Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hortern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
Speaker 2: geopolitics from our global headquarters in New York City. We
Speaker 2: are live on Bloomberg Television weekday mornings from six to
Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify
Speaker 2: or anywhere else you listen, and as always on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business app.
Speaker 3: Joining us now is Amanda Liner of a Black Rock.
Speaker 1: Amanda, a difficult time for the Federal Reserved to.
Speaker 3: Be meeting, given that their dueling risks seem to be
Speaker 3: their double mandate seems to be very much increasingly in conflict.
Speaker 1: Do you think we're going to learn anything at all
Speaker 1: this week?
Speaker 4: Good morning, Thank you for having me. That's the one
Speaker 4: thing that we are focused on. I would say the
Speaker 4: Summary of Economic projections has the potential to give us
Speaker 4: some incremental clarity on their reaction function. We think on
Speaker 4: the margin it will reflect a more challenging growth inflation mix.
Speaker 4: But keep in mind this is just the median of
Speaker 4: all of the different committee members. It's not actually a
Speaker 4: cohesive projection from the committee, so we need to kind
Speaker 4: of discount that. What we are most focused on is
Speaker 4: what would be the scenario analysis the reaction function if
Speaker 4: the dual mandate comes into tension. A few months ago
Speaker 4: you started see Chair pal Beth Hammock talk about that
Speaker 4: being on the radar. I think the incremental news it
Speaker 4: has become, as you alluded to, even more challenging with
Speaker 4: the geopolitical situation, So that would be the hopefully the
Speaker 4: one nugget that we will be looking for is how
Speaker 4: would they navigate that backdrop? What would they prioritize. The
Speaker 4: SEP already reflects an unemployment rate of four point four
Speaker 4: percent for this year, so we know that they are
Speaker 4: baking in some weakning in the labor market. How much
Speaker 4: weakening would we need to see in order for their
Speaker 4: posture to change.
Speaker 3: Earlier this year, there was a feeling that any inflationary
Speaker 3: shock from tariffs or trade tensions in general would be
Speaker 3: transitory they even use that word, or even short lived.
Speaker 1: Now there's a question of the dual shocks.
Speaker 3: You have the terror for risk, and then you also
Speaker 3: have potentially some sort of oil shop that is persistent.
Speaker 1: Even if it's not.
Speaker 3: The closure of the strait of removes, there is this
Speaker 3: feeling that there's going to be a higher premium. How
Speaker 3: much does that complicate things and create a more sort
Speaker 3: of long lasting inflationary impulse.
Speaker 5: I think you nailed it.
Speaker 4: It's not just the inflation data, but inflation expectations. So
Speaker 4: even though they're navigating to core PCE, which would exclude energy,
Speaker 4: if we do have a rise in oil prices that
Speaker 4: is sustained, does that alter inflation expectations for consumers and
Speaker 4: could not cause them to react. I would say there's
Speaker 4: kind of two fold impacts that we see from this
Speaker 4: geopolitical backdrop. Its one, should there be higher U premias
Speaker 4: and corporate credit? And then two are there actually sector
Speaker 4: specific implications if there are sustained supply chain disruptions. We
Speaker 4: haven't seen that yet, hopefully we don't, but those are
Speaker 4: really what we're focused on. And then the magnitude and
Speaker 4: the duration of that has yet to be seen. Even
Speaker 4: when the FED was I would think casually using the
Speaker 4: word transitory, when was that back in the March meeting?
Speaker 4: It was also CAVEATD with the healthy dose of we're
Speaker 4: not quite sure really where this is going. I remember
Speaker 4: that meeting very well, and so I think they're even
Speaker 4: hesitant to say that they'll be able to look through it.
Speaker 4: I think they're just raising the possibility that maybe they
Speaker 4: can look through it well.
Speaker 6: To the point of credit markets, again, it's another thing
Speaker 6: where we see spreads widen a little bit and then
Speaker 6: not really react that much. Where you have seen some
Speaker 6: weaknesses in the junkiest part of the market, is the
Speaker 6: risk real there? Could you start to see defaults pick
Speaker 6: up in that area?
Speaker 4: Sure, So two things I would say, our conversations and
Speaker 4: really since early may have focused on two sided risks
Speaker 4: exactly as you noted, widening episodes have been short lived,
Speaker 4: and actually the common refrain from a lot of investors is, oh,
Speaker 4: I wish I would have taken advantage of that. More So,
Speaker 4: that's a very real risk, and so we're very focused
Speaker 4: on the two sided risks.
Speaker 5: Where we are trading carefully.
Speaker 4: And have been are those kind of left tail pockets
Speaker 4: of the market that we're already under pressure before the
Speaker 4: economic data deteriated. So, for example, US Triple c's had
Speaker 4: interest coverage below one time's already last quarter, it's rebounded
Speaker 4: a bit. That was before the economic data deteriated. You
Speaker 4: see that in pockets of the leverage level market, you
Speaker 4: see it in pockets of private credit. So that's really
Speaker 4: where we need to focus is saying, Okay, let's not
Speaker 4: be too defensive. There's a real opportunity cost to being
Speaker 4: under risked. But at the same time, if a company
Speaker 4: was already having trouble growing into its capital structure, or
Speaker 4: a sector was already having trouble navigating this environment, nothing
Speaker 4: on the horizon's going to make it easier. And so
Speaker 4: that's really I think where we are are mindful. I
Speaker 4: will add, though the high yield and leverage learned default
Speaker 4: rates have been quietly creeping for the past year and
Speaker 4: a half and it has not derailed the performance of
Speaker 4: the speculative grade parts of the market. So I think
Speaker 4: what that's telling you is it's the smallest capital structures
Speaker 4: that are defaulting. It's oftentimes repeat defaulters, and that is
Speaker 4: by definition priced into the market.
Speaker 6: Well, if we do see I said, that falls in
Speaker 6: between that dual mandate and they can't take action and
Speaker 6: they can't cut and rates do remain elevated, does that
Speaker 6: start to spread well.
Speaker 4: Actually, somewhat counterintuitively, it's probably going to support the yield
Speaker 4: base bid for corporate credit, which has been a really
Speaker 4: powerful technical force. I would say the yield based buyer
Speaker 4: has exhibited some patients on and off, so they're sitting
Speaker 4: it out sometimes. But in general, structurally higher interest rates
Speaker 4: coupled with okay growth, even below trend growth, that's not
Speaker 4: a bad recipe for corporate credit. That would probably bring
Speaker 4: some of that yield based demand in off the simelines.
Speaker 4: This is also part of the reason why we like
Speaker 4: selectively moving down in quality. You were talking about the
Speaker 4: volatility and the treasury market. Kind of one of the
Speaker 4: understated differences between IG and highyield is high yeld as
Speaker 4: a shorter duration market, so you're kind of less exposed
Speaker 4: to those swings and treasuries, especially at the long end.
Speaker 3: Just real quickly, here is the private credit market exposed
Speaker 3: to for selling based the fact that you're seeing endowments
Speaker 3: of universities looking to raise money, not for selling.
Speaker 4: Illiquidity is a feature, not a bug, of private credit.
Speaker 4: What I think that is reflective of as a multitude
Speaker 4: of factors, and I think it's a positive that actually
Speaker 4: folks can make acid allocation shifts over time when they
Speaker 4: need to with liquid assets, but it's not a liquid
Speaker 4: market by design.
Speaker 3: Amandal Adam of Blackcroc, thank you so much for being
Speaker 3: with us as always.
Speaker 1: Right now.
Speaker 3: Aaron David Miller of the Carnegie and Townment for International
Speaker 3: Peace joins us erin. I just want to get your
Speaker 3: sense of how realistic it is for the calls for
Speaker 3: de escalation to actually resonate with either not on Yahoo
Speaker 3: or with Iran at.
Speaker 1: A time or both of them seem to be really
Speaker 1: digging in.
Speaker 7: Great question, Lucia, thanks for having me.
Speaker 8: I think it's completely unrealistic and detached from the current
Speaker 8: reality for three reasons. The Israelis want to destroy as
Speaker 8: much of Iran's nuclear program as possible, but they're going
Speaker 8: to have a very difficult time doing it, and they
Speaker 8: have escalation dominance and their superiority and political superiority. There's
Speaker 8: absolutely no pushback from anyone in the region, Europe, from
Speaker 8: the United States, from the Trump administration for the Israelis
Speaker 8: to stop. As one Israeli general put it, retired, we're
Speaker 8: playing soccer with the Iranians, but they have no goalie.
Speaker 8: The Iranians having invested five trillion dollars into this nuclear program,
Speaker 8: having been embarrassed and humiliated to a degree that is
Speaker 8: unprecedented problem in the history of Islamic Republic.
Speaker 7: Are not going to yield on this.
Speaker 8: How deep their ballistic missile inventory is, what twenty twenty
Speaker 8: five hundred ballistic missiles. They can keep this up for
Speaker 8: some time, and the Americans, I think, are faced.
Speaker 7: Trump administration is faced with a dilemma.
Speaker 8: He does not want to answer this war, but he
Speaker 8: cannot stop it. It reminds me of Lennon Johnson's description
Speaker 8: in the Vietnam War of a hitchhiker in a Texas hailstorm.
Speaker 8: I can't run, I can't hide, and I can't make
Speaker 8: it stop. Question for Trump, for all of this, I'm
Speaker 8: not sure Trump wants to make it stop.
Speaker 3: Well, that's actually something he's hinted at, this question of
Speaker 3: maybe they have to fight it out and just complete it.
Speaker 3: From that perspective, what is the ultimate goal though, Erin,
Speaker 3: I mean, given the fact that you just said that,
Speaker 3: as one general told you, Israel is playing soccer and
Speaker 3: Iran has no goalie.
Speaker 9: But what's the ultimate aim?
Speaker 1: Is it regime change?
Speaker 3: How do they achieve something that actually can be sustainable
Speaker 3: for the entire region.
Speaker 7: I mean critical question.
Speaker 8: Have you told me on October eighth that eighteen months
Speaker 8: into the Israeli Hamas Warren Gaza there will be absolutely
Speaker 8: no sign of this conflict debating, I would have said,
Speaker 8: you basically are a bad analyst. The fact is the
Speaker 8: Prime Minister in Gaza has identified.
Speaker 7: Total victory as a goal. I think what he would
Speaker 7: like to do.
Speaker 8: His aspirations would be regime change on one hand, and
Speaker 8: number two deploying the United States if he can to
Speaker 8: do what the Israelis cannot, which is to destroy four
Speaker 8: though and really make a not a dent, but a
Speaker 8: major crippling of the Iranian nuclear program, which would set
Speaker 8: it back at least at least two years. So I
Speaker 8: think right now there's no reason for Ninitaannao to stop.
Speaker 7: Ballistic missiles in Israel are very problematic.
Speaker 8: I mean, the Iranians are launching, maybe ten to fifteen
Speaker 8: percent are actually getting through and striking. But you've seen
Speaker 8: Ethan reported, you've seen some of the damage. Twenty four
Speaker 8: Israelis killed. I think the public will endure this for
Speaker 8: quite some time. So right now I see absolutely no
Speaker 8: way no off ramp, no possibility.
Speaker 7: And then you, of course raise the.
Speaker 8: Question is what, in fact would a negotiation, other than
Speaker 8: cessational hostilities, what would a negotiation between the United States
Speaker 8: and Iran produce? Two months of negotiations produced an impast
Speaker 8: and I think your writings are in no mood frankly
Speaker 8: right now for compromise erin.
Speaker 10: I hear you saying that there is not a likely
Speaker 10: off ramp in the near term. But for investors, what
Speaker 10: can we watch to look for any signs of de
Speaker 10: escalation or escalation from here? You know, what are the
Speaker 10: key points that you are looking for?
Speaker 7: Right?
Speaker 8: I mean d escalation I think right now is not
Speaker 8: in the cards. I think there's a really good chance
Speaker 8: that we'll be in for weeks in It's the escalatory
Speaker 8: possibilities that concerned me.
Speaker 7: This is your guys business, not mine. Would concern investors
Speaker 7: as well.
Speaker 8: And escalation, I think could occur in one of two ways.
Speaker 8: Number One, Iranian ballistic missiles actually end up surging and
Speaker 8: you end up.
Speaker 7: With a mass casualty event in Israel.
Speaker 8: Scores hundreds of Israelis are killed or wounded.
Speaker 7: The Trump administration.
Speaker 8: Under those circumstances, Congress are going to be hard pressed,
Speaker 8: I think to enter the conflict, and the second path escalation,
Speaker 8: or maybe there are three. Second path escalation, would be
Speaker 8: a bad decision in the part of the Islamic Republic
Speaker 8: to go after American assets, US forces in Iraq, Syria
Speaker 8: or obviously forces thirty to thirty five thousand Americans that
Speaker 8: are deployed in the Gulf, and they have many short
Speaker 8: range ballistic missiles, thousands of them that could produce that.
Speaker 8: The third possibility is that the Iranians try some sort
Speaker 8: of asymmetrical strategy in which they go after Israeli interests
Speaker 8: abroad Jewish interests abroad in a terror attack. I think
Speaker 8: that's a back door that would also probably bring in
Speaker 8: in the United States. But again we've watched over the
Speaker 8: course of the last eighteen months. We've steered clear of
Speaker 8: the one thing that investors worry about, the one thing
Speaker 8: I would worry about, the one thing the region worries.
Speaker 7: About, and that would be a major regional war.
Speaker 8: We've avoided that this is bringing us. The longer this
Speaker 8: goes on, the greater the chances of an escalatory cycle,
Speaker 8: an Iranian Saudi conflict and a US conflict, which would
Speaker 8: essentially push oil prices, probably well in excess one hundred dollars.
Speaker 3: Aron, just quickly, here one thing that the market keeps
Speaker 3: focusing on that could catalyze that kind of regional lord
Speaker 3: be shutting down the streets for moves. How realistic is
Speaker 3: that given the fact that to anger everybody in the neighborhood,
Speaker 3: I mean, the.
Speaker 8: Rinians could probably close it, and the Americans would definitely
Speaker 8: open it.
Speaker 7: But again we're talking about a.
Speaker 8: Prolonged delay, filled with uncertainties, all sorts of exit ramps
Speaker 8: of an unpleasant nature that is going to make this
Speaker 8: extremely unpredictable.
Speaker 3: Aaron David Miller of the Carnegie Endowment for International Piece,
Speaker 3: Thank you so much.
Speaker 1: For the insight. Here's eldest the Federal Reserves today meeting
Speaker 1: kicking off tomorrow. The f ONEC widely.
Speaker 3: Expected to hold rate steady but update its economic forecast,
Speaker 3: giving markets a clue about how officials will handle tariffs,
Speaker 3: inflation and more. Joining us now for that potential scenario
Speaker 3: analysis is Steve Verstudo of Mizuho.
Speaker 1: Steve, great to see you, Thank you so much for
Speaker 1: being here.
Speaker 9: Just before we.
Speaker 3: Get into what the Fed does, I want to bring
Speaker 3: you into the debate that Kelsey and I were having earlier.
Speaker 3: How important is it that in the risk on Friday
Speaker 3: and today you are not seeing bonds full faith and
Speaker 3: credit rally.
Speaker 5: I think there's a number of things.
Speaker 11: A people have questioned the dollars reserve currency status, people
Speaker 11: have questioned a lot of interesting information about where people
Speaker 11: are going from a global perspective in terms of investing
Speaker 11: in the United States.
Speaker 5: The reality is we haven't seen much.
Speaker 11: Okay, so yeah, the dollar is down a little bit,
Speaker 11: but on a DXY basis, it's still very, very healthy.
Speaker 11: Under Joe Biden, we were at ninety on a DXY basis,
Speaker 11: and we're talking about ninety seven ninety eight.
Speaker 5: Now, what's the big deal?
Speaker 11: The reality is, when you look at most markets, there's
Speaker 11: very little impact of anything. And I think this goes
Speaker 11: to the fact that there is no systemic risk in
Speaker 11: the economy.
Speaker 5: There is no balance sheet related risk.
Speaker 11: There's excess liquidity, there's excess global savings, and there's a
Speaker 11: lot of oil floating around in the world. And I
Speaker 11: think when you put all of that together, you can
Speaker 11: easily see why Marcus are just sitting there saying, Okay,
Speaker 11: we've tried to sell off several times.
Speaker 5: I've tried to rally several times. We've had eight recession calls.
Speaker 11: Since twenty twenty two. None of them have worked. Let's
Speaker 11: just get on with life.
Speaker 10: So you're essentially describing a bit of an equilibrium where
Speaker 10: everything is just.
Speaker 5: Kind of at this steady state.
Speaker 10: And so that gets me thinking about this concept of
Speaker 10: the neutral rate, which the FED estimates in the dot plot,
Speaker 10: and they're going to do another.
Speaker 9: Crack at that.
Speaker 10: That neutral rate has been taking higher, It's about fifty
Speaker 10: basis points higher over the last year, but the Fed
Speaker 10: still thinks that the current level of policy is restrictive.
Speaker 9: What do you think.
Speaker 11: I don't think the current level of policy is restrictive,
Speaker 11: having for quite some time, I think the FED rate
Speaker 11: cuts last year were a disaster. I think trying to
Speaker 11: repeat that again this year would be a bigger mistake.
Speaker 5: I think when you look at a two.
Speaker 11: Percent real greater growth in the economy, an inflation rate
Speaker 11: that's running about two two and a half percent, you're
Speaker 11: looking at four and a half percent neutral rate from
Speaker 11: a nominal FED funds rate perspective, And to me, where
Speaker 11: are we right now four and a half percent? I
Speaker 11: think we should be ending the year closer to five percent,
Speaker 11: because I think inflation will be three percent.
Speaker 5: And I think the only reason why you haven't seen
Speaker 5: inflation from tariffs coming.
Speaker 11: Through is because in this environment, while there's negotiations going on,
Speaker 11: a lot of CEOs are sitting there saying I'm not
Speaker 11: going to be the first one to move to raise
Speaker 11: prices because I don't want to lose market share. I
Speaker 11: pre inventoried a lot of stuff. I've got time, I've
Speaker 11: got opportunity. Let's see how this plays out before I'm
Speaker 11: make any decisions.
Speaker 10: Well, we would certainly agree with you in terms of
Speaker 10: the inflation assessment. We also took a look at that
Speaker 10: and said, yeah, I mean, you're not going to get
Speaker 10: negative goods prices on goods prices month over month on
Speaker 10: a persistent basis. But I do want to kind of
Speaker 10: drill into this idea of goldilocks and how long it
Speaker 10: can persist this equilibrium, particularly on the labor market side,
Speaker 10: because what caught my eye last week was continuing claims
Speaker 10: which continue to rise. Use just those cracks under the surface.
Speaker 10: Do you see those as a concern? Is there anything
Speaker 10: there for the FED to be worried about claims?
Speaker 11: And continuing claims on a forward moving average or at
Speaker 11: exceptionally low levels. When you look at the covered employment there,
Speaker 11: even at a lower level, there's no risk whatsoever in
Speaker 11: this labor market.
Speaker 5: And I think that's the key.
Speaker 11: I think if you're looking for one market where there's
Speaker 11: potentially a movement out of equilibrium, it is the labor market.
Speaker 11: But that is only a move towards a tighter labor market. Okay,
Speaker 11: once you get this tax cut done, and this tax
Speaker 11: cut I think will be bigger than anyone still currently thanks,
Speaker 11: I think you don't wind up seeing what a much
Speaker 11: tighter labor market and much greater push on inflation. And
Speaker 11: therefore I question whether or not the Fed's going to
Speaker 11: get the so called two rate cuts out this year.
Speaker 1: So you think that maybe the Fed's not going to cut.
Speaker 5: Is that kind of your call?
Speaker 11: Hour call has been the Fed shouldn't cut whatsoever, And
Speaker 11: therefore we believe the Fed won't cut.
Speaker 3: So there's a question here about longer term bonds and
Speaker 3: how that really bleeds through at a time when people
Speaker 3: have not seen this as a haven, and there's been
Speaker 3: a real question about the inflation risk being priced in
Speaker 3: or not. And I'm just wondering do you see yields
Speaker 3: going higher from here with questions about US assets as
Speaker 3: a haven as well as potential that's only exacerbated potentially
Speaker 3: by inefficiencies and oil shocks that might come up along
Speaker 3: the way.
Speaker 11: I mean, I think we're supposed to get to five
Speaker 11: percent on the tenure note.
Speaker 5: I don't think that's a disaster.
Speaker 11: When you look at what's happening in the boj market,
Speaker 11: for example, they're having a significant amount of problems.
Speaker 5: There is yields rise in Japan.
Speaker 11: You look at Europe, European rates probably aren't going to
Speaker 11: go up because Europe's a mess, and Christine Legard doesn't
Speaker 11: think she needs to cut interest rates and she does,
Speaker 11: so I think you've got this situation. Well, I'd rather
Speaker 11: buy Europe because Europe's more likely to go into deflation
Speaker 11: than by the US, where we're likely to have three
Speaker 11: percent inflation. So I don't think we have to get
Speaker 11: beyond the macro into this geopolitical concern about solvency and
Speaker 11: sovereignty and all this other garbage and reserve currency to
Speaker 11: explain what's happening in markets. What's happening in markets is
Speaker 11: you're reflecting relative interest rate differentials based on relative inflation
Speaker 11: differentials and.
Speaker 5: Relative real growth.
Speaker 11: And there's nothing that's mysterious about this.
Speaker 5: It's traditional macroeconomics.
Speaker 10: So we're continuing to work through one big, beautiful bill
Speaker 10: that's going on underneath all of these headlines that we've
Speaker 10: been dealing with. And I was curious, you know, the
Speaker 10: way I think about deficit expansion is there's deficit expansion
Speaker 10: and then there's fiscal impulse.
Speaker 5: So some of the improvement or.
Speaker 10: Deterioration in the deficit is a function of just extending
Speaker 10: the tax cut was isn't necessarily a fiscal impulse. How
Speaker 10: do you differentiate between the two?
Speaker 5: And you mentioned.
Speaker 10: Already that you see the risk is actually to more
Speaker 10: fiscal impulse and more deficit expansion from here.
Speaker 5: Yeah, no, I agree with you.
Speaker 11: I mean, if you were just going to extend the
Speaker 11: tax cut alone, you would not have a major positive
Speaker 11: impulse into the economy. But we're not going to do that.
Speaker 11: And I think the interesting thing is all this stuff
Speaker 11: is going on, and the bill is working its way
Speaker 11: through the system without the political without the news oversight
Speaker 11: to it that it would normally deserve to get. And
Speaker 11: this is what happened when suddenly the House passed the bill.
Speaker 5: Okay, when it came out of committee.
Speaker 11: In the House, so many people walk up, Oh my god,
Speaker 11: it's not just extending, you know, the Trump tax cuts.
Speaker 11: And I think, you know, this is part of the
Speaker 11: process of how the bill is getting done as quickly
Speaker 11: as it is. And I still think their game plan
Speaker 11: is to get it done by July fourth and have
Speaker 11: it implemented by October one.
Speaker 5: So they could have a full year of real.
Speaker 11: Tax cuts coming through the economy going into the November elections.
Speaker 5: And I think that's the game plan here.
Speaker 11: I think the game plan is teriffts of the diversion
Speaker 11: to get the tax cut, tax cuts are the reason
Speaker 11: to get the midterm. The midterm is to get to
Speaker 11: what they really want to do, which is.
Speaker 5: Drain the swamp.
Speaker 3: Well, this is what we're going to try to focus
Speaker 3: on as we parse through all the different risks that
Speaker 3: are coming up and dominating the new stever Shudo of
Speaker 3: a zooha, thank you so much for being with us.
Speaker 3: Back to our top story for market, it's a fourth
Speaker 3: day of fighting between Israel and Iran, raising uncertainty for
Speaker 3: energy markets. Ellen Walls of the Atlantic Council, writing, if
Speaker 3: Israel can take out Iran's ability to produce gasoline, diesel
Speaker 3: and provide electricity, the situation becomes significantly more dire. If
Speaker 3: the regime cannot maintain control through the use of force,
Speaker 3: it will likely fall.
Speaker 1: Ellen joins us.
Speaker 3: Now, Ellen, thank you so much for being with us,
Speaker 3: and we are just getting word from the Prime Minister
Speaker 3: of Benjamin Natan Yahoo that Israel is on the way
Speaker 3: to destroying Iran's nuclear and missile threats. Do you have
Speaker 3: a sense, Ellen of what the endgame could possibly be?
Speaker 12: You know, it's interesting because I think for Israel, the
Speaker 12: real endgame is just to take out all of the
Speaker 12: Iran's ability to threaten them, so the missile sites, the
Speaker 12: nuclear sites.
Speaker 9: I don't think that.
Speaker 12: They're really aiming for regime change. I mean, they don't
Speaker 12: want to participate in that. I think that there's also
Speaker 12: the understanding amongst them and also amongst US policy makers
Speaker 12: that what would take its place, and sometimes.
Speaker 9: Uh, the a lack of a regime or a power.
Speaker 12: Vacuum could be even more dangerous. I mean, you know,
Speaker 12: there's the IRGC is probably the strongest entity in Iran,
Speaker 12: and so if you know the civil government falls, It's
Speaker 12: possible the IRGC or what's left of it, would take over,
Speaker 12: seeing that they have you know, control of most of
Speaker 12: the use of force there, and that could be you know,
Speaker 12: potentially a worse situation than they're in now. So I
Speaker 12: think there's a very delicate balance here between causing you
Speaker 12: a widespread destruction.
Speaker 9: If you're going to take out you know, multiple.
Speaker 12: Fueling stations and you're going to take out multiple refineries,
Speaker 12: then you're going to essentially, you know, send around to
Speaker 12: the dark ages for a period of time, and things
Speaker 12: could really fall apart at.
Speaker 9: The individual and city level.
Speaker 12: So I think that they're they're really, i think, working
Speaker 12: more towards taking out the military capabilities as opposed to
Speaker 12: trying to say, foment widespread destruction.
Speaker 3: Allen, A lot of people have talked about the idea
Speaker 3: of some sort of broadening out of the conflict and
Speaker 3: embroiling a greater number of countries in the region in
Speaker 3: this war.
Speaker 9: I just wonder, who's Iron's friend.
Speaker 3: Why is there anyone or is there anyone coming to
Speaker 3: Iran's defense in any capacity, or are more of the
Speaker 3: nations on Israel side, or just frankly don't want to
Speaker 3: get involved in any way, shape or form.
Speaker 12: So I think that in terms of say friends, I
Speaker 12: think that Iran has potentially has maybe some strategic allies
Speaker 12: that could be useful in maybe arguing Iran's case in
Speaker 12: a diplomatic situation. So take China for example, China buys
Speaker 12: a lot of oil from the Iran.
Speaker 9: Relatively they're Iran's largest customer. But because Iran.
Speaker 12: Buys that oil and they accept Chinese currency, they have
Speaker 12: to spend a lot of that Chinese currency on good.
Speaker 9: And services from China.
Speaker 12: So China does a lot of business in Iran, and
Speaker 12: China doesn't want to see this situation fall apart. If,
Speaker 12: in fact, it gets so dire that there are threats
Speaker 12: to Chinese ships or oil tankers that are heading for China,
Speaker 12: you know, coming out of the Persian Gulf, and that's
Speaker 12: not just Irani and ships that could also be ships
Speaker 12: coming from Saudi Arabia, from Krewate, from other oil suppliers,
Speaker 12: then China is definitely going to exert the full weight
Speaker 12: of its economic might internationally and on Iran and say, okay,
Speaker 12: you know you've got to cut a deal.
Speaker 9: This has to end.
Speaker 12: You know, this is not worth threatening our you know,
Speaker 12: economic relationship Russia likewise. In fact, we saw Russia saying, now, hey,
Speaker 12: we want to We're ready to, you know, facilitate negotiations
Speaker 12: and we'll accept all of your uranium Iran, which you know,
Speaker 12: is kind of an.
Speaker 9: Interesting offer from Russia.
Speaker 12: But they're definitely, I wouldn't say they're necessarily on Iran's side.
Speaker 12: They're not going to come e them in the event
Speaker 12: of military catashph but they would definitely be there to
Speaker 12: support them.
Speaker 9: In a diplomatic sense. And I also think, you know,
Speaker 9: you've got Saudi Arabia.
Speaker 12: The Saudis definitely aren't best friends with the Iranians, but
Speaker 12: relations have certainly improved, and I think the fact that
Speaker 12: you see them essentially quiet is really almost.
Speaker 9: A sign of not support.
Speaker 12: They definitely would like to They're more than happy for
Speaker 12: Israel to take out Iran's nuclear you know, nuclear arsenal
Speaker 12: and nuclear reactors, but they don't want to see Iran
Speaker 12: completely devastated.
Speaker 9: That's not a good situation for.
Speaker 12: Them, you know, like a power vacuum in the Gulf
Speaker 12: is not going to be a good situation for the Saudis,
Speaker 12: or for the Amortis, or for anyone else. So if
Speaker 12: it gets to that, you are going to see them
Speaker 12: standing up, and I think trying to support the regime ellen.
Speaker 6: Whenever conflicts arise in the Middle East, concentration quickly goes
Speaker 6: to the strait of horror moose and the likelihood of
Speaker 6: it being closed. Is that the right thing to be
Speaker 6: concerned about? Or is there a scenario or you get
Speaker 6: what's happening in the Red Sea where you get one
Speaker 6: a few tankers attacked and that's enough to convince insurance
Speaker 6: companies that it is not worth trying to ensure ships
Speaker 6: going through the street.
Speaker 9: So it's interesting. I think there are two points there.
Speaker 12: I do think that we're a bit stuck in this
Speaker 12: old paradigm from the twentieth century where we all is
Speaker 12: in the West need oil from the Persian Gulf, and
Speaker 12: we all remember, or at least those of us who
Speaker 12: were alive, and then remember the Iran Iraq War, and
Speaker 12: there was a tanker war and both sides were Iran
Speaker 12: was trying to prevent certain tankers from leaving the Golf,
Speaker 12: and certain tankers needed basically US military escorts in order
Speaker 12: to get out, and that caused havoc with oil prices.
Speaker 12: So I do think the straight up Room is a
Speaker 12: very important waterway, But if you look at the traffic
Speaker 12: patterns and the way that ships go around there, there
Speaker 12: are other ways to traverse the straits that don't involve
Speaker 12: going through Iranian waters.
Speaker 9: So if it did threaten the security of ships there,
Speaker 9: there are workarounds.
Speaker 12: They're not that easy and would take some time to
Speaker 12: work through, but it is absolutely possible. The other issue though,
Speaker 12: is that, like you said, that can Ron actually do this.
Speaker 12: It's not clear that they could physically that they could
Speaker 12: physically close the straights. On the other hand, they could
Speaker 12: cause enough trouble that insurance companies are going to raise
Speaker 12: their rates through the roof. Now, does that make it
Speaker 12: impossible for ships to go No, people will pay, but
Speaker 12: oil prices will have to go up. Customers will have
Speaker 12: to pay more in order to compensate for that insurance rate.
Speaker 12: When you look at the Red Sea, that's a little
Speaker 12: bit different because there is an alternative route you can
Speaker 12: go around Africa and a lot of you know, large
Speaker 12: ships are equipped.
Speaker 5: To do that.
Speaker 12: So, but with the straight Ufore moves and the Persian Gulf,
Speaker 12: other than a couple pipelines that are able to get
Speaker 12: oil and other products out without going through the streets.
Speaker 9: There really is no other way out.
Speaker 12: So for a rock cut, some Saudi oil, Bachrainy oil,
Speaker 12: there's no other way. The UE has a workaround and
Speaker 12: so modifications could be made, but there's nothing else they
Speaker 12: can do, so they're going to just have to pay
Speaker 12: the higher insurance rates.
Speaker 3: Ellen Waalds of the Atlantic Council, thank you so much,
Speaker 3: as always for your insights.
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best
Speaker 2: in markets, economics, an gio politics. You can watch the
Speaker 2: show live on Bloomberg TV weekday mornings from six am
Speaker 2: to nine am Eastern. Subscribe to the podcast on Apple, Spotify,
Speaker 2: or anywhere else you listen, and as always on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business Out