08.480 thinking specifically about margets and I think the reason for that, 0:14:08.520 --> 0:14:10.720 and you know, I'm a transcript junkie. We really go 0:14:10.800 --> 0:14:12.959 through and just you know, read everything we can in 0:14:13.160 --> 0:14:16.520 SMP five hundred recording season each quarter, and what we've 0:14:16.559 --> 0:14:19.520 really seen or two things is Number one, companies have 0:14:19.640 --> 0:14:23.480 just gotten much much better at combating margin pressures and 0:14:23.520 --> 0:14:27.800 so new efficiencies, software, new tools, new recruiting strategies, those 0:14:27.840 --> 0:14:29.280 are all kind of throwing a monkey wrench in the 0:14:29.320 --> 0:14:32.000 models for people like me. Secondly, when you think about 0:14:32.040 --> 0:14:35.280 the market from kind of a top down perspective, technology 0:14:35.440 --> 0:14:38.280 has been just a structural margin winner over time, and 0:14:38.320 --> 0:14:41.160 it now accounts for a disproportionate share of earnings, much 0:14:41.240 --> 0:14:44.200 much bigger impact now than it has in the past, 0:14:44.200 --> 0:14:46.720 and so that's also throwing some of those backward models off. 0:14:46.960 --> 0:14:48.520 And I'll tell you, I think the by side has 0:14:48.520 --> 0:14:51.480 really ratcheted down their expectations for earnings coming into this 0:14:51.560 --> 0:14:54.640 recording season. So we're not expecting things to be fantastic, 0:14:54.680 --> 0:14:56.160 but we do think there's already a lot of fear 0:14:56.200 --> 0:14:59.240 baked it awesome. As always, you know, we love catching 0:14:59.280 --> 0:15:01.160 up with you lot of count of scena of obviously 0:15:01.240 --> 0:15:03.800 capital markets, just on some of the changing kids around 0:15:03.840 --> 0:15:05.960 the sect of preferences for obviously and how to line 0:15:06.000 --> 0:15:13.960 up with you can always tain as well without further ado. 0:15:14.640 --> 0:15:18.600 Andrew Hallandhorst the most studied economist in America in the 0:15:18.680 --> 0:15:22.360 last number of days. He's chief US Economists City Group. Andrew, 0:15:22.440 --> 0:15:24.680 John Ferreroll Torrio to Shreds a day you put out 0:15:24.720 --> 0:15:27.160 your note looking for a set of higher notes. I'm 0:15:27.160 --> 0:15:29.800 glad to see you survived, Andrew. I want to talk 0:15:29.840 --> 0:15:32.240 about the underlying theory at you see l A that 0:15:32.320 --> 0:15:35.640 you learned on all this. If we get the persistency 0:15:35.960 --> 0:15:40.680 of a non measured rate rise, what are the responsiveness 0:15:40.840 --> 0:15:45.360 is within the system you're most focused on. Those elasticities 0:15:45.360 --> 0:15:49.960 are going to be absolutely original. Given the Hollendhorst move, 0:15:50.560 --> 0:15:54.520 which ones matter? Yeah, thanks very much Tom for having me. 0:15:54.560 --> 0:15:58.040 It's a great question how the economy responds as you 0:15:58.040 --> 0:16:00.920 start to see interest rates moving higher um and you 0:16:01.120 --> 0:16:03.160 to your point. I think when people first saw our 0:16:03.160 --> 0:16:05.920 call for fifty basis point hikes at the next four meetings, 0:16:06.280 --> 0:16:09.080 it looked aggressive to some people. But if you think 0:16:09.080 --> 0:16:12.080 about the kind of underlying theory, like you were mentioning, 0:16:12.640 --> 0:16:15.800 this is a FED that has a neutral rate. They 0:16:15.800 --> 0:16:18.040 think around two and a half percent. In a world 0:16:18.040 --> 0:16:21.600 of two percent inflation. We're living in a world of 0:16:22.080 --> 0:16:25.520 six seven, eight, almost nine percent inflation, depending on how 0:16:25.520 --> 0:16:28.880 you calculate it. So the idea that FED officials would 0:16:28.880 --> 0:16:31.480 want to pretty expeditiously to use their term, get to 0:16:31.680 --> 0:16:34.440 a number like two percent, a little bit over two percent, 0:16:34.560 --> 0:16:37.080 that that's not that aggressive of a call. Okay, well 0:16:37.120 --> 0:16:39.680 this is important. Let's chop it down from I S 0:16:39.840 --> 0:16:42.600 l M and all the other theories blah blah blah 0:16:42.960 --> 0:16:46.240 down to the core economic function. If we get a 0:16:46.280 --> 0:16:51.840 whole norse move, which partial differential moves the most consumption 0:16:52.480 --> 0:16:55.240 or business investment or is it going to be expressed 0:16:55.240 --> 0:16:59.120 in the trade balance, which one matters? Tom. I would 0:16:59.200 --> 0:17:01.640 watch the howasing market here. I think that's really the 0:17:01.680 --> 0:17:04.640 important sector to watch in general. That's where interest rates 0:17:04.640 --> 0:17:06.800 have a very direct effect on what's going on in 0:17:06.840 --> 0:17:09.320 the economy. And if you look at that thirty year 0:17:09.640 --> 0:17:13.280 fixed rate nominal mortgage rate that's moved up from around 0:17:13.280 --> 0:17:16.040 three percent above four and a half percent now, so 0:17:16.080 --> 0:17:18.800 we've had a significant move in mortgage rates. The question 0:17:18.840 --> 0:17:21.000 you ask as an economist, is is four and a 0:17:21.040 --> 0:17:24.159 half percent mortgage rate really that high in a world 0:17:24.200 --> 0:17:26.760 where you're seeing inflation that's much higher. Does the FED 0:17:26.840 --> 0:17:29.120 need to go even further than that? But I think 0:17:29.160 --> 0:17:31.399 that is kind of the first sign that we're getting, 0:17:31.440 --> 0:17:34.119 you know, some traction from what the FED is doing 0:17:34.680 --> 0:17:37.840 feeding through to broader financial conditions, WHI should feed through 0:17:37.840 --> 0:17:39.760 in some way to the housing market. It's just it's 0:17:39.800 --> 0:17:41.520 not really that that's gonna be enough to pull off 0:17:41.560 --> 0:17:44.480 the housing market. And that really that really rings true 0:17:44.480 --> 0:17:47.440 here is Kaylee looks at seven thousand square feet downtown. 0:17:47.480 --> 0:17:50.280 I mean, the mortgage rate adjustment has been huge. Honestly, 0:17:50.359 --> 0:17:52.760 house prices Tom in this country, in the UK, for 0:17:52.800 --> 0:17:57.959 that match, are obscene, absolutely incredible. Nuts, are right, I'm 0:17:58.000 --> 0:18:00.520 gonna use that word. They are nuts. And Drew I 0:18:00.640 --> 0:18:02.560 wasn't tough on you at till a couple of weeks ago, 0:18:02.720 --> 0:18:05.480 and you know that. Let's talk about the economic data. Andrew. 0:18:05.480 --> 0:18:07.800 You've got faith in this economy. You've got faith in 0:18:07.800 --> 0:18:10.280 this economy, and for that reason, to restrain this economy, 0:18:10.280 --> 0:18:11.960 you think rates have to go a whole lot higher. 0:18:12.200 --> 0:18:15.320 There was one little crack in that on Friday, and 0:18:15.359 --> 0:18:17.920 even the team picked up on it. The I M. 0:18:17.960 --> 0:18:20.560 Can you walk us through what's been happening and why 0:18:20.600 --> 0:18:22.639 that maybe just a little bit of a blinking, flashing 0:18:22.720 --> 0:18:25.560 light on your dashboard. Yeah, I think you really have 0:18:25.600 --> 0:18:28.360 to be watching all the signals here because to your point, John, 0:18:28.359 --> 0:18:30.920 I mean, we have very strong demand, demand that is 0:18:30.960 --> 0:18:34.800 exceeding supply. The issue when demand exceeds supply is that 0:18:34.880 --> 0:18:37.440 even as demand begins to cool, you might not see 0:18:37.480 --> 0:18:40.800 activities slow that much. You would really see prices slow 0:18:40.840 --> 0:18:44.240 down because well, you're constrained by supply at the beginning 0:18:44.240 --> 0:18:46.520 of the day in any case. UM, So we're watching 0:18:46.520 --> 0:18:49.080 all these indicators on something like in I s M 0:18:49.160 --> 0:18:53.120 slowing down UM that that would be raising our level 0:18:53.160 --> 0:18:55.600 of concerns somewhat. You know a lot of people looking 0:18:55.600 --> 0:18:57.760 at the yield curve. That's another signal that I think 0:18:57.800 --> 0:19:00.760 means we should be cognizant of the fact that the 0:19:00.800 --> 0:19:03.560 economy may slow down UM and and the FIT may 0:19:03.600 --> 0:19:06.600 need to slow down the economy down significantly to get 0:19:06.640 --> 0:19:08.639 inflation down. So there's a lot of reasons to be 0:19:09.080 --> 0:19:11.840 thinking about scenarios where the economy slows down. But what 0:19:11.920 --> 0:19:14.439 I would go back to is the other number on Friday, 0:19:14.440 --> 0:19:18.639 which was the jobs report, and we're running on average 0:19:18.800 --> 0:19:22.439 above five thousand new jobs a month. You have wage 0:19:22.480 --> 0:19:27.119 inflation above five percent annualized. UM. You put those numbers together, 0:19:27.160 --> 0:19:30.879 you have nominal incomes that are running above ten percent 0:19:31.040 --> 0:19:33.040 year on year, and I think that kind of nominal 0:19:33.080 --> 0:19:35.399 income growth, we're probably going to see a lot of 0:19:35.440 --> 0:19:38.520 spending power behind that. But in the face of higher 0:19:38.520 --> 0:19:42.000 oil prices, really higher prices across the board, Andrew, how 0:19:42.040 --> 0:19:45.360 long can the American consumer go before demand destruction really 0:19:45.359 --> 0:19:48.359 starts to kick in. Yeah, it's a great question, and 0:19:48.560 --> 0:19:50.720 I think we are seeing that to some extent. Um. 0:19:50.960 --> 0:19:53.720 We were talking about housing before. Um, you would demand 0:19:53.720 --> 0:19:56.000 for housing be even stronger if house prices were not 0:19:56.040 --> 0:19:58.560 as high as they are. That's definitely the case. So 0:19:58.640 --> 0:20:00.680 you know, a combination of higher price prices and higher 0:20:00.680 --> 0:20:03.240 mortgage traits in the housing market. And then we're broadly 0:20:03.280 --> 0:20:05.920 for consumption, like you're talking about, we have higher oil prices, 0:20:06.160 --> 0:20:08.640 higher gasoline prices at the pump that that really does 0:20:09.000 --> 0:20:12.440 hurt consumers on a day to day basis. Um. Again, though, 0:20:12.440 --> 0:20:16.920 you're just coming at that from so much nominal income 0:20:16.960 --> 0:20:20.919 power you know, hitting that increase in prices that I 0:20:20.960 --> 0:20:23.320 don't think that will be enough so far. Now we're 0:20:23.320 --> 0:20:25.520 watching the you know, if you watch the consumer sentiment 0:20:25.600 --> 0:20:27.520 numbers for instance, there you do see some of those 0:20:27.560 --> 0:20:30.439 numbers tipping because people are concerned about prices that are 0:20:30.480 --> 0:20:33.360 moving higher as they should be. Um but so far 0:20:33.440 --> 0:20:36.320 it still looks like an economy that was running well 0:20:36.359 --> 0:20:39.840 above two percent potential growth, probably still running above two 0:20:39.840 --> 0:20:41.600 percent potential growth. But you know, kind of like you 0:20:41.600 --> 0:20:44.920 were discussing earlier, slowing down closer to that two percent numbers. 0:20:44.960 --> 0:20:47.119 You go through the year, Andrew, to bring it back 0:20:47.160 --> 0:20:50.280 to monetary policy, how does the balance sheet factor into 0:20:50.359 --> 0:20:54.440 your assumptions of potentially two basis points of move over 0:20:54.480 --> 0:20:57.960 four meetings? If the balance sheet is introduced as a 0:20:58.000 --> 0:21:03.119 factor in May, does what influence? Does that have? Great question? 0:21:03.160 --> 0:21:05.560 So economists like myself spending a lot of time right 0:21:05.560 --> 0:21:08.400 now guessing at what these interest rate increases will look 0:21:08.400 --> 0:21:10.680 like beneficials spending a lot of time talking about the 0:21:10.720 --> 0:21:13.879 potential path of interest rate increases. But really we should 0:21:13.880 --> 0:21:17.359 probably all be a bit more focused on the balance sheet. 0:21:17.640 --> 0:21:20.040 That's an incredibly important tool that the FED has when 0:21:20.040 --> 0:21:22.320