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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene along

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Speaker 1: with Jonathan Ferroll and Lisa Brownowitz Jaily. We bring you

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Speaker 1: insight from the best and economics, finance, investment, and international relations.

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Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com

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Speaker 1: and of course on the Bloomberg Terminal. Now a definitive

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Speaker 1: conversation with Peter Tribowitz, Professor of International Relations at LS

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Speaker 1: of course iconic at University of Texas, and it's important

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Speaker 1: group group effort the retreat of the West, which was timely,

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Speaker 1: to say the least, over the past twenty four at months.

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Speaker 1: I want to take it the other way, Professor Trubowitz,

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Speaker 1: and say the advance of the East. If I look

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Speaker 1: at Putin and I see him, and this is a

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Speaker 1: phrase from you, of the power, power and partisan ship

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Speaker 1: that we can see. How much power does Mr Putin

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Speaker 1: hold and what partisanship can he look for? Is the

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Speaker 1: East advances? I'm good to be with you. So, uh,

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Speaker 1: Putin holds a lot of cards and he's displaying them.

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Speaker 1: He's been using them and playing them. Um, they're mostly

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Speaker 1: hard power cards, deploying troops, running exercises, moving his ships

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Speaker 1: through the Dardanel Straits and so forth. He doesn't have

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Speaker 1: much soft power, and there's a lot of opposition uh

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Speaker 1: in Europe to what he's doing, and the closer you

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Speaker 1: get to Russia, the more opposition there is if you're

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Speaker 1: talking about in the Baltic States and obviously in in Ukraine.

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Speaker 1: I think he's gotten himself to a point now where

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Speaker 1: he's I mean, he's laid down a lot of demands

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Speaker 1: and I think we're now kind of a crunch time

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Speaker 1: where we're to see whether or not he gets traction

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Speaker 1: on his main demand, which is that the Ukraine not

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Speaker 1: joined NATO or not. I think that's where the game

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Speaker 1: is right now. We're in the eleventh hour or whatever

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Speaker 1: you know metaphor you want to use. There's some hopeful signs,

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Speaker 1: but this could easily go south. What will you listen

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Speaker 1: for from the new leader of Germany and the coming hours.

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Speaker 1: I think that's is a very interesting trip that he's

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Speaker 1: making because first, as you know, he stopped yesterday in

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Speaker 1: Kiev and had a conversation there with Zelensky, the Ukrainian leader,

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Speaker 1: before moving on to to Putin. I think the question

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Speaker 1: here is in my what I'm looking for is whether

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Speaker 1: or not Zelenski's comment yesterday about NATO being his country's

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Speaker 1: desire to be part of NATO being more a dream

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Speaker 1: in quotes than a realistic goal is somehow the basis

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Speaker 1: for private negotiations, stuff that we're just not privy to

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Speaker 1: right now and arrangements that are going on, And whether

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Speaker 1: or not the announcement this morning that Russia was pulling

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Speaker 1: back some of its troops is in response to that

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Speaker 1: unclear reading tea leaves. Um, but um, that's that is

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Speaker 1: where I think they you know, the discussion and the

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Speaker 1: negotiation is right now, Peter. Usually it is reading tea leaves.

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Speaker 1: And yet we've gotten an unprecedented amount of information from

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Speaker 1: the US administration in real time about what they believe

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Speaker 1: to be happening. How do you read that? I think

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Speaker 1: there are multiple audiences there, Lisa, that's a great question.

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Speaker 1: One of them is to underscore to the Ukrainians how

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Speaker 1: serious the situation is. The second is really or maybe

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Speaker 1: it should be. The first is to deter putin they're

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Speaker 1: getting information, it's coming from close to Bolton, it would appear,

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Speaker 1: and uh, and to really raise in a sense his

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Speaker 1: understanding or the stakes that are involved, and that the

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Speaker 1: US is is in a sense trying to get out

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Speaker 1: in front on the narrative or the information game. But

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Speaker 1: I think the third thing is to try to demonstrate

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Speaker 1: to the American public that it's all they're on game

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Speaker 1: inside the United State, that Biden administration is managing this

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Speaker 1: much more effectively than let's say it managed the Afghan

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Speaker 1: pull out. Peter Trubowitz to go back to George Kennon

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Speaker 1: and the founding of all this, is this the new containment?

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Speaker 1: Are we searching for a new Western strategy to contain

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Speaker 1: the leader of Russia? Well, I think the West is

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Speaker 1: searching for a strategy. I don't think that this is

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Speaker 1: our primary Western states like the U S and Germany

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Speaker 1: and UK and others. I don't think this is what

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Speaker 1: they had imagined. And but ironically, what is going on

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Speaker 1: here thus far is it putent. Efforts to change the

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Speaker 1: European security structure have actually um I think given native

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Speaker 1: given the Western Alliance kind of new purpose, something that

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Speaker 1: really hasn't had as your question alludes to since the

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Speaker 1: Soviet Union collapsed thirty years ago. It's led to the

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Speaker 1: deployment of more US and other troops in Eastern Europe

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Speaker 1: as well as the delivery of thousands of anti tank

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Speaker 1: missiles and other weapons to the Ukraine. Putin has managed

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Speaker 1: to get everybody's attention in the West, but the results

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Speaker 1: are not all favorable to him. Whether or not this

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Speaker 1: is what takes form as kind of on a Western

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Speaker 1: collective strategy is unclear. Remember what Joe Biden would like

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Speaker 1: to be focusing on is China and East Asia. So

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Speaker 1: every day that he is in his team is investing

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Speaker 1: time in Europe, is the day really that they're not

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Speaker 1: getting the message out as much with respect to East

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Speaker 1: Asia and in China. And I say that despite the

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Speaker 1: fact that the Secretary of State is in East Asia

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Speaker 1: right now. But that story is buried below the full Professor,

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Speaker 1: what a great point. This tritey was a clinic and

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Speaker 1: I'd love for you to come back soon so we

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Speaker 1: can extend that conversation to the second chapter of this

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Speaker 1: which I believe is a discussion about China. Peter, Thank you,

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Speaker 1: Peter Tripu. It's that of the London School of Economics.

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Speaker 1: Gabriella scientist joins his global market Strategies that JP Morgan

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Speaker 1: Asset Management. She writes one of the clearest, most detailed

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Speaker 1: notes on the street with a real sense of international affairs. Gabriella,

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Speaker 1: thank you so much for joining us. I love what

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Speaker 1: you say. Throw out the blueprint, Okay, brilliant, what's the

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Speaker 1: what's the replacement? What is the new blueprint that matters? Hi? Tom,

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Speaker 1: good to see you. So I think that's ultimately what

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Speaker 1: we're trying to figure out this year as investors. Right,

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Speaker 1: the market is pricing in today what's going to be

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Speaker 1: a transition year for the economy from pandemic recovery to

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Speaker 1: post pandemic expansion. It's one where we have more optimism

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Speaker 1: about growth, but we're also a bit more concerned about inflation.

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Speaker 1: So it does mean a different withdrawal of liquidity than

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Speaker 1: we had post financial crisis. That's not the blueprint. Now,

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Speaker 1: we need to figure out what the new blueprint is,

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Speaker 1: and I don't think investors have a clear reading that,

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Speaker 1: and neither do policymakers. They're trying to figure that out

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Speaker 1: real time, out loud with several FED speeches. Uh. And

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Speaker 1: there's so many permutations we can come up with right

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Speaker 1: in terms of rates and balance sheet timing, pace endpoint.

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Speaker 1: So ultimately we do think volatility is going to stay

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Speaker 1: higher for longer. That means making big outsize bets on

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Speaker 1: a tactical position is really difficult this year, Gabrielle. I

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Speaker 1: know you speak four or five six eight language, jas.

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Speaker 1: I mean that's what you do with Pennsylvania. But the

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Speaker 1: answer is you speak Greek. Let's go alpha beta right now?

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Speaker 1: You say, within investment in finance, alpha matters? What does

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Speaker 1: alpha and why does it matter? Now? So beta is

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Speaker 1: just really the kind of return you can get just

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Speaker 1: by being invested in the market. Alpha is the kind

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Speaker 1: of excess return you can generate by focusing on the

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Speaker 1: kinds of companies you invested. And I think for the

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Speaker 1: last fifteen years or so, it's been a cycle of beta.

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Speaker 1: I was all just about being invested in writing um

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Speaker 1: returns of of indices, right, and you could have generated

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Speaker 1: a six and a half percent annualized returns just from

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Speaker 1: a very simple sixty four portfolio. But going forward, because

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Speaker 1: the market has recovered already so quickly post pandemic shock,

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Speaker 1: we only project beta returns going forward of four point

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Speaker 1: three percent annualized, So we gotta work harder to generate

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Speaker 1: the same returns as the last cycle. And that's where

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Speaker 1: alpha comes in, you're starting to see a turn and

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Speaker 1: hedge fun alpha. That could be a sign that really

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Speaker 1: this is the dawn of alpha. There's a lot of

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Speaker 1: valuation dispersion beneath the surface. There's a lot of value

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Speaker 1: to add by focusing on stock pick and going forward.

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Speaker 1: How much of the alpha Gabriella comes from China. So

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Speaker 1: China is a really important piece of this puzzle because

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Speaker 1: you can add alpha in Chinese markets, and you can

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Speaker 1: also improve the sharp ratio of a portfolio by adding

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Speaker 1: Chinese onshore assets um SO both stocks and bonds. We

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Speaker 1: projected for China to have the highest returns over the

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Speaker 1: next decade, double for Chinese A shares versus the US

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Speaker 1: and double for Chinese local currency government bonds versus U

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Speaker 1: S Treasury. So there's a lot of improvement that can

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Speaker 1: happen on returns by adding Chinese assets, and you also

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Speaker 1: get a diversification kicker from those markets. They really beat

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Speaker 1: to their own drum. You're seeing that in action this year. Santos,

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Speaker 1: thank you so much. With JP Morgan Asset Management, Mark

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Speaker 1: McCormick here Global Ahead a foreign exchange strategy TV Securities

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Speaker 1: in Canada. Mark McCormick joins us this morning, Mark, I

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Speaker 1: look at the continuum of your note and it seems

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Speaker 1: like it's a McCormick see change here off of your

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Speaker 1: wonderful call on dollar resiliency. Are you ready to make,

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Speaker 1: as Bullard would say, a regime change call in the

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Speaker 1: land of McCormick. Yeah, I think we're getting closer to

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Speaker 1: the top and the dollar in broad terms, but I

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Speaker 1: do think what's what's kind of interesting is there's still

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Speaker 1: some more dollar resiliency ahead. So I know there's like

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Speaker 1: kind of a big shift in the market in terms

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Speaker 1: of how much expectations are going on the Euro, but

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Speaker 1: I still think that there's room here to trade euro

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Speaker 1: from the downside. Um, so we're kind of thinking a

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Speaker 1: bit about a V shape bounce in the Euro. So

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Speaker 1: we see another move maybe towards one twelve. We bought

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Speaker 1: them out there around fed fed liftoff time, and then

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Speaker 1: we're basically off to the races in the back half

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Speaker 1: of the year, looking for kind of a revisit around

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Speaker 1: one twenty toward the end of You do a great

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Speaker 1: job on the currency wars, and a currency wars are

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Speaker 1: usually ascribe to race to the bottom of weaker and

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Speaker 1: weaker currencies to boost exports. But you take it a

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Speaker 1: different way, what does next year's currency wars look like?

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Speaker 1: So we're basically living in it now, which is a

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Speaker 1: race to the top where essentially policymakers prefer currency strength

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Speaker 1: because it's a way to limit inflationary pressures. And I think,

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Speaker 1: as you mentioned, you noted Swiss frank and that's a

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Speaker 1: that's a clear story here that the central bank, the SMB,

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Speaker 1: has allowed a little bit more currency strength and more

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Speaker 1: people wouldn't have anticipated. And Swissy has been much stronger

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Speaker 1: than more people would have expected in this environment of

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Speaker 1: higher global yields, largely because they're allowing the currency to

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Speaker 1: do some of the work for them. So stronger currency,

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Speaker 1: lower infreation. And now every central bank around the world,

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Speaker 1: all policymakers actually are looking for stronger currencies. They're not

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Speaker 1: telling you that, but you can see it based on

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Speaker 1: what their actions and what they're doings in. The preference

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Speaker 1: now is for stronger currency um and that's helping to

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Speaker 1: work off some of the inflationary pressures we have mark

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Speaker 1: In the past decade, we've really talked about rate hikes

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Speaker 1: or rate cuts really dictating the moves that we've seen

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Speaker 1: in currency markets, and that's shifted over the past year

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Speaker 1: to a growth outlook over the next twelve months, do

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Speaker 1: you think it's going to primarily be driven by growth

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Speaker 1: and not necessarily rate moves? And I point to China

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Speaker 1: for example, where you see the one actually strengthening despite

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Speaker 1: the increased support and the potential rate cuts coming up. Yeah,

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Speaker 1: it's an important question because what I think is most important,

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Speaker 1: and our work shows it, is currencies are multidimensional. So

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Speaker 1: I know we're kind of focused on central banks and

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Speaker 1: geopolitics right now, but if you look at what factors

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Speaker 1: have been making money the last couple of years, it's value,

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Speaker 1: it's growth, and it's also terms of trade. So I

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Speaker 1: do think growth is also it's it shows on our

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Speaker 1: back test it's the most important factor through periods of time,

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Speaker 1: and I think it's it's one of the things that

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Speaker 1: will matter most, especially on COVID reopenings. You know, if

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Speaker 1: we're moving in a world where we have since we

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Speaker 1: have synchronized policies that are kind of allowing everyone to reopen,

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Speaker 1: growth is gonna matter and we're going to see growth diversions.

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Speaker 1: But I think when we think about central banks, growth, commodity,

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Speaker 1: terms of trade, and value, and I think one of

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Speaker 1: the most important things we have to think about our equities.

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Speaker 1: But on the rate side, where we're going now it's

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Speaker 1: really about terminal rate pricing. It's kind of like the

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Speaker 1: first ones in are now kind of the countries are

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Speaker 1: at a big, big disadvantage. If you look at the

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Speaker 1: Canadian dollar and the BOC started to move last year

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Speaker 1: and it's kind of one of the least exciting currencies

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Speaker 1: now in the central bank trade. But there's a moment

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Speaker 1: in time here for probably the next three to six

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Speaker 1: months when we think about terminal rates and figuring out

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Speaker 1: who is the highest terminal rate will help the currency.

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Speaker 1: But if we step back from that, growth, terms of

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Speaker 1: trade and commodity exposure, equity momentum, and value are the

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Speaker 1: critical drivers for currencies moving through this year and probably

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Speaker 1: into next year. So if we connect this mark with

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Speaker 1: this idea of the currency wars that you're talking about,

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Speaker 1: where nations want to see stronger currencies to fight off inflation,

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Speaker 1: how does this factor into the Fed's calculus. Does this

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Speaker 1: actually encourage them to be a little bit more hesitant

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Speaker 1: to raise rates or be more aggressive in order to allow,

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Speaker 1: ironically the dollar to strengthen more because it will increase

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Speaker 1: growth prospects. Well, I think part of it is they

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Speaker 1: want to essentially, I wouldn't use the words shock the markets,

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Speaker 1: but essentially what they want to do is kind of

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Speaker 1: get ahead of expectations. And I think what we're what

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Speaker 1: US is worried more so than any other country in

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Speaker 1: the world, is that ranted wage pressures are starting to

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Speaker 1: rise faster than other countries. If you still kind of

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Speaker 1: strip out your diffusion indicators for inflation in Europe, there's

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Speaker 1: still definitely a focus on energy and that's a big

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Speaker 1: driver of inflation. But US is starting to see um

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Speaker 1: expectations around longer term projections of inflation starting to rise

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Speaker 1: potentially uncomfortable levels. So I think there's a component here

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Speaker 1: that what the fence trying to do is really they've

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Speaker 1: got a little bit too far behind the curve. They're

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Speaker 1: trying to get aggressively in front of the curve, but

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Speaker 1: they're also wary that growth is also slowing. So they

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Speaker 1: have a moment in time here where they can hike,

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Speaker 1: and they can hike aggressively because they actually might be

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Speaker 1: hiking into what is very slowly slow down in the

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Speaker 1: economy next year. So I think they're definitely just trying

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Speaker 1: to get ahead of things and anchor longer term inflation

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Speaker 1: expect Here, you're gonna revisit Swiss franc Here you're a

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Speaker 1: swissy and one oh four eight seven five and one

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Speaker 1: oh five print would be weaker Swiss franc We're not

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Speaker 1: there yet. You've been doing this for years. Mark watching

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Speaker 1: Swiss National Bank. We're talking about balance sheet dynamics in America.

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Speaker 1: They own a truckload of Apples, Starbucks and other selected

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Speaker 1: equity shares. What is their vulnerability is they make a

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Speaker 1: potload of money and in Apple's shares. I just don't

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Speaker 1: understand that. Well. It's quite interesting too because it goes

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Speaker 1: around with the global growth momentum stories. So if you

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Speaker 1: think about kind of a big driver this moving markets around,

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Speaker 1: you know what's underperforming? US equities are underperforming because they

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Speaker 1: are highly leveraged to growth. Growth is highly levered to

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Speaker 1: real rates, and so not not only are U S

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Speaker 1: real rates rising now, but global real rates a rising.

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Speaker 1: So the concern from that trade is that they're going

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Speaker 1: to be owning underperforming sets um And I think what's

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Speaker 1: what's a very interesting is that when we think about

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Speaker 1: the growth to growth to value rotation, which I think

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Speaker 1: is going to occur in equities, but the sequencing is

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Speaker 1: too quick to trade it now because ultimately we need

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Speaker 1: higher real rates, which means we need fed terminal priceing

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Speaker 1: to go up. But the concern for that moment for

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Speaker 1: Swiss franc is Euro offers a tremendous amount more value

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Speaker 1: than the Swiss Frank. And then if you kind of

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Speaker 1: again think about the performance of the balance sheet or

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Speaker 1: having exposures to those equity markets, those are the gonna

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Speaker 1: be the equity markets that are underperforming probably over the

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Speaker 1: next six months, over the next twelve months. So this

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Speaker 1: is where Euro Swiss is gonna be very interesting. Is

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Speaker 1: that Swissy was allowed to kind of again control inflation

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Speaker 1: a little bit more than anticipating you didn't need that

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Speaker 1: from the Euro. You also got again the balance she's

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Speaker 1: kind of leveraged these global growth stocks or there are

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Speaker 1: leverage real rates, But the value in the equity store

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Speaker 1: is really in the Euro, not in Swiss frank. As

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Speaker 1: we move forward, and Mark, I'm going to ask you

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Speaker 1: a question and if you don't want to answer it,

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Speaker 1: you can just pretend you can't hear me, guy, and

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Speaker 1: in Canada right now. Yeah, So in March, the central

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Speaker 1: Bank is going to rate and that's exactly what I's got.

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Speaker 1: Mort Away, thank you, Mott, m Security, thank you very much.

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Speaker 1: Na marcsca joins now chief Financial A constant Jeffreys Ania.

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Speaker 1: The inflation reports plural that we've seen signify more sustained inflation.

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Speaker 1: Do you need to take a terminal rate year end

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Speaker 1: or end of first quarter two thousand twenty three and

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Speaker 1: bring it up. I would say, you know, we should

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Speaker 1: certainly be pricing more hikes um into the curve. The

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Speaker 1: question is should be pricing more in the next six months,

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Speaker 1: And I think the answer to that from my perspective

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Speaker 1: is no, because although inflation has you know, persisted a

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Speaker 1: little bit longer than expected, we have some forward looking

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Speaker 1: indicators that's still suggest that within the next few months,

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Speaker 1: you know, it will peak. And the fact is that

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Speaker 1: we just don't know at this point how much of

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Speaker 1: this will self correct versus how much will ultimately have

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Speaker 1: to be squeezed out by the fact. Well, what are

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Speaker 1: some of those points? Are those points in c p

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Speaker 1: I or are they in PPI? The business inflation index.

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Speaker 1: What are the tea leaves that give you confidence inflation

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Speaker 1: abbs after the two sets of data we've received. So, look,

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Speaker 1: one of the things that drives inflation is product shortages,

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Speaker 1: and we've clearly seen that kind of build and and

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Speaker 1: intensified through the course of the last year. But those

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Speaker 1: supply demendant balances, at least in the consumer product space,

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Speaker 1: actually peaked around October November December. Imports surged tremendously at

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Speaker 1: a time where demands sort of plateaued. As a result,

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Speaker 1: we've built some inventories in the retail sector in particular,

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Speaker 1: where inventories are at the highest level they've been since

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Speaker 1: April of twenty twenty. We're also starting to see some

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Speaker 1: signs that inflation expectations on the part of consumers are

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Speaker 1: rolling over. That was the case with the New York

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Speaker 1: survey that came out yesterday. The three year I've had

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Speaker 1: inflation expectations. The climb pretty sharply, also two levels not

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Speaker 1: seen since April of twenties. So I think that you know,

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Speaker 1: consumers are recognizing the product shortages are not as acute

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Speaker 1: as they were, um say, in September October, and it

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Speaker 1: seems like that's what they're responding to that where does

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Speaker 1: inflation have to come down to make you comfortable to

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Speaker 1: feel like the Fed can hike less than seven times

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Speaker 1: and still be complacent. I think if we see um

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Speaker 1: the month over month trajectory kind of recre get down

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Speaker 1: two point three type readings, I think that will be

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Speaker 1: enough to sort of stabilize expectations at the front end

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Speaker 1: of the curve. Um, you know, when we're thinking about

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Speaker 1: the longevity or sustainability of this tightening cycle, and it's

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Speaker 1: the curve price for enough in twenty three and twenty four.

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Speaker 1: I think that's more of a question related to the

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Speaker 1: labor market in the shape of the Phillips curve. And

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Speaker 1: I do think that, you know, those pressures will persist.

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Speaker 1: Right now, it seems to me like the labor market

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Speaker 1: is going to put a floor under inflation at around

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Speaker 1: three percent, just given where we are right now in

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Speaker 1: terms of wages, unit labor calls, so um, you know. So,

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Speaker 1: so I do think that there is a piece of

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Speaker 1: this inflation story that will have to be squeezed out

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Speaker 1: by the FED, and and probably a two percent terminal

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Speaker 1: rate is not enough to do that. But I just

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Speaker 1: I just don't necessarily think that we need to be

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Speaker 1: pricing any more than seven hike into and at what

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Speaker 1: terminal rate is possible to keep the economy from tanking?

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Speaker 1: In other words, how much can the Fed hike before

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Speaker 1: it curtails any kind of recovery and goes in the

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Speaker 1: opposite direction. I think it really has to do with

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Speaker 1: that kind of speed and how they distribute those hikes, right,

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Speaker 1: because if they get to the neutral rate of two

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Speaker 1: fifty in one year, uh, that's gonna knock off a

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Speaker 1: lot of you know, from growth next year and could

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Speaker 1: put actually took us into the recession um if they

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Speaker 1: had seven times this year, which is our base base

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Speaker 1: and from which is what's priced into the curve, that's

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Speaker 1: gonna take off just under one percent from growth momentum

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Speaker 1: in twenty three um, which is obviously a sizeable drug,

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Speaker 1: but not enough to put us in a recession um.

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Speaker 1: So it really depends on how quickly we get to

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Speaker 1: that neutral rate. Does someone want the meeting room at

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Speaker 1: Jeff Ferrance is not what the banking is. Apparently there's

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Speaker 1: construction going on above this. We go Aneta will let

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Speaker 1: you go. Thank you so much for being with us,

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Speaker 1: Anna marksca of Jefferies. We appreciate it. This is the

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Speaker 1: Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays

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Speaker 1: Tom keene In. This is Bloomer