Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg Termainment. We're thrilled to
Speaker 1: bringing out the perspective of someone out of Florida and
Speaker 1: West Point who has a commanding understanding of Europe, working
Speaker 1: with Admiral Stevitas at NATO, and of course his leadership
Speaker 1: as former US Commanding General in Europe for American troops.
Speaker 1: Ben Hodges joins US today. General, thank you so much
Speaker 1: for joining us. I want you to convey to our
Speaker 1: listeners and viewers across this nation right now, what is
Speaker 1: the number one thing our military can do to assist
Speaker 1: NATO and to assist you, Krane. But the present time
Speaker 1: of American soldiers is always such a powerful message of
Speaker 1: assurance to allies and also of warning to the Kremlin.
Speaker 1: The Kremlin does not want to take on the U. S.
Speaker 1: Army or Air Force or Navy, especially either alone or
Speaker 1: as part of NATO. So the deployment of American troops
Speaker 1: to the eastern flank of NATO, I think was a
Speaker 1: good move uh and a strong signal if we further
Speaker 1: deploy army to Lithuania, which you know encyclopedic, or we
Speaker 1: deploy navy through the Bosphorus into the Black Sea, as
Speaker 1: Ukraine begs Turkey to shut down the Bosphorus to Russian military.
Speaker 1: Uh ships, If we do that, how will that change
Speaker 1: it for Ukraine? What is its signal now for Ukraine? Well,
Speaker 1: of course, Ukraine is not an island. It's strategically important
Speaker 1: for all of us, including Russia, because of where it
Speaker 1: said on the Black Seat. It's why Catherine the Great
Speaker 1: um stole Crimea back at the end of the eighteenth century.
Speaker 1: Uh So Turkey, our ally, could really change the calculus
Speaker 1: for the Kremlin. If Turkey were to close the Straits,
Speaker 1: which it's entitled to do because of its sovereignty to
Speaker 1: Russian navy, that would that would make a significant impact
Speaker 1: on Russian thinking. What the United States and our allies
Speaker 1: are doing by reinforcing NATO's eastern flank, of course, tells
Speaker 1: the Russians do not let this get out of control,
Speaker 1: did not let it spill over into a NATO country,
Speaker 1: because then that will also completely change the situation. What
Speaker 1: will you listen for from General Austin now holding court
Speaker 1: a Secretary of Defense at the Pentagon. I would like
Speaker 1: to hear him say that we are accelerating the delivery
Speaker 1: of weapons systems that Ukraine needs. I mean we need
Speaker 1: something like a Berlin airlift in terms of UH quantity
Speaker 1: and speed to get more air defense systems specifically. Well,
Speaker 1: this is in general, this is critical. Do we need
Speaker 1: to put US troops into Love right now, to go
Speaker 1: across from Poland a NATO country X number of miles
Speaker 1: in the Love and set up camp in western Ukraine
Speaker 1: to say enough? No? I agree with the President here
Speaker 1: that um that we don't need to have NATO soldiers
Speaker 1: American soldiers inside Ukraine. UM. Well, what we can do
Speaker 1: is working with our Polish allies, establish a line of communication.
Speaker 1: That's that can send what we call white convoys, non
Speaker 1: military convoys, carrying all the stuff that Ukraine needs towards
Speaker 1: Lviv and then the Ukrainians would distribute it. Howard I think,
Speaker 1: But we don't want to get to a situation where
Speaker 1: by our actions we end up with Russians and Americans
Speaker 1: fighting each other. Ben, just to give you a sense
Speaker 1: of the US actually just put out this headline coming across.
Speaker 1: No new troop deployment is currently planned, but possible. Why
Speaker 1: is it so important to not have troops necessarily in
Speaker 1: Ukraine from the United States? Why do you think that
Speaker 1: that is a tactical misstep. So let's let me capyat that.
Speaker 1: I was disappointed when the one d and fifty National
Speaker 1: Guardsmen from Florida actually were pulled out of their training
Speaker 1: mission that has been going on for six years there
Speaker 1: in Yavaief. I wish that they were all still there.
Speaker 1: But when you bring in additional troops, uh this, this
Speaker 1: then looks like escalation and keeping all of our allies
Speaker 1: together is an essential part of our resistance, and so
Speaker 1: I think that in this case, we want to avoid
Speaker 1: a situation that ends up with NATO forces going against
Speaker 1: Russian forces when it's not in a situation of Article five. Ben.
Speaker 1: There has been discussion from European nations about contributing more
Speaker 1: troops to NATO in the surrounding nations not necessarily directly
Speaker 1: coming into conflict with Russia. What's your view on their
Speaker 1: capacity to increase troops, specially given the non military action
Speaker 1: that you've seen from the likes of Germany post World
Speaker 1: War Two. Well, it's a fair point. I think what
Speaker 1: we're gonna see is NATO reconsider our compliance with the
Speaker 1: so called NATO Russia Founding Act and that we will
Speaker 1: go to permanent basing in Estonia, Latvia, Lithuania, Poland and
Speaker 1: Romania of US and or other NATO troops. We have
Speaker 1: not done this, uh in a good faith effort that
Speaker 1: even though Russia had abrogated the NATO Russia Founding Act,
Speaker 1: we were complying with the provisions that say no permanent basing.
Speaker 1: I think this is going to change. I think we
Speaker 1: will see more NATO troops, particularly in the Baltic region.
Speaker 1: We really need to improve our air and missile defense
Speaker 1: in that region. In Germany and the Netherlands have to
Speaker 1: have a lot of capability where they could help here
Speaker 1: in general. Can I work through that line from the
Speaker 1: Ukrainian Leadia with you in real time? When you hear
Speaker 1: a line like this, Russian occupation forces are trying to
Speaker 1: seize the Chernobyl power plant, defenders of giving that life
Speaker 1: so that the tragedy of will not be repeated. We've
Speaker 1: reported this to the Swedish leader. This is a declaration
Speaker 1: of war against the whole of Europe. Can you help
Speaker 1: me interpret that? General? What does that mean? That last
Speaker 1: line when they go to somewhere like Chernobyl and you
Speaker 1: know the history that what does that mean? So? Um two,
Speaker 1: two or three aspects of this. First of all, Ukrainian
Speaker 1: forces are achieving a lot of technical successes against Russian forces.
Speaker 1: You he won't get much coverage on this from Moscow,
Speaker 1: but for sure lots of the Russian aircraft, helicopters are
Speaker 1: being shot down, tanks are being destroyed. We're gonna start
Speaker 1: seeing more and more video and reports of Russian losses.
Speaker 1: I think as the situation becomes more clear. So that's important.
Speaker 1: And when President Zelinski, who I met three weeks ago
Speaker 1: and Keith a tenacious guy, when he talks about declaration
Speaker 1: of war, of course I don't take it in the
Speaker 1: in the means of a US legal definition of declaration
Speaker 1: of war. But without a doubt, Um, this is it
Speaker 1: is time for European leaders to be open eyed and
Speaker 1: talk clearly about who we're dealing with. For sure, sees
Speaker 1: this as war, whether it's with ships, tanks, nuclear weapons, disinformation.
Speaker 1: Cyber Russia is always in a war state of mind,
Speaker 1: it may not always involve weapons. In this case, I
Speaker 1: think President Jelinski is exactly right. General Hodges, I want
Speaker 1: you to speak to the American people right now. And
Speaker 1: this is so urgent out of Vietnam of the certitude
Speaker 1: of technology in military and General Powell of course was
Speaker 1: steeped in that that it didn't work and that military
Speaker 1: was a tough thing with maximum force applied when needed.
Speaker 1: You're an infantry guy. When there's a silly phrase boots
Speaker 1: on the ground you lived at, tell me, as an
Speaker 1: infantry guy, how we apply a power like force against
Speaker 1: Mr Putin? Uh, thank you Tom Well. Of course, future
Speaker 1: future war, which we're in already, will involve everything from drones,
Speaker 1: artificial intelligence, UH, the advantages of quantum quantum computing, but
Speaker 1: the disadvantages if our adversaries are using that, because that
Speaker 1: will break down the security of all of our I
Speaker 1: T systems are communications networks, so this is this is
Speaker 1: going to change things. And of course their ability to
Speaker 1: disrupt our GPS targeting and navigating UH systems. So that's there.
Speaker 1: But what did we watch for the last three months
Speaker 1: endless video of rail cars carrying tanks and artillery and
Speaker 1: armored fighting vehicles, big steel Russian ships, submarines. So it's
Speaker 1: you get more uh new technology, but you still are
Speaker 1: going to have people in trenches, people still fighting with
Speaker 1: rockets and artillery. That's part of it. In Russia, clearly
Speaker 1: uh IN tends to use blunt force. They're already employed this,
Speaker 1: but with more electronic warfare, they really have keepbility to
Speaker 1: jam that we have fallen behind. General Hodges. We appreciate
Speaker 1: your time, sir, and thank you for being with the
Speaker 1: spend Hodges there, the former US commanding General in Europe.
Speaker 1: We're looking for some kindance now. Peter Roppenheimer of Goldman
Speaker 1: first on equities. I want to get to you first, Peter,
Speaker 1: and thanks for being with us, just a simple one
Speaker 1: of us so many people. You've done the research, you've
Speaker 1: got an outlook, all your suggestions. What changed this morning?
Speaker 1: What did you have to rip up after what we've
Speaker 1: seen play out across Ukraine? Hi? John, Look, I think
Speaker 1: that the markets respond in real time, and the most
Speaker 1: obvious impact of what we've seen in this escalation is
Speaker 1: just a rise and uncertainty, and that means a rise
Speaker 1: in risk premier. We estimate that each twenty basis point
Speaker 1: rise in risk prem and knocks around five pc off
Speaker 1: the ecty market, and we've seen something about twice that,
Speaker 1: which is quite large relative to historically what we've seen
Speaker 1: with political events. And it should be said that generally speaking,
Speaker 1: political events, as long as they don't have big macro spillovers,
Speaker 1: tend to fade and you tend to get some kind
Speaker 1: of rally. Now, obviously this is a very uncertain situation
Speaker 1: and there are some major political and economical implications, not
Speaker 1: least of which of course is via energy prices. We
Speaker 1: were already seeing a fairly decent correction in most equity
Speaker 1: markets because of the fears of higher inflation and interest rates.
Speaker 1: Those that were more defensive and perhaps more value orientated,
Speaker 1: particularly those in Europe and now Fermian Correction territory as well.
Speaker 1: But I would say that if we look at our
Speaker 1: tactical indicators, our risk appetite indicators, for example, the markets
Speaker 1: are now really pricing quite a big slow down and
Speaker 1: position has become quite negative, and typically from these sorts
Speaker 1: of levels in that indicator we do get a rally.
Speaker 1: So just a couple of days ago, I was speaking
Speaker 1: with a portfolio manager who represented a sea change, basically saying,
Speaker 1: go toward Europe, go toward European equities and away from
Speaker 1: the US because of the hiking cycle. Has that narrative
Speaker 1: completely got shifted though on its head, even with the
Speaker 1: valuation story, just simply because the risk is that much
Speaker 1: higher in that region. Well, certainly Europe is much more exposed,
Speaker 1: both economically and of course in terms of proximity, but
Speaker 1: I don't think it really changes the fundamental underlying issues.
Speaker 1: First of all, the European economy is actually pretty robust
Speaker 1: at the moment, much different to the situation say after
Speaker 1: the financial crisis. To your point, the policy cycle is
Speaker 1: less aggressive in Europe. In fact, fiscal policy is still easing,
Speaker 1: interest rates are likely at least in the Eurozone, to
Speaker 1: be rise at a much slower pace, and we've got
Speaker 1: strong private set to balance sheets in Europe. We have
Speaker 1: more exposure to value too, energy stocks and to other
Speaker 1: areas of the market that investors been tilting towards. And
Speaker 1: we should also recognize that valuations are reasonably good. I mean,
Speaker 1: if you take the stock six for example, it's trading
Speaker 1: on a peeve about fourteen times now having pezzed around
Speaker 1: eighteen much cheaper than the US and pretty much in
Speaker 1: line with its long run average. So in the short term,
Speaker 1: of course, uncertainty is going to be a big drag
Speaker 1: to this market, but fundamentally it looks reasonably sound and
Speaker 1: we do remain actually overweight on a on a one
Speaker 1: year you, Peter, in your geography at the London School
Speaker 1: of Economics, which folks, is world class, even long agoing
Speaker 1: far away, when Mr Appenheimer darkened the door, there's an
Speaker 1: idea of the European experiment. It is under threat today, Peter,
Speaker 1: is you and I have never seen, even with a
Speaker 1: collapse in n one frame for us this moment and
Speaker 1: how Europe must adapt. Which institution do you look for,
Speaker 1: Ernest Goldman Sax looks for to provide a new stability
Speaker 1: for Europe. Well, it's a great question, but we should
Speaker 1: emphasize that the institutional framework across Europe has strengthened dramatically
Speaker 1: since the days of the financial crisis and the sovereign
Speaker 1: debt crisis. Obviously, we've had a ramp up in the
Speaker 1: available instruments that can be used on the europe wide
Speaker 1: basis to deal with any systemic shocks, and that's that's
Speaker 1: a significant positive. And we should note that, for example,
Speaker 1: while sovereign spreads have widened a little bit in places
Speaker 1: like Italy, it's been very modest relative to what we've
Speaker 1: seen in previous periods where they've been heightened uncertainty. Uh
Speaker 1: and uh, And I would say that from that perspective,
Speaker 1: things are looking a lot more robust. That being said,
Speaker 1: one of the critical issues for Europe, of course, his
Speaker 1: energy security. Europe has been ahead globally in terms of
Speaker 1: its focus on decarbonization and ramping up investment in things
Speaker 1: like renewables, and I think this adds a new degree
Speaker 1: of urgency to that program, because that's what Europe is
Speaker 1: going to have to really agree on in order to
Speaker 1: become more independent in terms of its sources of energy
Speaker 1: and paid a greater catch up with you, sir, as
Speaker 1: always a difficult moment for the continent and for the
Speaker 1: people of Ukraine. Thank you. Peter Rappenhammer Goldman. When I
Speaker 1: first read Timothy Ash many years ago, I'm gonna guess
Speaker 1: at bear Stearns, but I really can't remember tim And
Speaker 1: the answer is it jumped off the page. Tomash is
Speaker 1: one of the most acute writers and thinkers on Europe
Speaker 1: and strategy. He has senior e M Sovereign strategy is
Speaker 1: a blue bay. On this historic day, Timash, thank you
Speaker 1: so much for taking time with us today. I want
Speaker 1: to focus on the e M of Eastern Europe. Take
Speaker 1: us from Estonia down to Poland. What is your biggest
Speaker 1: worry as Putin attacks? Well, the biggest worry for the
Speaker 1: market is Russia itself, right, I mean I think we're
Speaker 1: as has been mentioned, I mean this is the biggest
Speaker 1: It's a systemic geopolitical events in Europe, the biggest one
Speaker 1: in Second World War. Remember we had the fall of
Speaker 1: the Building Wall, which was a positive. This is a
Speaker 1: big negative. And I think you know those countries surrounding
Speaker 1: Ukraine and Russia, you know the Baltics, Poland, Romania will
Speaker 1: be very worried. Now. I don't think Putin is going
Speaker 1: beyond Ukraine, but I think this is a game change
Speaker 1: in terms of European security. I mean, NATO has got
Speaker 1: a really set up its act. We're going to see
Speaker 1: a big increases in defense spending because of this. But
Speaker 1: at the moment, it's they focus really is on Russian
Speaker 1: markets and they've been collapsing today. I mean, you know,
Speaker 1: lots of talk about Fortress Russia interest in. The Russians
Speaker 1: themselves didn't see this coming, and I think they've been
Speaker 1: panic selling across the board of Russian assets. Russians didn't
Speaker 1: believe their own leaders on this one, which is why
Speaker 1: Russian assets have been been falling so so aggressively today.
Speaker 1: It's him. We worked through this together eight years ago
Speaker 1: over Crimea when I was in London, and to him,
Speaker 1: this is different, and you know it's different. And as
Speaker 1: you say, Fortress Russia, a lot of people have talked
Speaker 1: about that recently. The President Putin prepared for this moment.
Speaker 1: There was trying to insulate the economy, run a budget surplus,
Speaker 1: raise capital. It's him, just how insulated are they? Well?
Speaker 1: I was the first person to coin the phrase stans
Speaker 1: Russia back in and Putin has been planning this. This
Speaker 1: has been all about building those balance sheets. He has
Speaker 1: been determined to go into Ukraine for a long time.
Speaker 1: I've written it, I argued it back into fifteen fifteen.
Speaker 1: There was likely to be a defining want to be
Speaker 1: rushing the grain, and this is it. Unfortunately, now Russia.
Speaker 1: You know, it has the balance sheet, but the level
Speaker 1: of sanctions were likely to see because of this, It's
Speaker 1: going to be pariah Russia, pariah putin uh and it's
Speaker 1: gonna be very difficult to do any business with Russia.
Speaker 1: That means higher borrowing costs, less investment, less growth, lower
Speaker 1: living standards, and Russians already and not really happy with
Speaker 1: their lot in life and memory. Kazakhstan we had some
Speaker 1: social arrests recently because of precisely that point. So this,
Speaker 1: this makes Russia weaker. This and likely if it's regime
Speaker 1: change in Ukraine, what's likely to happen is that any
Speaker 1: new government that emerges in Ukraine will be sanctioned by
Speaker 1: the West as well. So Russia, Russia will have to
Speaker 1: pay the costs of rebuilding Ukraine and Belarus, and its
Speaker 1: economy is going to be in a pretty die state
Speaker 1: because of sanctions. Tim what's the fallout for the broader
Speaker 1: emerging market complex, given the fact that food prices are
Speaker 1: likely to surge, given the fact that weak production could
Speaker 1: be disrupted, all of the potential commodity complex eruptions that
Speaker 1: we're seeing today feeding out into the importers in the
Speaker 1: emerging market world. Look, I mean the market was so
Speaker 1: sanguine about this, right, I mean it assumed it wasn't
Speaker 1: going to be a globally stemic event. It is right.
Speaker 1: I mean, this is about hardcore European security, It's about energy,
Speaker 1: It's about you know, heating European homes. And I think
Speaker 1: the fallout as we've seen today is very very significant
Speaker 1: energy prices, higher supply disruptions. Are there going to be
Speaker 1: disruptions in manufacturing production in Europe because of this? In
Speaker 1: emerging markets, you know, it's it's about energy importers versus
Speaker 1: energy exporters. Place slight Turkey, he sent eu Rope, Asia.
Speaker 1: You know they import a lot of energy. They're going
Speaker 1: to be hit by you know, higher inflation and globally
Speaker 1: it's stagflation. I guess is the fear here, Timothy ask
Speaker 1: what is the power of I'm going to say, dominant,
Speaker 1: more visible, more stable emerging market nations. What is the
Speaker 1: power in place here of say India or Indonesia or
Speaker 1: to bring it over to Europe, m Latvia? What are
Speaker 1: their power right now? Well? I said not much. Unfortunately,
Speaker 1: a lot of the energy markets have have lots of
Speaker 1: structural issues. Reform issues. I mentioned winners and losers into
Speaker 1: the energy bounce. India is a huge energy importer as
Speaker 1: it's Turkey, So I think, you know, people are just
Speaker 1: waiting to see how this pans out, what it means
Speaker 1: for global commodity prices. You know you mentioned already global
Speaker 1: central banks. How are they're going to respond to this? Uh,
Speaker 1: you know, pretty uncertain, but you know, duo politics matters
Speaker 1: and it's here to stay. And as I said, this
Speaker 1: is a game changer. It's him. You used the stagflation
Speaker 1: word moments ago. Who's that for the whole region or
Speaker 1: one particular country, Well, globally right. That means you think
Speaker 1: a global story and that's your stagflation. That's the ultimate
Speaker 1: story now, not just the toros. Is that your base
Speaker 1: case stafflation is lower growth, high inflation. The risk here
Speaker 1: is that we see further supply disruptions around energy and
Speaker 1: that hits global growth. And it's I mean, inflation is here.
Speaker 1: That's the reality. As consumers. We know that central banks
Speaker 1: might be trying to sell us a different story, but
Speaker 1: we're all we all see inflation and it's if it's
Speaker 1: hard to see it falling quickly, and certainly this episode
Speaker 1: will not hold up Tim wonderful to catch up with
Speaker 1: your Tim Ash there of Blue Bay Connor he joins
Speaker 1: US now head of Research and E D and F
Speaker 1: Man Cornor we know Chicago Board of Trade. We do
Speaker 1: not know Novo East Spot. How critical is the wheat
Speaker 1: dynamic for Russia right now? It's huge. Russia, together with Ukraine,
Speaker 1: they can't for global wheat exports. So at a time
Speaker 1: when global wheat market is already pretty tight, fundamentally, we
Speaker 1: can't really afford to see a big player come out
Speaker 1: of action. So supplies are tight, demand is inelastic, and
Speaker 1: the world does heavily rely on this region. Black sea
Speaker 1: export are absolutely critical for world supplies right now. Do
Speaker 1: you believe that soft commodities led by Russian wheat will
Speaker 1: be part of sanctioned announcements today and indeed in the
Speaker 1: coming days. This is where I have my doubts, because
Speaker 1: unfortunately food inflation is a growing story around the world.
Speaker 1: Um the Middle East, North Africa in particular rely heavily
Speaker 1: on Russian Ukraine for their wheat imports. If there were
Speaker 1: to be a spike, and we're already seeing wheat is
Speaker 1: one of the best performing commodities, so far um. If
Speaker 1: that were to lead to further hikes in prices, then
Speaker 1: I think food inflation could be a political politically, you know,
Speaker 1: really really challenging situations. So I feel that that is
Speaker 1: one area where I think sanctus might be not might
Speaker 1: not not take place. If you look back into a
Speaker 1: thousand fourteen, when Russia annex Crimea, the exports of week
Speaker 1: continue to take place. So I'm hoping this will be
Speaker 1: the same this time around. A lot of nations have
Speaker 1: imprepared paring for this. We've even heard from Germany talking
Speaker 1: about how they will be able to be independent of
Speaker 1: Russian oil and gas, should that be necessary. Have you
Speaker 1: seen anything on the ground, any types of diversions in
Speaker 1: terms of some of the important export pathways in response
Speaker 1: and in preparation for this invasion. No, so um. I
Speaker 1: mean certainly on energy. I know that, for example, Germany
Speaker 1: um has diversified quite a bit away from Russian oil.
Speaker 1: You know, they've got quite a bit of windpower themselves.
Speaker 1: They are using moral and g um. Luckily, Europe is
Speaker 1: a big agricultural producing themselves, so they don't actually import um,
Speaker 1: so they won't be relying on Russia for any of
Speaker 1: their imports, although they do rely a little bit on
Speaker 1: um Ukraine for their sunflower oils. So vegetable oils right now,
Speaker 1: cooking oils if you like, are extremely tight globally. Um,
Speaker 1: so there's no room for slack there. But I think
Speaker 1: energy wise, yes, natural guests of a sale the European
Speaker 1: zone is basically dependent on the region. Um, it's going
Speaker 1: to be extremely costly to divert that away into llergy
Speaker 1: and other resources. How much have you revisited your expectations
Speaker 1: for oil and gas prices? What your base cases? Now
Speaker 1: that what as John said, the tail risk has become
Speaker 1: the base case in Europe. Yeah, So I think hundred
Speaker 1: dollar was a hundred dollar about for Crudel was given
Speaker 1: just based on fundamentals. Now there was there was this
Speaker 1: potential geopolitical risk periment which now, as you mentioned, is
Speaker 1: now becoming no longer premium but has to be actually
Speaker 1: priced in now. So the worst case for scenario has
Speaker 1: actually come to fruit. Um, maybe we started hundred dollars.
Speaker 1: I think hundred twenty is probably a given now from
Speaker 1: here on. Again, similar to what I'm seeing in the
Speaker 1: food exports and retex what I'm not entirely convinced that
Speaker 1: there will be embargo on US energy and sorry, you're
Speaker 1: Russian energy because Biden in the USA, I was just
Speaker 1: trying to control prices at home. Europe needs lower fuel bills.
Speaker 1: I think it would be political suicide if they were
Speaker 1: to put sanctions on UM Russian oil. It would be
Speaker 1: it would just cause them massive spiral and therefore more invitation. Corna,
Speaker 1: you are a grizzled pro at this. And of course
Speaker 1: the joy across the economy is always comes back to
Speaker 1: the discussion of oil. When an amateur like me says
Speaker 1: to you, can the US come to the rescue? Can
Speaker 1: we move ships across the Atlantic to bring hydrocarbons to Europe?
Speaker 1: How do you respond to such foolishness? No, it's just
Speaker 1: on afraid basis. It wouldn't work. The US had been
Speaker 1: enjoying almost self sufficiency in terms of oil. They used
Speaker 1: to be that important. Then Shiloh came and they became
Speaker 1: a net exporter. But the shale oil production is plateau
Speaker 1: in UM and if anything, they now have to tap
Speaker 1: into their own oil reserves, the government strategic reserves, So
Speaker 1: the US can't come to the rescue. UM for guess
Speaker 1: you've got the likes of Qatar and might try and
Speaker 1: help in but for crude opening themselves are sitting on
Speaker 1: not too much bad capacity. Um, so what hundred or
Speaker 1: hundred twenty even dollar oil will tell you is that
Speaker 1: we need to Russian demand. So what will happen eventually
Speaker 1: is you're going to see some kind of economic growth
Speaker 1: stalling and ultimately demand will come off because there isn't
Speaker 1: so much slack unless we're got to deal with Iran. Iran,
Speaker 1: may you know with the nuclear deal that may lead
Speaker 1: to some more bows coming out. Kind of thank you,
Speaker 1: as always, kind of there a d F and man,
Speaker 1: we adjust, as does Morgan Stanley Economics, Robert Rosen joins
Speaker 1: US now senior US Economists Robert Steve Anglinder over standard
Speaker 1: charter has been resilient before this historic moment of the
Speaker 1: five six seven rate high team, maybe a little bit
Speaker 1: off the mark. Do you adjust back down to three
Speaker 1: rate hikes this morning? Well, thanks for having me, Tom.
Speaker 1: We still see the Fed on track to raise interest
Speaker 1: rates in March by twenty five basis points, but of
Speaker 1: course there are now an increased degree of uncertainty in
Speaker 1: the economic outlook, so the Fed has to weigh what
Speaker 1: they're seeing in terms of domestic economic conditions, the strong
Speaker 1: labor market, the resilient consumer uh and in the inflationary backdrop.
Speaker 1: The FED has to weigh that against the potential risks
Speaker 1: to the economic outlook going forward. Let's go back to
Speaker 1: mc chesney, Martin and Truman and Eisenhower of the Korean War.
Speaker 1: Is this a point where the White House says to
Speaker 1: Chairman Powell, Look, we really need your help. This is
Speaker 1: what we'd like you to do. You know, the FED
Speaker 1: we will maintain its independence in Monterrey policy, of course,
Speaker 1: but the FED has to ask important questions. And this
Speaker 1: is not the first time that the FED has had
Speaker 1: to grapple with domestic economic conditions that might call for
Speaker 1: rate hikes, but international conditions that present some potential risks
Speaker 1: to the economic outlook. So that's a lot to weigh there.
Speaker 1: It does make a case for caution, so it helps
Speaker 1: the FED with the debates we were having in recent
Speaker 1: weeks about fifty basis points or twenty five basis points
Speaker 1: in March. It makes that decision a little bit easier,
Speaker 1: But the FED doesn't want to get caught that back footed.
Speaker 1: Uh IF risks to the economic outlook don't prove to
Speaker 1: be as significant, and they still have to deal with inflation.
Speaker 1: Will be you ready to use the s witch yet? Stagflation?
Speaker 1: Are you in the team there? Yeah? Is it part
Speaker 1: of the conversation for you? I don't think we're there yet.
Speaker 1: This is certainly a type of financial condition shock that
Speaker 1: pushes inflation and activity in opposite directions. Oil prices are
Speaker 1: going to put upward pressure on headline inflation. That adds
Speaker 1: to the multitude of inflationary shocks that we've been seeing
Speaker 1: in recent months, and of course it can have a
Speaker 1: negative effect on economic activity. But you look at the
Speaker 1: way the labor market is today. I know that can turn,
Speaker 1: but I think we've been surprised time and time again
Speaker 1: about the resilience of the labor market and the resilience
Speaker 1: of the U. S. Consumer, as as remaining the heartbeat
Speaker 1: really of this economic Expand what's the red line though
Speaker 1: for oil prices? Do you have a sense rob of
Speaker 1: how high oil prices can get before you start talking
Speaker 1: about a material downshift in the pace of economic growth.
Speaker 1: We are certainly seeing the effects of oil prices on
Speaker 1: consumer wallets. We're looking at you know, every ten cent
Speaker 1: increase in retail gas prices is about a ten billion
Speaker 1: annualized hit to consumer budgets, and that has been adding up.
Speaker 1: It's been stacking up, and it's been stacking up with
Speaker 1: other inflationary pressures. We've been seeing real wages in the
Speaker 1: red for most groups save for the lower end of
Speaker 1: the wage spectrum. If energy prices keep creeping up and
Speaker 1: they keep real wage growth in the red, then I
Speaker 1: do think that's where you start to have to get
Speaker 1: a little bit more concerned about the pace of consumer
Speaker 1: activity when we're looking at the second half of the year.
Speaker 1: Is there a precedent for how quickly the economy can
Speaker 1: shift in response to a shock like this given all
Speaker 1: of the dynamism, all of the strength that you've been
Speaker 1: talking about that we're seeing in corporate balance sheets and beyond. Yeah, absolutely,
Speaker 1: I mean things can certainly turn fast. But again it
Speaker 1: comes down to where are the fundamentals and where is
Speaker 1: the heartbeat of the economy, and that's the labor market.
Speaker 1: And we've seen job growth with incredible momentum, aggregate incomes
Speaker 1: growing strongly, ways growth at the individual level still growing strongly.
Speaker 1: So there's still a lot of positive tail winds in
Speaker 1: place to keep the domestic economic expansion going strong this year. Um.
Speaker 1: But of course things can turn fast, and when they
Speaker 1: turn fast, it tends to be transmitted through those financial
Speaker 1: shocks through uncertainty. UM. And we've seen how the FED
Speaker 1: has been responsive to developments like that very quickly in
Speaker 1: the past. So uh, you know, pivoting, that pivoting style
Speaker 1: that we've seen from Chair pow Um likely to remain
Speaker 1: in his tool kit. Do we rationalize, Robert Rosener that
Speaker 1: if inflation is a hundred basis points higher than expected,
Speaker 1: are critically the timeline is extended out of a longer inflation.
Speaker 1: How do the PhDs at the out adapt to that.
Speaker 1: It's really tricky question, Tom, because you know, typically the
Speaker 1: knee jerk reaction as you look at an energy price
Speaker 1: shock and you think that that that that that might
Speaker 1: be the t word transitory, right, But it's occurring against
Speaker 1: this backdrop of a multitude of inflationary shocks, and we
Speaker 1: do have to start to get concerned about what that
Speaker 1: could mean for the path going forward. But again it
Speaker 1: pushes the dual mandate in opposite directions because you have
Speaker 1: energy prices now lifting inflation, but also you have to
Speaker 1: be watchful for the downside, risks for activity that could
Speaker 1: potentially have down the line. Rob Wonderful has a waste
Speaker 1: diffic moment for you to same. And I'm actin'ly gonna
Speaker 1: be talking all morning about well this makes for next month.
Speaker 1: Rob Rosen that of Morgan Stanley. This is the Bloomberg
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Speaker 1: Tom keene In. This is Bloomberg