1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 2 00:00:09,240 --> 00:00:13,200 Speaker 1: with Jonathan Ferrell and Lisa Brownowitz. Daily we bring you 3 00:00:13,320 --> 00:00:18,600 Speaker 1: insight from the best and economics, finance, investment, and international relations. 4 00:00:18,960 --> 00:00:23,840 Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com, 5 00:00:23,920 --> 00:00:29,280 Speaker 1: and of course on the Bloomberg terminal. We don't need 6 00:00:29,320 --> 00:00:32,240 Speaker 1: a history lesson right now, John, particularly with the guests 7 00:00:32,280 --> 00:00:34,720 Speaker 1: that we have now, in all that he has lived 8 00:00:34,800 --> 00:00:38,040 Speaker 1: in Lithuania, but needless to say, the speech, which I 9 00:00:38,080 --> 00:00:43,000 Speaker 1: read every word of was absolutely extraordinary in translation. None 10 00:00:43,000 --> 00:00:47,280 Speaker 1: of this has been lost in translation. For Vigadishutzkis, he 11 00:00:47,360 --> 00:00:53,160 Speaker 1: is the former European Ambassador to Russia, but beyond that 12 00:00:53,360 --> 00:00:57,320 Speaker 1: has lived his Lithuania and he joins us this morning 13 00:00:57,360 --> 00:01:00,640 Speaker 1: knowing that this is a short two twenties three miles 14 00:01:00,800 --> 00:01:05,320 Speaker 1: across Lithuanian Vilnius to Colin and Grad. Ambassador, thank you 15 00:01:05,360 --> 00:01:09,520 Speaker 1: so much for joining us. Robert Kagan Mike Robert Kagan 16 00:01:09,920 --> 00:01:13,640 Speaker 1: last night in the Washington Post simply said the Baltic 17 00:01:13,760 --> 00:01:18,080 Speaker 1: States are the most at risk by Mr. Putin's perception 18 00:01:18,600 --> 00:01:22,720 Speaker 1: of his Russian Empire, whatever that may be. Howard Risks 19 00:01:22,760 --> 00:01:29,000 Speaker 1: this morning is Estonia Latvia and you're Lithuania. Well, we consent, 20 00:01:29,400 --> 00:01:35,120 Speaker 1: of course because even being lumbers of NATO, the Mightists 21 00:01:35,360 --> 00:01:38,280 Speaker 1: and the largest alliance military alliance in the world and 22 00:01:38,400 --> 00:01:42,120 Speaker 1: members of the EU, our history taught us we can 23 00:01:42,120 --> 00:01:45,800 Speaker 1: not afford ourselves to be complacent. And of course, when 24 00:01:45,920 --> 00:01:51,760 Speaker 1: the outcast Cold War is being rejected, and you know 25 00:01:52,040 --> 00:01:56,080 Speaker 1: that that that the Bodhis and the twenty first century 26 00:01:56,480 --> 00:02:00,240 Speaker 1: being written brutally and with a force, there's no to 27 00:02:00,280 --> 00:02:02,960 Speaker 1: become glazing. And that's why we hope that one of 28 00:02:03,040 --> 00:02:06,640 Speaker 1: the resolves nat TO and United States administration will demonstrate 29 00:02:07,080 --> 00:02:10,560 Speaker 1: by station i pulemanent troops in the Baltic States. When 30 00:02:10,600 --> 00:02:14,919 Speaker 1: we see the moments of this weekend, the question has 31 00:02:15,000 --> 00:02:19,519 Speaker 1: to be the application of NATO troops and indeed United 32 00:02:19,560 --> 00:02:22,679 Speaker 1: States troops. Do you need to see a more active 33 00:02:22,720 --> 00:02:27,400 Speaker 1: summoning of those troops to your Lithuania. Yes, we appreciate, 34 00:02:27,639 --> 00:02:30,320 Speaker 1: you know, support what the United States has been in 35 00:02:30,400 --> 00:02:36,000 Speaker 1: a very demonstrating recent visit of Secretary of Defense with Austin. However, 36 00:02:36,360 --> 00:02:41,360 Speaker 1: you know Kremlin respects only US boats on the ground. 37 00:02:41,800 --> 00:02:44,560 Speaker 1: I know that from our experience, and that's what we 38 00:02:45,240 --> 00:02:50,560 Speaker 1: what we expect pray and requests for the US to 39 00:02:50,680 --> 00:02:54,560 Speaker 1: come to to rescue and prevent any kind of entertainments 40 00:02:54,720 --> 00:02:58,600 Speaker 1: Gremlin may consider. So is it forced that ultimately is 41 00:02:58,600 --> 00:03:00,840 Speaker 1: going to make a difference to latter where Putin forget 42 00:03:00,840 --> 00:03:03,280 Speaker 1: about economic sanctions that he spent the past eight years 43 00:03:03,320 --> 00:03:07,880 Speaker 1: trying to fortify his economy economy against the gaudis well. 44 00:03:07,919 --> 00:03:11,840 Speaker 1: I think it will require a jew strategic stamina and 45 00:03:12,560 --> 00:03:16,680 Speaker 1: Western resolves, especially European resolves, to recognize what's going on. 46 00:03:16,720 --> 00:03:20,400 Speaker 1: What puts In said yesterday, Um, I may sound politically 47 00:03:20,480 --> 00:03:25,200 Speaker 1: incorrect is nothing new. He's been pursuing this narrative of 48 00:03:25,400 --> 00:03:30,120 Speaker 1: assertation and aggressiveness since two thousand. Certain he plainly said 49 00:03:30,160 --> 00:03:33,040 Speaker 1: that he does not consider Ukraine to be a normally 50 00:03:33,120 --> 00:03:35,320 Speaker 1: even the state. It's part of Russia, It's part of 51 00:03:35,360 --> 00:03:39,640 Speaker 1: Russia nation. And you know, rewriting brutally the borders with 52 00:03:39,840 --> 00:03:44,200 Speaker 1: disrespect to basic rules is showing experience, and that's what 53 00:03:44,400 --> 00:03:47,760 Speaker 1: we hope that It will require a political stamina, will 54 00:03:47,800 --> 00:03:53,119 Speaker 1: require troops of the ground, talking diplomacy but also sanctions 55 00:03:53,120 --> 00:03:56,640 Speaker 1: as well well. And speaking of diplomacy, are are the 56 00:03:56,680 --> 00:04:01,240 Speaker 1: Mixed A chords now dead? I think that I mean 57 00:04:01,400 --> 00:04:04,520 Speaker 1: Putting the said it's it's it's over, and I I mean, 58 00:04:04,560 --> 00:04:08,840 Speaker 1: you know, how how would you expect that to be written? 59 00:04:09,200 --> 00:04:13,440 Speaker 1: I think it means records are gone. UH, They've been 60 00:04:13,480 --> 00:04:16,360 Speaker 1: shredded by by Gremlin. And now the question is how 61 00:04:16,440 --> 00:04:20,040 Speaker 1: the West will will respond. I wish that the West 62 00:04:20,040 --> 00:04:25,040 Speaker 1: will respond in a strategic terms. That's how what Putting understands. 63 00:04:25,120 --> 00:04:29,719 Speaker 1: And it will require sanctions most profound and severe, maybe 64 00:04:29,760 --> 00:04:33,680 Speaker 1: freezing them before the summit between the President Biden and 65 00:04:33,680 --> 00:04:37,599 Speaker 1: and Putin and then moving forward that would require that 66 00:04:37,640 --> 00:04:42,160 Speaker 1: would require also a greater support to Ukraine because it's 67 00:04:42,200 --> 00:04:46,400 Speaker 1: all about I mean independence and sovereignty of free nation. 68 00:04:46,960 --> 00:04:49,520 Speaker 1: And the time is to come back to to the 69 00:04:50,240 --> 00:04:53,640 Speaker 1: decisions by the West to extend membership Action Plan for 70 00:04:53,760 --> 00:04:57,720 Speaker 1: Ukraine and invite for the negotiation talks into the EU. 71 00:04:57,880 --> 00:05:01,760 Speaker 1: That's how the europe Secluit architecture has to be built 72 00:05:01,800 --> 00:05:06,040 Speaker 1: and maintained. Alongside we stop to putting on confidence building 73 00:05:06,040 --> 00:05:08,839 Speaker 1: measures on arms controls. But it's only part of the 74 00:05:08,960 --> 00:05:13,359 Speaker 1: much more complex puzzle UH and the litmus tests we 75 00:05:13,440 --> 00:05:17,919 Speaker 1: are witnessing the most found in history. Ambassador Jeffrey Sachs 76 00:05:18,000 --> 00:05:20,680 Speaker 1: and the financial Times this weekend. Of course, with all 77 00:05:20,720 --> 00:05:24,440 Speaker 1: of its experience with gorber Schev and Yelsa, Russian professor 78 00:05:24,520 --> 00:05:27,599 Speaker 1: sax as, Look, it's not appeasement, but there needs to 79 00:05:27,640 --> 00:05:31,960 Speaker 1: be a diplomatic negotiation. Do you fear or can you 80 00:05:32,120 --> 00:05:36,799 Speaker 1: imagine that is part of a NATO diplomacy and frankly German, 81 00:05:36,920 --> 00:05:41,440 Speaker 1: France and Russia diplomacy, that we would generate a strip 82 00:05:41,480 --> 00:05:45,400 Speaker 1: of land from Russia across the Kalina Grad. Would that 83 00:05:45,440 --> 00:05:47,840 Speaker 1: be a chip that we would have to give up 84 00:05:47,839 --> 00:05:53,960 Speaker 1: with land across your Lithuania. Well, I think I'm sure 85 00:05:54,040 --> 00:05:57,000 Speaker 1: that is not something what is being considered in Paris, 86 00:05:57,080 --> 00:06:00,680 Speaker 1: Berlin or Washington, d C. In the wild House, we 87 00:06:00,680 --> 00:06:05,080 Speaker 1: we trust, I mean the island, cloud assurances and the 88 00:06:05,120 --> 00:06:09,800 Speaker 1: security into Nadom. George W. Bush, which I was a 89 00:06:09,839 --> 00:06:12,360 Speaker 1: party to host as ambassador of the Swing to United 90 00:06:12,360 --> 00:06:15,960 Speaker 1: States at that time, he said in business anyone as 91 00:06:15,760 --> 00:06:18,000 Speaker 1: as of now who makes the enemy of this wing 92 00:06:18,360 --> 00:06:21,000 Speaker 1: will be the enemy of the United States. We trust 93 00:06:21,040 --> 00:06:24,560 Speaker 1: those wits and we we we count on your support. 94 00:06:25,160 --> 00:06:26,320 Speaker 1: We're not going to have you on the show with 95 00:06:26,400 --> 00:06:28,000 Speaker 1: us this morning, said thank you for out us A 96 00:06:28,000 --> 00:06:37,640 Speaker 1: shouts cast. They form a EU ambassadors to Russia. Let 97 00:06:37,720 --> 00:06:41,880 Speaker 1: us move on here to a discussion with Leslie Felconio, 98 00:06:42,080 --> 00:06:46,719 Speaker 1: senior fixed income Strategies for UBS UBS Growth Wealth Management. 99 00:06:46,760 --> 00:06:48,560 Speaker 1: We're through she could join us in the blur of 100 00:06:48,600 --> 00:06:53,240 Speaker 1: news this morning, Leslie. The short order, is this international 101 00:06:53,360 --> 00:06:58,760 Speaker 1: relations brings yield down? I believe I learned that's price up, 102 00:06:59,480 --> 00:07:03,279 Speaker 1: yield down. Is this the ultimate by the dip or 103 00:07:03,360 --> 00:07:07,520 Speaker 1: you run with the fortune of seeing price up, yield 104 00:07:07,600 --> 00:07:10,920 Speaker 1: down and fixed income? Well, I mean, I think this 105 00:07:11,040 --> 00:07:13,200 Speaker 1: is obviously a short term flight to safety, but I 106 00:07:13,240 --> 00:07:16,080 Speaker 1: don't think that alters actually the long term growth prospects 107 00:07:16,080 --> 00:07:19,320 Speaker 1: that we're seeing, particularly for the US economy. And if anything, 108 00:07:19,800 --> 00:07:22,480 Speaker 1: we would be more in terms of you know, selling 109 00:07:22,480 --> 00:07:25,080 Speaker 1: the rally right now given our outlets that we anticipate, 110 00:07:25,160 --> 00:07:27,280 Speaker 1: you know, at three point eight percent real GDP that 111 00:07:27,320 --> 00:07:29,880 Speaker 1: the consumer is still strong. So you're gonna have this 112 00:07:30,000 --> 00:07:32,440 Speaker 1: flight to safety and sort of these pockets of vulnerability. 113 00:07:32,440 --> 00:07:34,480 Speaker 1: And you know, as we know, we have this kind 114 00:07:34,560 --> 00:07:36,560 Speaker 1: of risk, and we have this kind of short term 115 00:07:36,920 --> 00:07:40,320 Speaker 1: bouts of volatility. You know, investors have a tendency to 116 00:07:40,360 --> 00:07:47,160 Speaker 1: focus on downside side opportunity. Fold in here, UBS Economics 117 00:07:47,360 --> 00:07:52,280 Speaker 1: did fifty basis did fifty point rate rate increase? Did 118 00:07:52,280 --> 00:07:56,320 Speaker 1: that drift away this weekend? I think the probability is 119 00:07:56,440 --> 00:07:59,640 Speaker 1: has become increasingly low, even not just just just meet 120 00:07:59,720 --> 00:08:02,000 Speaker 1: this weekend, but even you know, before this week and 121 00:08:02,120 --> 00:08:03,840 Speaker 1: listening to some of the FED rehetoric, I mean, we 122 00:08:03,880 --> 00:08:05,520 Speaker 1: don't think that they're going to start off at the 123 00:08:05,520 --> 00:08:07,840 Speaker 1: fifty basis point rad hike. I mean, I think some 124 00:08:07,920 --> 00:08:10,760 Speaker 1: of the FED rhetoric last week actually showed that. I mean, 125 00:08:10,800 --> 00:08:12,640 Speaker 1: it doesn't mean that they won't do fifty later on, 126 00:08:13,080 --> 00:08:14,520 Speaker 1: but to start off with that might be a little 127 00:08:14,520 --> 00:08:16,840 Speaker 1: bit too extreme. And look, I mean, they're still buying bonds, 128 00:08:16,960 --> 00:08:19,680 Speaker 1: you know, they're still increasing their balance sheet, and I 129 00:08:19,680 --> 00:08:21,640 Speaker 1: think they're going to wait to see exactly how the 130 00:08:21,680 --> 00:08:24,119 Speaker 1: base case effects turn in terms of inflation the second 131 00:08:24,120 --> 00:08:27,280 Speaker 1: half before they do such an aggressive move. Well, speaking 132 00:08:27,280 --> 00:08:30,200 Speaker 1: of aggressive moves, obviously the West is reacting to what 133 00:08:30,240 --> 00:08:33,120 Speaker 1: we saw from about Vladimir Putin over the long weekend. 134 00:08:33,120 --> 00:08:35,199 Speaker 1: We're now hearing from the UK's Boris Johnson that the 135 00:08:35,280 --> 00:08:39,160 Speaker 1: UK will sanction five Russian banks as well as individuals. 136 00:08:39,160 --> 00:08:41,559 Speaker 1: When we look at the potential implications for the fixed 137 00:08:41,559 --> 00:08:45,600 Speaker 1: income market of this geopolitical crisis Leslie, and specifically the 138 00:08:45,679 --> 00:08:48,240 Speaker 1: energy complex. What's the read through and to break evens 139 00:08:48,240 --> 00:08:52,560 Speaker 1: inflation expectations and therefore monetary policy ultimately. Well, you know, 140 00:08:52,600 --> 00:08:54,240 Speaker 1: it's interesting because if you look at things like the 141 00:08:54,280 --> 00:08:56,600 Speaker 1: five year factored forward swap, it's like a two point 142 00:08:56,640 --> 00:08:59,280 Speaker 1: three percent Even if you look at the break even today, 143 00:08:59,480 --> 00:09:03,160 Speaker 1: we're noting this big rise in inflation expectations. I think 144 00:09:03,200 --> 00:09:05,240 Speaker 1: it's a component, but I don't think it's going to 145 00:09:05,280 --> 00:09:06,920 Speaker 1: be a driver, and I don't think it's going to 146 00:09:07,000 --> 00:09:09,920 Speaker 1: alter necessarily the fence path, which we do believe will 147 00:09:09,920 --> 00:09:11,760 Speaker 1: be around five right types by the end of the year. 148 00:09:12,000 --> 00:09:14,000 Speaker 1: It will probably be a big gradual of twenty five 149 00:09:14,160 --> 00:09:16,320 Speaker 1: the data that we know right now. But I don't 150 00:09:16,320 --> 00:09:18,040 Speaker 1: think this is going to have a need jerk reaction 151 00:09:18,080 --> 00:09:20,360 Speaker 1: where the FET has to become even more hawkish because 152 00:09:20,480 --> 00:09:23,160 Speaker 1: we're seeing rise in energy prices, all right. So there's 153 00:09:23,160 --> 00:09:25,920 Speaker 1: obviously the break even component, Leslie. There's also the real 154 00:09:26,000 --> 00:09:30,000 Speaker 1: yields component. Do we reach positive territory will they stay negative? 155 00:09:30,920 --> 00:09:33,240 Speaker 1: Well even listen, I think five year real yields are 156 00:09:33,360 --> 00:09:35,520 Speaker 1: very native. I mean, the tenure we've had a correction 157 00:09:35,520 --> 00:09:38,319 Speaker 1: with we're down negative rate fifty right now. We probably 158 00:09:38,400 --> 00:09:40,640 Speaker 1: go to plus or minus twenty, but that five year 159 00:09:40,640 --> 00:09:43,360 Speaker 1: real yield has remained stubbornly negative, and even though nominal 160 00:09:43,480 --> 00:09:45,319 Speaker 1: yields in the five year side had gotten almost a 161 00:09:45,360 --> 00:09:47,400 Speaker 1: two percent, which by the way, we don't think it's 162 00:09:47,400 --> 00:09:49,680 Speaker 1: going to get that much higher. However, we do think 163 00:09:49,679 --> 00:09:52,240 Speaker 1: those break even inflation expectations are going to fall from 164 00:09:52,240 --> 00:09:54,080 Speaker 1: that two point nine level that we see right now, 165 00:09:54,400 --> 00:09:56,800 Speaker 1: probably closer to that five year five year swop about 166 00:09:56,800 --> 00:09:59,320 Speaker 1: two point three. So we are expecting really yields to 167 00:09:59,440 --> 00:10:02,080 Speaker 1: Risehether or not they turned positively this year is a 168 00:10:02,160 --> 00:10:04,640 Speaker 1: question mark, but they could be close to it. Leslie, 169 00:10:04,679 --> 00:10:06,240 Speaker 1: thank you for paying with us. What a busy morning 170 00:10:06,240 --> 00:10:08,960 Speaker 1: for everybody. Leslie found County on there of UBS Global 171 00:10:08,960 --> 00:10:16,520 Speaker 1: Wath Management joining us now to give perspective here, particularly 172 00:10:16,600 --> 00:10:19,000 Speaker 1: for those listening in Europe. And Merita Son joins as 173 00:10:19,080 --> 00:10:22,679 Speaker 1: founder director of Research at Energy Aspects. I must say 174 00:10:22,760 --> 00:10:26,840 Speaker 1: she's just fabulous at the dynamics of supply and demand 175 00:10:27,000 --> 00:10:30,480 Speaker 1: in energy. Emerita. My fault is I don't spend enough 176 00:10:30,520 --> 00:10:34,679 Speaker 1: time talking about natural gas. What can Mr Putin, Mr 177 00:10:34,800 --> 00:10:43,080 Speaker 1: Medvedev do to change the dialogue of natural gas in Europe. Well, 178 00:10:43,160 --> 00:10:45,040 Speaker 1: I think natural gas, of course, you know, it's it's 179 00:10:45,080 --> 00:10:49,280 Speaker 1: been very prominently featured in in the media last year, 180 00:10:49,720 --> 00:10:52,640 Speaker 1: particularly because of North Stream too. But I will say 181 00:10:53,200 --> 00:10:55,600 Speaker 1: Putin has come out even just a few hours ago 182 00:10:55,640 --> 00:11:00,079 Speaker 1: and said that gas supplies will be uninterrupted, and I 183 00:11:00,120 --> 00:11:01,960 Speaker 1: think that has been one of the big fears in 184 00:11:02,000 --> 00:11:05,760 Speaker 1: the market, whether because of either Western sanctions or because 185 00:11:05,840 --> 00:11:09,040 Speaker 1: Russia um decides to turn off both oil and gas 186 00:11:09,080 --> 00:11:11,679 Speaker 1: supplies to Europe. But they have never done that before, 187 00:11:11,720 --> 00:11:15,040 Speaker 1: including during the Cold War. So again I think Russia 188 00:11:15,240 --> 00:11:17,959 Speaker 1: is not going to be the one acting on that 189 00:11:18,040 --> 00:11:20,920 Speaker 1: and using energy as a weapon. But of course we've 190 00:11:20,960 --> 00:11:24,640 Speaker 1: seen the headlines with Germany halting the process, which which 191 00:11:24,960 --> 00:11:27,240 Speaker 1: you know, which was one of the things we were 192 00:11:27,360 --> 00:11:30,880 Speaker 1: expecting should the should the tensions escalct But you know, 193 00:11:30,960 --> 00:11:35,400 Speaker 1: John emailed me a Sunday morning. Emread about five am 194 00:11:35,600 --> 00:11:40,960 Speaker 1: the Netherlands natural gas code t ZT one commodity And 195 00:11:40,960 --> 00:11:44,000 Speaker 1: the bottom line is it was cheap and then it 196 00:11:44,080 --> 00:11:47,120 Speaker 1: became expensive with a spike up here, and it's come 197 00:11:47,160 --> 00:11:50,960 Speaker 1: down and been managed. Who's managing the price of natural 198 00:11:51,040 --> 00:11:56,040 Speaker 1: gas in Europe right now? The recent natural gas prices 199 00:11:56,040 --> 00:11:59,200 Speaker 1: have managed to come down in Europe has actually been 200 00:11:59,240 --> 00:12:03,120 Speaker 1: thanks to Asia, because Asia had bought a whole lot 201 00:12:03,200 --> 00:12:06,360 Speaker 1: of ellergy cargoes if you remember, not this winter, the 202 00:12:06,480 --> 00:12:09,120 Speaker 1: prior winter was very very cold, they were caught short. 203 00:12:09,520 --> 00:12:11,800 Speaker 1: So then as a result of them over buying and 204 00:12:11,880 --> 00:12:15,240 Speaker 1: the weather was fairly mild, they had some access which 205 00:12:15,240 --> 00:12:18,560 Speaker 1: they then managed to send over to Europe. That is 206 00:12:18,640 --> 00:12:22,360 Speaker 1: what has helped gas prices come off. But fundamentally, I 207 00:12:22,400 --> 00:12:25,280 Speaker 1: mean we saw record high TTF prices, which is the 208 00:12:25,400 --> 00:12:29,240 Speaker 1: price you're referring to last year. Those fundamentals haven't changed. 209 00:12:29,440 --> 00:12:33,560 Speaker 1: Demand remains very very high, and also supplies, regardless of 210 00:12:33,559 --> 00:12:37,160 Speaker 1: what's going on geopolitically with Russia, Russian supplies into Europe 211 00:12:37,200 --> 00:12:40,920 Speaker 1: have remained very low and we weren't even expecting north 212 00:12:40,920 --> 00:12:43,920 Speaker 1: Stream to to come online till November of this year anyway, 213 00:12:44,000 --> 00:12:46,640 Speaker 1: so it is still a very tight market. And reason 214 00:12:46,679 --> 00:12:49,040 Speaker 1: how did you interpret the language from Chancellor Shelts earlier, 215 00:12:49,120 --> 00:12:51,240 Speaker 1: was that a man putting things on ice or a 216 00:12:51,240 --> 00:12:56,200 Speaker 1: man killing it. Well, look at the West has to 217 00:12:56,240 --> 00:12:58,959 Speaker 1: be seen to be doing something right, and we've maintained 218 00:12:59,000 --> 00:13:03,640 Speaker 1: our view that there will not be sanctions on energy supplies, 219 00:13:03,760 --> 00:13:06,360 Speaker 1: prompt energy supplies, whether it be for oil or for gas. 220 00:13:06,760 --> 00:13:09,439 Speaker 1: Um Europe is just way too dependent. Means thirty five 221 00:13:09,440 --> 00:13:12,679 Speaker 1: percent of gas European gas comes from Russia, thirty eight 222 00:13:12,760 --> 00:13:15,640 Speaker 1: and thirty nine percent of oil and diesel comes from Russia. 223 00:13:15,720 --> 00:13:18,160 Speaker 1: So it's it's just going to hurt the West a 224 00:13:18,160 --> 00:13:21,000 Speaker 1: lot more, especially with crude close to hundred dollars and 225 00:13:21,040 --> 00:13:23,440 Speaker 1: gas still very very high. Yes it's off the record highest, 226 00:13:23,440 --> 00:13:25,320 Speaker 1: but it's still high. So um they need to be 227 00:13:25,360 --> 00:13:28,600 Speaker 1: doing something, but it's going to be around technology sanctions, 228 00:13:28,640 --> 00:13:32,120 Speaker 1: potentially some bank some individuals being sanctioned. And again this 229 00:13:32,200 --> 00:13:35,280 Speaker 1: was something where yes north Stream too, it wasn't supposed 230 00:13:35,280 --> 00:13:37,640 Speaker 1: to be coming online tomorrow right it is still further 231 00:13:37,679 --> 00:13:40,400 Speaker 1: down the pipeline, and it was something along the lines 232 00:13:40,440 --> 00:13:44,360 Speaker 1: of future projects that could be affected and north Stream 233 00:13:44,400 --> 00:13:46,760 Speaker 1: to falls under that category. And Rachel, we've got a 234 00:13:46,800 --> 00:13:48,560 Speaker 1: decent understanding of where we are now and trying to 235 00:13:48,559 --> 00:13:50,200 Speaker 1: work out where it will be by the time we 236 00:13:50,200 --> 00:13:52,120 Speaker 1: get to the end of the year. And Redwards, our 237 00:13:52,160 --> 00:13:55,080 Speaker 1: colleague good friend here at Blombergh, caught up with Russell Hardy, 238 00:13:55,160 --> 00:13:58,400 Speaker 1: the chief executive officer AVITZL Group and he said on 239 00:13:58,440 --> 00:14:01,360 Speaker 1: the demand side, the one d Emberil number is probably 240 00:14:01,400 --> 00:14:03,679 Speaker 1: going to be excited this year. This was on crude. 241 00:14:03,800 --> 00:14:06,040 Speaker 1: He went on to say demand is going to surge 242 00:14:06,640 --> 00:14:09,360 Speaker 1: in the second half, and so we understand how tight 243 00:14:09,440 --> 00:14:11,280 Speaker 1: things are now, how tight do you think they'll be 244 00:14:11,600 --> 00:14:13,240 Speaker 1: by the time we get to the end of twenty two. 245 00:14:15,559 --> 00:14:17,960 Speaker 1: I think the couple of things I would say where 246 00:14:18,080 --> 00:14:20,520 Speaker 1: we could get some extra supplies. Iran is of course 247 00:14:20,560 --> 00:14:24,280 Speaker 1: one of them. Potential sanctions lifting in the coming weeks, 248 00:14:24,280 --> 00:14:26,200 Speaker 1: and you could get more oil out in the second 249 00:14:26,240 --> 00:14:28,520 Speaker 1: half of the year. US producers again there's still being 250 00:14:28,600 --> 00:14:31,600 Speaker 1: very disciplined, but potentially you could eke out a little 251 00:14:31,600 --> 00:14:34,400 Speaker 1: bit more from them. But Russell Hardy is exactly right. 252 00:14:34,480 --> 00:14:37,040 Speaker 1: We've been talking about this for months now that there 253 00:14:37,120 --> 00:14:38,960 Speaker 1: is a lot of pent up demand. Demand is going 254 00:14:39,000 --> 00:14:41,720 Speaker 1: to be rising, particularly in Asia, and we've talked about 255 00:14:41,760 --> 00:14:44,720 Speaker 1: this on this show before. Asia just hasn't been able 256 00:14:44,760 --> 00:14:47,320 Speaker 1: to come out unlike the West over the last few 257 00:14:47,800 --> 00:14:50,920 Speaker 1: years because of COVID restrictions. So they are itching to 258 00:14:51,440 --> 00:14:53,560 Speaker 1: fly and just get back to a normal life. So 259 00:14:53,640 --> 00:14:55,920 Speaker 1: there is a lot of demand that we are going 260 00:14:55,960 --> 00:14:59,120 Speaker 1: to see, particularly in the summer and the only way 261 00:14:59,160 --> 00:15:02,200 Speaker 1: to then solve for this market, because you're not going 262 00:15:02,240 --> 00:15:04,560 Speaker 1: to get much incremental supplies, is going to be through 263 00:15:04,640 --> 00:15:07,840 Speaker 1: high prices because demand growth has to moderate. How much 264 00:15:07,920 --> 00:15:10,360 Speaker 1: higher is one hundred dollar oil and above one hundred 265 00:15:10,400 --> 00:15:15,520 Speaker 1: dollar royal sustainable aim riada Um. Well, if you think 266 00:15:15,560 --> 00:15:18,000 Speaker 1: about back to two thousand and eight compared or if 267 00:15:18,040 --> 00:15:21,040 Speaker 1: you do it on an inflation adjusted basis, oil prices 268 00:15:21,080 --> 00:15:23,920 Speaker 1: need to be thirty higher now than in two thousand 269 00:15:24,000 --> 00:15:25,680 Speaker 1: and eight if you are to have the same impact 270 00:15:25,720 --> 00:15:28,840 Speaker 1: on demand. So yes, it could go significantly higher before 271 00:15:28,880 --> 00:15:31,280 Speaker 1: you start having an impact on demand. And Tom's going 272 00:15:31,320 --> 00:15:34,600 Speaker 1: to like this because it talks about elasticities. People have 273 00:15:34,720 --> 00:15:37,440 Speaker 1: actually saved up a lot more money and governments are 274 00:15:37,440 --> 00:15:40,479 Speaker 1: handing out a lot more checks, which means income elasticity 275 00:15:40,600 --> 00:15:43,240 Speaker 1: right now is a lot stronger than price elasticity. So 276 00:15:43,440 --> 00:15:45,920 Speaker 1: even at hundred dollar royal, even potentially at hundred twenty 277 00:15:45,960 --> 00:15:48,400 Speaker 1: dollar oil, you don't see the slow down that you've 278 00:15:48,440 --> 00:15:51,400 Speaker 1: seen in the past. We've already on our numbers. Oil 279 00:15:51,440 --> 00:15:54,160 Speaker 1: demand is already above hundred million barrels per day. We 280 00:15:54,200 --> 00:15:57,800 Speaker 1: will surpast two thousand and nineteen levels in the second 281 00:15:57,800 --> 00:16:00,800 Speaker 1: half of this year, and we will be effectively growing 282 00:16:00,840 --> 00:16:03,600 Speaker 1: by over three million barrels per day this year. When 283 00:16:03,640 --> 00:16:06,760 Speaker 1: does supply and demand then come back into balance or 284 00:16:06,800 --> 00:16:09,000 Speaker 1: more of a balance, and start to change that equation. 285 00:16:09,040 --> 00:16:13,840 Speaker 1: How long is it going to take? I think this 286 00:16:13,920 --> 00:16:15,840 Speaker 1: is not a short term thing, you know, a hundred 287 00:16:15,840 --> 00:16:17,760 Speaker 1: dollar oil. I mean we've been calling for a hundred 288 00:16:17,760 --> 00:16:20,080 Speaker 1: pluss dollar oil between twenty three and twenty six for 289 00:16:20,080 --> 00:16:22,840 Speaker 1: a while, and that is precisely because this isn't a 290 00:16:22,880 --> 00:16:24,840 Speaker 1: short term phenomenal show. You know, you're not going to 291 00:16:24,880 --> 00:16:27,520 Speaker 1: get hundred dollar roil necessarily like this year on a 292 00:16:27,560 --> 00:16:31,960 Speaker 1: sustained basis, geopolitical risk, socide. But this is ultimately about 293 00:16:32,000 --> 00:16:35,320 Speaker 1: under investment. We've had years of underinvestment and now it's 294 00:16:35,560 --> 00:16:38,160 Speaker 1: getting much much worse due to all the narrative around 295 00:16:38,240 --> 00:16:41,560 Speaker 1: energy transition. But demand simply isn't reacting. If anything, demand 296 00:16:41,640 --> 00:16:45,240 Speaker 1: is actually rising quicker than anyone had expected. So therefore 297 00:16:45,280 --> 00:16:47,920 Speaker 1: there's a huge policy mismatch. Governments are coming out and 298 00:16:47,960 --> 00:16:50,440 Speaker 1: talking about, you know, at the end to fossil fueld 299 00:16:50,480 --> 00:16:53,640 Speaker 1: without actually doing anything to reduce demand. It's going to 300 00:16:53,680 --> 00:16:55,280 Speaker 1: be here for a few years. You know, it really 301 00:16:55,320 --> 00:16:57,560 Speaker 1: shows up John and I got ratios in my head 302 00:16:57,680 --> 00:17:01,880 Speaker 1: and reader said that was brilliant. The responsiveness is given 303 00:17:01,880 --> 00:17:06,919 Speaker 1: a higher incomes. It what barrel size, emery decent? Do 304 00:17:07,000 --> 00:17:10,440 Speaker 1: we actually click in demand? Ankst Is it a hundred 305 00:17:10,520 --> 00:17:15,000 Speaker 1: and thirty dollars a barrel? I don't think we know 306 00:17:15,200 --> 00:17:17,639 Speaker 1: the answer quite yet, simply because of the amount of 307 00:17:17,680 --> 00:17:19,760 Speaker 1: income and savings we've got in the economy. But yes, 308 00:17:19,800 --> 00:17:22,800 Speaker 1: I would say it's not lower than one twenties, probably 309 00:17:23,040 --> 00:17:25,879 Speaker 1: around the number you talked about, maybe even slightly higher. 310 00:17:26,440 --> 00:17:29,360 Speaker 1: I'm ready to send thank you of any aspects. Thank 311 00:17:29,400 --> 00:17:37,639 Speaker 1: you very much. Anthony Capiano joins us right now on 312 00:17:37,840 --> 00:17:40,159 Speaker 1: your vacation plans, and I know you can't get a 313 00:17:40,280 --> 00:17:42,879 Speaker 1: room anywhere. I know the drill of course, writing her 314 00:17:42,880 --> 00:17:46,080 Speaker 1: as chief executive officer Marriott International, I want to span 315 00:17:46,200 --> 00:17:48,520 Speaker 1: your two price points and a hundred dollars a night 316 00:17:48,800 --> 00:17:50,879 Speaker 1: out to five than some nights and these are we 317 00:17:50,920 --> 00:17:52,240 Speaker 1: don't need to spend a lot of time on it 318 00:17:52,240 --> 00:17:57,120 Speaker 1: because Kaylee's got legitimate questions. There's big Jet TV stopping 319 00:17:57,200 --> 00:18:01,040 Speaker 1: the world on Friday with the storm and London, and 320 00:18:01,080 --> 00:18:03,320 Speaker 1: the next day he's from the roof of a Marriott 321 00:18:03,400 --> 00:18:07,359 Speaker 1: Courtyard at Heathrow. Tell us about how you run the 322 00:18:07,440 --> 00:18:11,000 Speaker 1: airport's big jet TV standing on. What's it like we're 323 00:18:11,000 --> 00:18:15,040 Speaker 1: having the Courtyard franchise at a lower price point. Well, Tom, 324 00:18:15,200 --> 00:18:17,280 Speaker 1: first of all, thanks for having me. It's it's one 325 00:18:17,320 --> 00:18:19,720 Speaker 1: of the things that I love about our portfolio. I 326 00:18:19,760 --> 00:18:22,760 Speaker 1: get questions all the time with thirty brands, do you 327 00:18:22,760 --> 00:18:25,280 Speaker 1: have too many brands? What's the right number of brands? 328 00:18:25,480 --> 00:18:28,600 Speaker 1: The ability to offer that breadth of price points with 329 00:18:28,680 --> 00:18:31,880 Speaker 1: a hundred and sixty million loyalty members, we feel good 330 00:18:31,880 --> 00:18:34,520 Speaker 1: about the ability to offer that breath for every one 331 00:18:34,560 --> 00:18:35,960 Speaker 1: of our customs. Let's go the other way to the 332 00:18:36,080 --> 00:18:39,479 Speaker 1: Ritz Carlton in Moscow, which is five minute summer night, 333 00:18:39,560 --> 00:18:44,320 Speaker 1: highest rated hotel in the country. How do you see 334 00:18:44,359 --> 00:18:49,240 Speaker 1: and perceive your business in Russia? Given all that's going on, 335 00:18:49,600 --> 00:18:51,639 Speaker 1: how are you going to handle the Ritz Carlton in 336 00:18:51,640 --> 00:18:54,720 Speaker 1: the coming weeks. But we've got about thirty hotels in 337 00:18:54,800 --> 00:18:58,000 Speaker 1: Russia to hotels in the Ukraine as we sit here today, 338 00:18:58,280 --> 00:19:01,320 Speaker 1: with a handful of deals in both entrees in the pipeline. 339 00:19:02,200 --> 00:19:05,680 Speaker 1: Like every country we do business in, UH we are 340 00:19:05,720 --> 00:19:09,080 Speaker 1: about safety and security for our guests and our associates. 341 00:19:09,720 --> 00:19:13,320 Speaker 1: As we've watched the recovery from the pandemic, that recovery 342 00:19:13,320 --> 00:19:18,159 Speaker 1: has largely been fueled by steady improvement in consumer and 343 00:19:18,240 --> 00:19:22,840 Speaker 1: traveler confidence. Political instability, as we've seen over the last 344 00:19:22,880 --> 00:19:26,480 Speaker 1: forty eight hours, certainly has the potential to rattle that confidence, 345 00:19:26,720 --> 00:19:29,600 Speaker 1: so we're watching it closely. Well, let's tie to those 346 00:19:29,640 --> 00:19:31,879 Speaker 1: two stories together in terms of what we're seeing on 347 00:19:31,920 --> 00:19:35,680 Speaker 1: the geopolitical front and what we're seeing with the consumer. Obviously, 348 00:19:35,880 --> 00:19:39,159 Speaker 1: one of the concerns is that if you have repercussions 349 00:19:39,200 --> 00:19:41,919 Speaker 1: on Russia, it's going to disrupt energy flows that is 350 00:19:41,920 --> 00:19:44,760 Speaker 1: going to be more inflationary. How does that translate into 351 00:19:44,800 --> 00:19:47,920 Speaker 1: the discretionary spending of a US consumer. Are they going 352 00:19:47,960 --> 00:19:50,399 Speaker 1: to be spending as much on travel and leisure in 353 00:19:50,400 --> 00:19:52,720 Speaker 1: the face of some of these inflationary pressures. Well, I 354 00:19:52,720 --> 00:19:55,000 Speaker 1: thought it was interesting right before I came on, I 355 00:19:55,080 --> 00:19:59,320 Speaker 1: heard your your prior speaker talk about competition for consumer 356 00:19:59,400 --> 00:20:02,439 Speaker 1: discretionary a spending and more and more folks that have 357 00:20:02,640 --> 00:20:06,479 Speaker 1: been effectively locked down for the last two years thinking 358 00:20:06,520 --> 00:20:11,600 Speaker 1: about spending on travel and tourism. Uh, we watch fuel prices, 359 00:20:11,680 --> 00:20:14,719 Speaker 1: particularly for leisure travel in the US, but I can 360 00:20:14,760 --> 00:20:19,280 Speaker 1: tell you even last summer, despite some variability and fuel prices, 361 00:20:19,320 --> 00:20:22,520 Speaker 1: we didn't see any meaningful dilution of the of the 362 00:20:22,600 --> 00:20:26,520 Speaker 1: velocity of of leisure demand recovery. How far do we 363 00:20:26,560 --> 00:20:29,280 Speaker 1: still have to go in that demand recovery? Tony Well. 364 00:20:29,320 --> 00:20:31,679 Speaker 1: In our fourth quarter earnings call, we talked about the 365 00:20:31,720 --> 00:20:36,120 Speaker 1: fact that globally, revenue per available room was about nineteen 366 00:20:36,280 --> 00:20:41,399 Speaker 1: percent behind where we were fourth quarter two thousand nineteen, 367 00:20:41,680 --> 00:20:44,879 Speaker 1: But that was a forty point improvement from what we 368 00:20:44,960 --> 00:20:47,560 Speaker 1: saw in the first quarter of last year, So we 369 00:20:47,640 --> 00:20:51,480 Speaker 1: are seeing slow, steady improvement. Even in December of last year, 370 00:20:52,000 --> 00:20:55,280 Speaker 1: RevPAR which is the acronym we use, was only down 371 00:20:55,320 --> 00:20:57,600 Speaker 1: eleven percent. Now, we did see a bit of a 372 00:20:57,680 --> 00:21:00,560 Speaker 1: hiccup from the O Macron variant, but we're already back 373 00:21:00,640 --> 00:21:03,840 Speaker 1: to booking volumes ahead of where we were before Oh 374 00:21:03,920 --> 00:21:06,760 Speaker 1: macrons started. Financier question everybody I see, and of course 375 00:21:06,760 --> 00:21:08,840 Speaker 1: if it's good numbers, everybody puts at the top of 376 00:21:08,880 --> 00:21:10,879 Speaker 1: the press release, and if it's not so good numbers, 377 00:21:10,880 --> 00:21:14,080 Speaker 1: it goes down. Do your compare and contrast pre pandemic 378 00:21:14,200 --> 00:21:17,840 Speaker 1: right now, which ratio matters? So you measure back to 379 00:21:18,440 --> 00:21:22,239 Speaker 1: two thousand nineteen. Well, I think rev par matters, I 380 00:21:22,280 --> 00:21:26,080 Speaker 1: think margins matter, and I think unit growth matters, which 381 00:21:26,080 --> 00:21:28,800 Speaker 1: are among the metrics just because the time go to 382 00:21:28,880 --> 00:21:31,159 Speaker 1: margins right now, because that's the heart and soul of it, 383 00:21:31,200 --> 00:21:33,240 Speaker 1: isn't it. Well, we had to make some really tough 384 00:21:33,320 --> 00:21:37,359 Speaker 1: decisions through the pandemic. Above property, we caught about thirty 385 00:21:37,400 --> 00:21:40,560 Speaker 1: percent of our costs. We've seen a several hundred basis 386 00:21:40,600 --> 00:21:43,919 Speaker 1: point improvement of margins at the property level, and we 387 00:21:44,040 --> 00:21:47,040 Speaker 1: as we see pricing power return, we think we can 388 00:21:47,040 --> 00:21:49,840 Speaker 1: preserve the vast majority of those margins. How much of 389 00:21:49,880 --> 00:21:52,159 Speaker 1: that on the cost side, Tony is related to labor? 390 00:21:52,200 --> 00:21:55,000 Speaker 1: What issues are you seeing there? Well, we are certainly, 391 00:21:55,080 --> 00:21:58,800 Speaker 1: particularly in the markets where demand has recovered most quickly, 392 00:21:59,119 --> 00:22:02,000 Speaker 1: we are seeing some wage pressure, as you might expect, 393 00:22:02,480 --> 00:22:05,080 Speaker 1: But as you also might expect, that's where we're seeing 394 00:22:05,200 --> 00:22:09,119 Speaker 1: pricing power uh the strongest. And we think even with 395 00:22:09,200 --> 00:22:12,800 Speaker 1: wage inflation, some of the efficiencies we've identified, we can 396 00:22:12,840 --> 00:22:16,440 Speaker 1: preserve the vast majority of those margin improvements. The airlines, 397 00:22:16,600 --> 00:22:19,879 Speaker 1: now I can report personally in my travel agent, Kayley 398 00:22:19,960 --> 00:22:26,080 Speaker 1: lines is are stupid, crazy busy pack for the summer. 399 00:22:27,160 --> 00:22:29,720 Speaker 1: What is this summer going to be like I think 400 00:22:29,720 --> 00:22:31,440 Speaker 1: it's going to be an all time record. I think 401 00:22:31,520 --> 00:22:35,439 Speaker 1: leisure demand has not slowed even a bit since the 402 00:22:35,480 --> 00:22:38,600 Speaker 1: start of the recovery. And maybe the most notable thing 403 00:22:38,640 --> 00:22:41,439 Speaker 1: to think about, so much of that recovery around the 404 00:22:41,480 --> 00:22:45,560 Speaker 1: world has been driven by domestic travel, and as international 405 00:22:45,640 --> 00:22:48,960 Speaker 1: borders start to open, you've got whole new segments of 406 00:22:49,040 --> 00:22:51,800 Speaker 1: leisure travelers that are gonna be traveling cross board. I 407 00:22:51,800 --> 00:22:54,520 Speaker 1: try to get a Barriott slot in Paris and I 408 00:22:54,560 --> 00:22:56,520 Speaker 1: had to book in Leon just to get in there. 409 00:22:56,800 --> 00:22:59,280 Speaker 1: I mean, that's a joke. It wasn't that far away. 410 00:22:59,760 --> 00:23:03,200 Speaker 1: He's encyclopedic because that's six hotels in Leoni's thinking about 411 00:23:03,320 --> 00:23:08,159 Speaker 1: right now, it's going to be a boom summer. Thank you, Tony, 412 00:23:08,200 --> 00:23:10,080 Speaker 1: thank you so much coming by it. Thanks for having 413 00:23:10,119 --> 00:23:13,240 Speaker 1: early visit. But far more importantly Tony Capiano there on 414 00:23:13,320 --> 00:23:16,800 Speaker 1: the distance from Mary Courtyard to the Ritz Carlton as well. 415 00:23:17,320 --> 00:23:21,120 Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join 416 00:23:21,240 --> 00:23:24,560 Speaker 1: us live weekdays from seven to ten am Eastern on 417 00:23:24,640 --> 00:23:28,919 Speaker 1: Bloomberg Radio and on Bloomberg Television each day from six 418 00:23:29,000 --> 00:23:33,879 Speaker 1: to nine am for insight from the best in economics, finance, investment, 419 00:23:34,000 --> 00:23:39,040 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 420 00:23:39,119 --> 00:23:42,920 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on 421 00:23:43,040 --> 00:23:47,199 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.