1 00:00:00,040 --> 00:00:06,720 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:11,640 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,480 --> 00:00:18,680 Speaker 2: with Lisa Bromwitz and Amrie Hordernt. Join us each day 4 00:00:18,720 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,400 --> 00:00:24,840 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,920 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,280 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,919 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,000 --> 00:00:37,680 Speaker 2: Terminal and the Bloomberg Business app. The White House taking 10 00:00:37,720 --> 00:00:40,279 Speaker 2: an oil and gas export band off the table as 11 00:00:40,320 --> 00:00:42,919 Speaker 2: a way to bring down energy prices after the Vice 12 00:00:42,960 --> 00:00:45,839 Speaker 2: President Jdvance met with oil executive Stephen Shork of the 13 00:00:45,840 --> 00:00:49,400 Speaker 2: Short Group, writing, the Brent WTI spread will not narrow 14 00:00:49,479 --> 00:00:52,599 Speaker 2: until one of two things happens. Homer's fully reopens or 15 00:00:53,120 --> 00:00:57,960 Speaker 2: WTI stops pricing. In diplomatic optionality that never materializes. Neither 16 00:00:58,600 --> 00:01:01,000 Speaker 2: is imminent. Stephen joins us now for more. Steven, welcome 17 00:01:01,040 --> 00:01:02,720 Speaker 2: to the program. I want to get to your line 18 00:01:03,000 --> 00:01:08,400 Speaker 2: in your research. The Brent WTI spread says everything diplomacy won't. Stephen, 19 00:01:08,480 --> 00:01:09,000 Speaker 2: just build on. 20 00:01:08,959 --> 00:01:11,080 Speaker 3: That yeah, absolutely, thank you. 21 00:01:11,120 --> 00:01:13,840 Speaker 4: So the bread market is now the benchmark for the 22 00:01:13,880 --> 00:01:17,320 Speaker 4: seaborn trade in oil, and this is the market that 23 00:01:17,480 --> 00:01:20,200 Speaker 4: is pricing the conflict is pricing the war is pricing 24 00:01:20,200 --> 00:01:24,800 Speaker 4: the shortages that we are seeing. If WTI market prices optionality, 25 00:01:24,880 --> 00:01:26,040 Speaker 4: prices optimism. 26 00:01:26,080 --> 00:01:27,560 Speaker 3: It's a landlocked contract. 27 00:01:27,680 --> 00:01:30,360 Speaker 4: It's a futures contract, and like every futures contract, it 28 00:01:30,400 --> 00:01:33,640 Speaker 4: derives its value from a physical asset. The physical asset 29 00:01:33,720 --> 00:01:36,240 Speaker 4: and WTI is landlocked in the Oklahoma. 30 00:01:36,319 --> 00:01:37,759 Speaker 3: It's a different type of crude oil. 31 00:01:38,080 --> 00:01:41,120 Speaker 4: Brent is a similar crude oil, a price in the 32 00:01:41,200 --> 00:01:44,920 Speaker 4: land basin barrels, and it's the benchmark for the seaborne trade. 33 00:01:45,080 --> 00:01:48,200 Speaker 4: So every time we see a dubbish headline the war 34 00:01:48,280 --> 00:01:51,120 Speaker 4: might be ending or there's an off ramp, that optimism 35 00:01:51,160 --> 00:01:54,360 Speaker 4: gets priced into the Brent, the WTI contract, and that 36 00:01:54,520 --> 00:01:57,440 Speaker 4: is the hope contract. The bread market is the real 37 00:01:57,480 --> 00:02:00,600 Speaker 4: market that is pricing the real event what's going on. 38 00:02:00,880 --> 00:02:03,680 Speaker 4: And that blowout in the spread that we've seen over 39 00:02:03,720 --> 00:02:06,320 Speaker 4: the past week we can have tells you that this 40 00:02:06,400 --> 00:02:09,200 Speaker 4: war is far from over because we are seeing a 41 00:02:09,240 --> 00:02:12,480 Speaker 4: tremendous bid in Brent over that WTI contract. 42 00:02:12,600 --> 00:02:14,480 Speaker 5: Steved I want to pick up on your point about 43 00:02:14,639 --> 00:02:17,560 Speaker 5: what the WTI is pricing in about policy, the US 44 00:02:17,639 --> 00:02:20,919 Speaker 5: government could do. So yesterday Secretary Right tweeted that there 45 00:02:21,000 --> 00:02:23,120 Speaker 5: is going to be no export pan, but then I 46 00:02:23,160 --> 00:02:25,840 Speaker 5: had a bunch of calls from people saying no export. 47 00:02:25,480 --> 00:02:26,560 Speaker 3: Pan for now. 48 00:02:26,639 --> 00:02:28,440 Speaker 5: Do you think it's something the US will keep in 49 00:02:28,480 --> 00:02:30,640 Speaker 5: their back pocket in case prices continue to rise? 50 00:02:31,680 --> 00:02:32,200 Speaker 3: Absolutely. 51 00:02:32,320 --> 00:02:35,120 Speaker 4: Now, let's be clear, an export pan would be catastrophic 52 00:02:35,160 --> 00:02:37,800 Speaker 4: for US oil production because all it would do is 53 00:02:38,000 --> 00:02:40,520 Speaker 4: pent up more supply here in the United States of 54 00:02:40,600 --> 00:02:42,919 Speaker 4: oil we don't necessarily use, so we don't have a 55 00:02:43,040 --> 00:02:44,920 Speaker 4: use for it, so we're not going to burn it, 56 00:02:45,200 --> 00:02:48,639 Speaker 4: so inventories will just build, and as those inventories build, 57 00:02:49,000 --> 00:02:51,760 Speaker 4: there's no place for new production to go. So ultimately 58 00:02:51,880 --> 00:02:56,000 Speaker 4: it's a catastrophic move for production. And I think it 59 00:02:56,040 --> 00:02:58,280 Speaker 4: appears that the White House got that message, but you 60 00:02:58,360 --> 00:03:01,240 Speaker 4: never know. It does make a nice headline, so we 61 00:03:01,280 --> 00:03:04,600 Speaker 4: could potentially see it's a political tool, it's not an 62 00:03:04,600 --> 00:03:05,480 Speaker 4: economic tool. 63 00:03:05,760 --> 00:03:07,760 Speaker 3: So certainly there is that potential. 64 00:03:08,000 --> 00:03:10,839 Speaker 4: And clearly with the way the Brent market has gone, 65 00:03:10,880 --> 00:03:14,079 Speaker 4: we've gone from a five dollars premium Brent OVERWTI at 66 00:03:14,080 --> 00:03:16,840 Speaker 4: the startup this week, so now it's upwards of thirteen 67 00:03:16,840 --> 00:03:19,400 Speaker 4: to fourteen dollars, so we've tripled that premium. 68 00:03:19,480 --> 00:03:20,400 Speaker 3: So clearly the. 69 00:03:20,320 --> 00:03:23,959 Speaker 4: Market is skeptical that an export ban is not off 70 00:03:24,000 --> 00:03:24,560 Speaker 4: of the table. 71 00:03:24,720 --> 00:03:26,840 Speaker 5: Steven, do you even think Brent right now is pricing 72 00:03:26,880 --> 00:03:28,680 Speaker 5: in really what is going on in the region. When 73 00:03:28,720 --> 00:03:32,400 Speaker 5: you look at Oman futures, I think yesterday they blew 74 00:03:32,480 --> 00:03:35,160 Speaker 5: past one hundred and seventy dollars a barrel that's more 75 00:03:35,200 --> 00:03:38,440 Speaker 5: tied to the physical barrels right now that are moving 76 00:03:38,560 --> 00:03:41,520 Speaker 5: in the Gulf. So is Brent even accurate? 77 00:03:42,480 --> 00:03:46,600 Speaker 4: It's an excellent question, and you know I'm restent to 78 00:03:46,640 --> 00:03:48,680 Speaker 4: say it's not, because then I've been saying, oh, the 79 00:03:48,720 --> 00:03:51,000 Speaker 4: market is wrong. But to your point, we have a 80 00:03:51,000 --> 00:03:54,680 Speaker 4: buibercated market, so the brand market is still an Atlantic 81 00:03:54,800 --> 00:03:55,680 Speaker 4: basin market. 82 00:03:55,720 --> 00:03:57,120 Speaker 3: That's where it's derived from. 83 00:03:57,280 --> 00:04:00,680 Speaker 4: To your point that Oman and the Dubai future contracts 84 00:04:00,760 --> 00:04:04,120 Speaker 4: which are linked more towards the Asian markets, that is 85 00:04:04,200 --> 00:04:07,920 Speaker 4: really reflective of the shortage. So with the Bread Dubai 86 00:04:08,040 --> 00:04:12,640 Speaker 4: or the Brent Oman, Brent steep discount to those markets 87 00:04:12,720 --> 00:04:14,760 Speaker 4: is telling you is that we're looking at the Atlantic 88 00:04:14,800 --> 00:04:17,120 Speaker 4: basin that is well supplied with oil. 89 00:04:17,600 --> 00:04:18,640 Speaker 3: The problem is in. 90 00:04:18,640 --> 00:04:22,039 Speaker 4: Asia where all that oil is still blockaded up in 91 00:04:22,040 --> 00:04:25,000 Speaker 4: the Straight of Jomus. Those are so your refineries from 92 00:04:25,080 --> 00:04:28,080 Speaker 4: India through Japan up through South Korea are bidding for 93 00:04:28,160 --> 00:04:31,200 Speaker 4: that oil and hence why we're getting such a huge 94 00:04:31,839 --> 00:04:34,559 Speaker 4: disconnect between the two markets. So the answer your question 95 00:04:35,360 --> 00:04:39,680 Speaker 4: Brent Brent is certainly disconnected. It's more connected as we've said, 96 00:04:39,839 --> 00:04:43,839 Speaker 4: relative to WTI. But actually the way the shortage is 97 00:04:43,920 --> 00:04:47,560 Speaker 4: with the physical shortages represented in the Oman and Dubai 98 00:04:47,600 --> 00:04:51,320 Speaker 4: markets clearly again that is another telltale that this war 99 00:04:51,440 --> 00:04:54,560 Speaker 4: is far from being resolved in any sort of positive manner. 100 00:04:54,600 --> 00:04:57,760 Speaker 2: And Stephen, that's the reality for Asian importers, buyers off 101 00:04:57,760 --> 00:05:00,599 Speaker 2: that crude of that physical asset. Do you think this 102 00:05:00,680 --> 00:05:03,480 Speaker 2: mark has taken too much comfort from the future's curve. 103 00:05:04,800 --> 00:05:08,080 Speaker 4: It's really interesting and where we're really seeing the blowout. 104 00:05:08,080 --> 00:05:10,479 Speaker 4: And to answer your question, I think the market is 105 00:05:10,920 --> 00:05:13,360 Speaker 4: rather relaxed. Is if we look at the Brent do 106 00:05:13,480 --> 00:05:16,320 Speaker 4: my market for instance, if we believe in market theory 107 00:05:16,400 --> 00:05:19,120 Speaker 4: or in that curve, then we're looking at Brent trading 108 00:05:19,200 --> 00:05:22,480 Speaker 4: at a thirty forty dollars discount to Dubai a sixty 109 00:05:22,560 --> 00:05:27,760 Speaker 4: seventy dollars discount to Oman. So the question is when 110 00:05:27,880 --> 00:05:31,640 Speaker 4: does or does the market catch up so that we'll 111 00:05:31,640 --> 00:05:33,680 Speaker 4: take to Dubai market. Right now, we're trading out about 112 00:05:33,680 --> 00:05:36,920 Speaker 4: a thirty five dollars discount Brent below Dubai. That's not 113 00:05:36,960 --> 00:05:40,160 Speaker 4: supposed to happen. Dubai is an inferior quality oil. It 114 00:05:40,240 --> 00:05:42,599 Speaker 4: trades at a discout to Brent. But that's not the case. 115 00:05:42,640 --> 00:05:45,800 Speaker 4: But we know why. But we go two months out 116 00:05:46,080 --> 00:05:49,400 Speaker 4: the Brent premium and we said Brent normally trades out 117 00:05:49,400 --> 00:05:52,279 Speaker 4: of premium to Dubai is now trading out a life 118 00:05:52,279 --> 00:05:54,960 Speaker 4: of contract high of nearly eight dollars of a barrel. 119 00:05:55,200 --> 00:05:57,000 Speaker 4: So what the market, at least what the curve is 120 00:05:57,040 --> 00:05:59,159 Speaker 4: telling us is that, yeah, there's. 121 00:05:59,040 --> 00:06:00,279 Speaker 3: A real problem. 122 00:06:00,120 --> 00:06:03,600 Speaker 4: There's a stranded barrels in the straight or hooves. 123 00:06:04,160 --> 00:06:05,160 Speaker 3: They're not going out. 124 00:06:05,440 --> 00:06:09,520 Speaker 4: Therefore, Dubai trades at a massive premium to Brent. We're 125 00:06:09,600 --> 00:06:12,279 Speaker 4: going out two months that premium reverses now to a 126 00:06:12,320 --> 00:06:15,280 Speaker 4: significant discount. So the market, if you believe in term 127 00:06:15,320 --> 00:06:18,160 Speaker 4: structure or in the forward curve of pricing theory, is 128 00:06:18,200 --> 00:06:19,960 Speaker 4: telling us, yeah, we've got a real problem in the 129 00:06:19,960 --> 00:06:22,800 Speaker 4: spot market. By the time we roll into summer, there's 130 00:06:22,839 --> 00:06:25,360 Speaker 4: going to be some sort of exit in this war 131 00:06:25,720 --> 00:06:28,159 Speaker 4: remains to be seen. We're not seeing it in the 132 00:06:28,160 --> 00:06:32,240 Speaker 4: product markets, for instance. So another question now is the 133 00:06:32,320 --> 00:06:36,320 Speaker 4: diesel market. The crack spread of the margin between diesel 134 00:06:36,360 --> 00:06:38,880 Speaker 4: prices and oil prices in the Golf Coast is almost 135 00:06:39,040 --> 00:06:40,600 Speaker 4: seventy dollars a barrel. 136 00:06:41,839 --> 00:06:43,559 Speaker 3: That so one of two things are going to happen. 137 00:06:43,960 --> 00:06:46,800 Speaker 4: Oil WTS is going to have to catch up to 138 00:06:46,839 --> 00:06:49,280 Speaker 4: where product prices are. A product price is going to 139 00:06:49,320 --> 00:06:51,760 Speaker 4: crash because of demand destruction. And now we're talking about 140 00:06:51,839 --> 00:06:55,359 Speaker 4: significant economic contraction. But the here and the now is 141 00:06:55,440 --> 00:06:58,359 Speaker 4: that the spread is telling us significant shortage in the 142 00:06:58,400 --> 00:07:01,479 Speaker 4: spot market prompt month, but going for two months out 143 00:07:01,600 --> 00:07:02,520 Speaker 4: we should start. 144 00:07:02,320 --> 00:07:04,719 Speaker 3: To see some sort of resolution. At least that's how 145 00:07:05,040 --> 00:07:05,560 Speaker 3: the market. 146 00:07:05,720 --> 00:07:09,200 Speaker 4: That's what the foward curve is suggesting to the globe. 147 00:07:09,960 --> 00:07:13,480 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. 148 00:07:22,720 --> 00:07:26,040 Speaker 2: The US and Israel working to calm crude markets, both 149 00:07:26,080 --> 00:07:30,680 Speaker 2: countries vowing to avoid targeting Iran's energy infrastructure. Following retaliatory 150 00:07:30,760 --> 00:07:33,160 Speaker 2: attacks across the Middle East. The fuel and oil spies 151 00:07:33,240 --> 00:07:37,040 Speaker 2: spike general Robert Welsh of Academy Securities, writing, the conflict 152 00:07:37,080 --> 00:07:39,760 Speaker 2: is transitioning to a war of attrition. There is no 153 00:07:39,880 --> 00:07:43,920 Speaker 2: clear checkmate scenario. General Welsh joins us now for more General, 154 00:07:43,960 --> 00:07:46,680 Speaker 2: welcome to the program sir, Are you suggesting this war 155 00:07:46,720 --> 00:07:49,560 Speaker 2: has entered a new, more enduring phase. 156 00:07:51,160 --> 00:07:55,240 Speaker 6: Good morning, John Jonathan, Thanks for having me today. You know, 157 00:07:55,320 --> 00:07:58,240 Speaker 6: the war changes as time goes on, and what we're 158 00:07:58,280 --> 00:08:02,440 Speaker 6: seeing now is from a perspective, it is going into 159 00:08:02,440 --> 00:08:05,040 Speaker 6: a little bit more of a war of attrition. There's 160 00:08:05,120 --> 00:08:07,760 Speaker 6: military sets that we've talked about in the past and 161 00:08:07,840 --> 00:08:10,640 Speaker 6: what the US military in the Israelis is trying to 162 00:08:10,680 --> 00:08:14,560 Speaker 6: take out. They're systematically doing that. They're very successful from 163 00:08:14,560 --> 00:08:18,640 Speaker 6: a military standpoint. But as we see that the nature 164 00:08:18,640 --> 00:08:21,400 Speaker 6: of conflict is really a clash of wills, and that 165 00:08:21,520 --> 00:08:25,800 Speaker 6: clash of wills is going on now between both the US, 166 00:08:25,880 --> 00:08:28,760 Speaker 6: Israelis and Iran. And Iran has to say so in 167 00:08:28,800 --> 00:08:31,360 Speaker 6: this and what we're seeing from Iran is they're taking 168 00:08:31,360 --> 00:08:35,120 Speaker 6: a very asymmetric approach to this, and their asymmetric approach 169 00:08:35,240 --> 00:08:39,800 Speaker 6: is number one. Their objective is the regime to remain. 170 00:08:40,280 --> 00:08:42,600 Speaker 6: But we're now seeing what's changing a little bit in 171 00:08:42,640 --> 00:08:46,720 Speaker 6: that is they're also looking at cost imposition on the 172 00:08:46,880 --> 00:08:49,240 Speaker 6: US and Israelis and also the golf partners in the 173 00:08:49,240 --> 00:08:52,120 Speaker 6: rest of the world. So that cost imposition now is changing, 174 00:08:52,360 --> 00:08:55,800 Speaker 6: and we see those attacks now becoming more prevalent on 175 00:08:56,600 --> 00:09:00,640 Speaker 6: infrastructure in the Persian Gulf, and we're seeing it more 176 00:09:00,679 --> 00:09:03,719 Speaker 6: and more taking place. And that's that costant position that 177 00:09:03,720 --> 00:09:06,240 Speaker 6: they're now parting to put to make it so painful 178 00:09:06,520 --> 00:09:08,959 Speaker 6: that the US, the Israelis, and the world community want 179 00:09:08,960 --> 00:09:10,080 Speaker 6: to get out of this situation. 180 00:09:10,360 --> 00:09:12,400 Speaker 5: General, we do have the United States sending a second 181 00:09:12,400 --> 00:09:14,880 Speaker 5: amphibious assault ship to the Middle East. Can you walk 182 00:09:14,960 --> 00:09:18,360 Speaker 5: us through what these highly trained marines could potentially be 183 00:09:18,520 --> 00:09:19,720 Speaker 5: used for in the region. 184 00:09:20,920 --> 00:09:21,199 Speaker 3: Sure. 185 00:09:21,559 --> 00:09:24,640 Speaker 6: I think as you look at the combatant Commander Admiral 186 00:09:24,640 --> 00:09:27,920 Speaker 6: Cooper in the Central Command, he wants to have as 187 00:09:28,000 --> 00:09:30,240 Speaker 6: many capabilities. 188 00:09:29,400 --> 00:09:31,559 Speaker 3: In his hands as he can use as possible. 189 00:09:32,400 --> 00:09:34,960 Speaker 6: Is the planning takes place, we see what we call 190 00:09:35,000 --> 00:09:38,920 Speaker 6: branches and sequels. As things start to change on the battlefield, 191 00:09:39,600 --> 00:09:42,599 Speaker 6: then different branches and plans come into play. Having a 192 00:09:43,600 --> 00:09:46,960 Speaker 6: marine amphibious group with a Navy amphibious ready group with 193 00:09:47,040 --> 00:09:53,400 Speaker 6: it marine amphibious unit, that capability brings it's a toolbox 194 00:09:53,480 --> 00:09:56,920 Speaker 6: in its own which adds to the toolbox that he has, 195 00:09:57,320 --> 00:10:01,960 Speaker 6: and it brings many capabilities that comes to bear. It's 196 00:10:01,960 --> 00:10:07,520 Speaker 6: got a reinforced infantry battalion with plenty of fire's capability 197 00:10:07,600 --> 00:10:13,079 Speaker 6: or attack capabilities. It has a full range of aviation 198 00:10:13,280 --> 00:10:19,160 Speaker 6: assets from attack helos, heavy transport helos with the H 199 00:10:19,280 --> 00:10:23,679 Speaker 6: fifty three's, it's got the MV twenty two's with our 200 00:10:24,000 --> 00:10:27,480 Speaker 6: rotor assaults support aircraft that can go out long ranges 201 00:10:28,160 --> 00:10:31,240 Speaker 6: and do raid type missions or insert missions. And then 202 00:10:31,280 --> 00:10:33,920 Speaker 6: it's got F thirty five's on board two that can 203 00:10:33,960 --> 00:10:37,960 Speaker 6: provide the close air support that. 204 00:10:35,520 --> 00:10:37,480 Speaker 3: The team would need. 205 00:10:37,559 --> 00:10:40,120 Speaker 6: But in this case, they'd be inserting themselves into a 206 00:10:40,280 --> 00:10:44,400 Speaker 6: very large joint operation where there's many capabilities that the 207 00:10:44,440 --> 00:10:47,719 Speaker 6: Centcom commander has to be able to fit this tool 208 00:10:48,160 --> 00:10:50,280 Speaker 6: into his toolbox and be able to use it as 209 00:10:50,320 --> 00:10:52,079 Speaker 6: he sees fit. So some of the missions you could 210 00:10:52,120 --> 00:10:54,960 Speaker 6: see you talked about carg Island, there could be raids 211 00:10:55,000 --> 00:10:59,320 Speaker 6: there going into the if there were any indications that 212 00:10:59,360 --> 00:11:03,480 Speaker 6: we'd go into than nuclear sites to try to hold those. 213 00:11:03,920 --> 00:11:07,640 Speaker 6: We've got very highly trained special operations forces that can 214 00:11:07,679 --> 00:11:10,320 Speaker 6: do those missions. But you'd probably need a conventional force 215 00:11:10,400 --> 00:11:13,640 Speaker 6: to go in that the Marine Expigracery Unit can provide 216 00:11:13,679 --> 00:11:16,280 Speaker 6: to go in and provide some of that security along 217 00:11:16,320 --> 00:11:18,680 Speaker 6: with many of the joint assets that would be on 218 00:11:18,760 --> 00:11:21,360 Speaker 6: top of that providing air superiority. 219 00:11:21,600 --> 00:11:24,120 Speaker 5: How vulnerable will they be though in a narrow corridor. 220 00:11:25,480 --> 00:11:27,840 Speaker 6: I think what you're seeing right now is why the 221 00:11:27,960 --> 00:11:32,520 Speaker 6: US Navy is not operating inside the Straits because those 222 00:11:32,520 --> 00:11:36,400 Speaker 6: conditions have not been set by the Joint Force to 223 00:11:36,480 --> 00:11:38,560 Speaker 6: be able to bring Navy ships in there. Yet the 224 00:11:38,640 --> 00:11:41,600 Speaker 6: Navy would rather stand off than stand inside there where 225 00:11:41,640 --> 00:11:44,440 Speaker 6: there are much more risks. So the threats to the Navy, 226 00:11:45,280 --> 00:11:48,960 Speaker 6: both from drones, missiles, and fast attack craft has to 227 00:11:49,000 --> 00:11:52,000 Speaker 6: be taken down more before you start to see them entering. 228 00:11:52,240 --> 00:11:55,480 Speaker 6: So this is a phase campaign based on conditions, and 229 00:11:55,520 --> 00:11:58,600 Speaker 6: what we've seen recently start to really play out is 230 00:11:59,120 --> 00:12:02,199 Speaker 6: as the air superority has been gained, the US has 231 00:12:02,320 --> 00:12:05,840 Speaker 6: now brought in capabilities like the A ten aircraft, which 232 00:12:05,880 --> 00:12:09,559 Speaker 6: you start and operated at a very low altitude, can 233 00:12:09,600 --> 00:12:12,160 Speaker 6: see targets and take out small targets like the fast 234 00:12:12,160 --> 00:12:15,040 Speaker 6: attack boats or where they've got missile sites hidden along 235 00:12:15,080 --> 00:12:18,080 Speaker 6: with these attack aircraft they're in so they're bringing much 236 00:12:18,120 --> 00:12:21,760 Speaker 6: more capabilities in there than are for that type of mission. 237 00:12:21,800 --> 00:12:24,520 Speaker 6: The septic conditions for navy aircraft could come. 238 00:12:24,440 --> 00:12:28,839 Speaker 2: In stay with us. More Bloomberg surveillance coming up after this. 239 00:12:38,080 --> 00:12:40,240 Speaker 2: The conflict in the Middle East pushing global bond the 240 00:12:40,280 --> 00:12:44,199 Speaker 2: attire as central bank's way, increasing inflationary risk. Terry Weiseman 241 00:12:44,280 --> 00:12:46,240 Speaker 2: of Macquarie Rights and the ottomate cost of the war 242 00:12:46,280 --> 00:12:49,560 Speaker 2: is unknown, but bond traders aren't taking any chances. Terry 243 00:12:49,600 --> 00:12:51,720 Speaker 2: Johns is now for more its Terry Carnic twkerd boarding 244 00:12:51,880 --> 00:12:53,800 Speaker 2: Terry Watson I said, what's going on? What kind of 245 00:12:53,840 --> 00:12:57,160 Speaker 2: a question is that in daylight today? See whatd ride 246 00:12:57,320 --> 00:12:59,480 Speaker 2: it's been in the old bond market. What's your reaction 247 00:12:59,520 --> 00:13:01,640 Speaker 2: to the most same, particularly at the front end of 248 00:13:01,640 --> 00:13:01,920 Speaker 2: the cave. 249 00:13:02,679 --> 00:13:05,160 Speaker 1: Well, the front end of the curve is responding to policy, 250 00:13:05,200 --> 00:13:07,960 Speaker 1: of course, John, it's you know what we wrote on 251 00:13:08,760 --> 00:13:11,120 Speaker 1: March fourth, actually just a few days after the war began, 252 00:13:11,240 --> 00:13:14,920 Speaker 1: was that central banks were going to respond to this 253 00:13:15,040 --> 00:13:17,840 Speaker 1: war and to the implications having for oil prices in 254 00:13:17,880 --> 00:13:20,280 Speaker 1: a hawkish fashion. Now that might not have been obvious 255 00:13:20,320 --> 00:13:23,280 Speaker 1: on March fourth, right, you know, in terms of crisis 256 00:13:23,320 --> 00:13:25,640 Speaker 1: and certainly in terms of high oil prices, we've also 257 00:13:25,679 --> 00:13:30,000 Speaker 1: seen historically higher unemployment. We've seen recessions in some cases. 258 00:13:30,559 --> 00:13:32,559 Speaker 1: But I felt that these central banks would have been 259 00:13:32,720 --> 00:13:36,920 Speaker 1: felt burned by what had happened in twenty twenty two 260 00:13:36,960 --> 00:13:39,120 Speaker 1: and twenty twenty three, and that they weren't going to 261 00:13:39,120 --> 00:13:41,360 Speaker 1: take any chances. So it's not just the bond traders 262 00:13:41,360 --> 00:13:43,520 Speaker 1: are not taking any chances here. The central banks aren't 263 00:13:43,520 --> 00:13:46,280 Speaker 1: taking any chances as well, certainly not through their rhetoric. 264 00:13:46,480 --> 00:13:48,840 Speaker 1: And that's why the front end of the curves moved up, 265 00:13:48,880 --> 00:13:51,600 Speaker 1: and that's why you've seen these very wide swings in 266 00:13:51,640 --> 00:13:55,920 Speaker 1: the last few days in the money markets. Projection of 267 00:13:55,960 --> 00:13:58,640 Speaker 1: where central bank policy rates are going to be at 268 00:13:58,640 --> 00:13:59,360 Speaker 1: the end of this day. 269 00:13:59,200 --> 00:14:01,840 Speaker 2: I can tell you as well, because the consensus view 270 00:14:02,080 --> 00:14:04,400 Speaker 2: coming into these central bank meetings is they would look 271 00:14:04,440 --> 00:14:07,120 Speaker 2: through this shock chair and power effectively said it's not 272 00:14:07,160 --> 00:14:09,720 Speaker 2: that simple. And the takeaway from the ECP and the 273 00:14:09,720 --> 00:14:12,840 Speaker 2: bays they might actually hike in the next several months. 274 00:14:12,880 --> 00:14:15,280 Speaker 1: Sure, and keep in mind there's something going on here 275 00:14:15,320 --> 00:14:18,960 Speaker 1: besides just the increase in oil prices and its transmission 276 00:14:19,040 --> 00:14:22,640 Speaker 1: to CPI, for example, Because if it was just that 277 00:14:22,760 --> 00:14:24,680 Speaker 1: it might not be that big a deal because in 278 00:14:24,680 --> 00:14:29,040 Speaker 1: many of these industrialized countries, you know, the energy products 279 00:14:29,240 --> 00:14:32,120 Speaker 1: are not that large a component of the CPI basket. 280 00:14:32,280 --> 00:14:34,160 Speaker 1: I think what central banks are worried about are the 281 00:14:34,160 --> 00:14:39,200 Speaker 1: so called second order effects, whereby if you do get 282 00:14:39,240 --> 00:14:42,480 Speaker 1: an increase in inflation, let's say by half a percent 283 00:14:42,600 --> 00:14:45,440 Speaker 1: or three quarters of a percent, it becomes sticky because 284 00:14:45,440 --> 00:14:48,720 Speaker 1: it becomes embedded inflation expectations. It then becomes embedded in 285 00:14:48,720 --> 00:14:51,360 Speaker 1: wage demands, and you don't have just the impulse from 286 00:14:51,360 --> 00:14:54,160 Speaker 1: the original increase in oil prices, but you have a 287 00:14:54,200 --> 00:14:58,680 Speaker 1: propagation of inflation expectations that causes more inflation. That's why 288 00:14:58,720 --> 00:15:00,840 Speaker 1: they're trying to nip this in the bud right now, 289 00:15:01,720 --> 00:15:03,920 Speaker 1: admitedly through their rhetoric at first. But if they have 290 00:15:03,960 --> 00:15:04,720 Speaker 1: to raise rates, they. 291 00:15:04,640 --> 00:15:05,320 Speaker 3: Will raise rates. 292 00:15:05,320 --> 00:15:06,680 Speaker 5: Can we talk about the cost of this war? 293 00:15:07,040 --> 00:15:07,200 Speaker 3: Sure? 294 00:15:07,200 --> 00:15:09,040 Speaker 5: To day, I believe you said it's one to two 295 00:15:09,040 --> 00:15:11,960 Speaker 5: billion dollars. Now you have the Pentagon asking Congress for 296 00:15:11,960 --> 00:15:13,920 Speaker 5: two hundred billion. Are we going to see movement on 297 00:15:13,960 --> 00:15:15,760 Speaker 5: the long end of the year old curve because of this? 298 00:15:15,880 --> 00:15:17,800 Speaker 1: I think the long end of the curves have moved 299 00:15:17,840 --> 00:15:19,800 Speaker 1: up for three reasons, and one of them is clearly 300 00:15:19,840 --> 00:15:22,880 Speaker 1: the fiscal implications. But let's talk about the first two reasons. 301 00:15:23,240 --> 00:15:25,360 Speaker 1: The first reason, the most important reason, I think, is 302 00:15:25,400 --> 00:15:29,320 Speaker 1: just higher inflation. When you have higher inflation, nominal assets, 303 00:15:29,360 --> 00:15:32,920 Speaker 1: nominal paying coupon assets like long term bonds just seem 304 00:15:32,960 --> 00:15:34,960 Speaker 1: all of a sudden less attractive. And we know that's 305 00:15:35,000 --> 00:15:38,000 Speaker 1: the case because break evens these in these markets have 306 00:15:38,040 --> 00:15:40,600 Speaker 1: gone up inflation break evens that is telling you that 307 00:15:40,680 --> 00:15:43,920 Speaker 1: the market itself is expecting more long term inflation. People 308 00:15:44,000 --> 00:15:47,520 Speaker 1: have been fleeing into the inflation protected products. They've been 309 00:15:47,520 --> 00:15:50,080 Speaker 1: fleeing out, relatively speaking of the nominal products. So yields 310 00:15:50,080 --> 00:15:51,480 Speaker 1: are going up on the long end of the US 311 00:15:51,520 --> 00:15:53,320 Speaker 1: Treasury curve and in the long end of the curves 312 00:15:53,320 --> 00:15:56,560 Speaker 1: in Europe. The other issue here, of course, is that 313 00:15:56,560 --> 00:15:59,400 Speaker 1: central banks are tightening, and that makes it more expensive 314 00:15:59,480 --> 00:16:01,880 Speaker 1: to carry a position in long bond you're financing at 315 00:16:01,880 --> 00:16:03,960 Speaker 1: a higher rate. It becomes less attractive to do that 316 00:16:04,160 --> 00:16:06,360 Speaker 1: you sell off the long bond. And the third reason 317 00:16:06,360 --> 00:16:08,640 Speaker 1: is the one you've just highlighted, which is that there 318 00:16:08,720 --> 00:16:12,400 Speaker 1: might be more issuance. Why, because there's a cost to 319 00:16:12,960 --> 00:16:17,080 Speaker 1: managing and running a war and I've seen reports suggesting 320 00:16:17,080 --> 00:16:20,280 Speaker 1: it's one to two billion dollars per day is the 321 00:16:20,280 --> 00:16:22,560 Speaker 1: cost of the US right now. So obviously, if this 322 00:16:22,600 --> 00:16:25,000 Speaker 1: becomes a long war, it could start to impinge on 323 00:16:25,080 --> 00:16:26,040 Speaker 1: the outlook for death. 324 00:16:26,080 --> 00:16:28,080 Speaker 2: So we've got about forty five seconds left. Where a 325 00:16:28,120 --> 00:16:30,400 Speaker 2: guests earlier on the programmer said some value would opened 326 00:16:30,440 --> 00:16:32,160 Speaker 2: up at the front end of the curve, the barter 327 00:16:32,280 --> 00:16:35,360 Speaker 2: hike is simply too high yields of three where fat 328 00:16:35,400 --> 00:16:37,880 Speaker 2: funds are right now, can't push it much further, and 329 00:16:37,920 --> 00:16:40,120 Speaker 2: if they do hike over the next two years, they 330 00:16:40,120 --> 00:16:42,560 Speaker 2: may well cut in response to those hikes further down 331 00:16:42,600 --> 00:16:44,480 Speaker 2: the road. Where do you think value has opened up 332 00:16:44,520 --> 00:16:45,240 Speaker 2: across the curve? 333 00:16:45,360 --> 00:16:48,360 Speaker 1: Look, I think it's not just a question of where 334 00:16:48,360 --> 00:16:52,800 Speaker 1: on the curve, but maybe where. Internationally we have seen major, 335 00:16:53,080 --> 00:16:56,120 Speaker 1: very aggressive swings. Let's say in where the market expects 336 00:16:56,120 --> 00:16:57,560 Speaker 1: the ECB to be at the end of the year, 337 00:16:57,880 --> 00:17:00,880 Speaker 1: three hikes, for example, is priced, and currently two or 338 00:17:00,960 --> 00:17:04,439 Speaker 1: three from the BOE. I think there the market may 339 00:17:04,520 --> 00:17:07,200 Speaker 1: have overreacted. In the market may be anticipating that this 340 00:17:07,240 --> 00:17:10,480 Speaker 1: war will take will last longer than it might actually do. 341 00:17:10,560 --> 00:17:12,399 Speaker 3: So, and of course if. 342 00:17:12,280 --> 00:17:15,040 Speaker 1: It doesn't and if it ends somewhat sooner, you're going 343 00:17:15,080 --> 00:17:18,480 Speaker 1: to see those violent reactions in the front end come 344 00:17:18,480 --> 00:17:20,280 Speaker 1: back down. So if I were looking for value in 345 00:17:20,320 --> 00:17:22,720 Speaker 1: the short in the short end of the curve, it's 346 00:17:22,760 --> 00:17:26,280 Speaker 1: not so much we're on the curve six months, twelve months, 347 00:17:26,560 --> 00:17:29,119 Speaker 1: eighteen months. It's internationally. I think some markets have simply 348 00:17:29,119 --> 00:17:31,240 Speaker 1: reacted more than others, and now might be where the 349 00:17:31,320 --> 00:17:31,760 Speaker 1: value is. 350 00:17:32,480 --> 00:17:36,040 Speaker 2: This is the Bloomberg Sevents podcast, bringing you the best 351 00:17:36,040 --> 00:17:39,119 Speaker 2: in markets, economics, and giet politics. You can watch the 352 00:17:39,160 --> 00:17:42,240 Speaker 2: show live on Bloomberg TV weekday mornings from six am 353 00:17:42,320 --> 00:17:46,280 Speaker 2: to nine am Eastern. Subscribe to the podcast on Apple, Spotify, 354 00:17:46,400 --> 00:17:48,639 Speaker 2: or anywhere else you listen, and as always, on the 355 00:17:48,640 --> 00:17:51,080 Speaker 2: Bloomberg Terminal and the Bloomberg Business app.