1 00:00:05,120 --> 00:00:09,200 Speaker 1: Welcome to the Bloomberg's Surveillance Podcast. I'm Tom Keane, along 2 00:00:09,200 --> 00:00:13,039 Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz. Daily we bring 3 00:00:13,119 --> 00:00:17,119 Speaker 1: you insight from the best and economics, finance, investment, and 4 00:00:17,239 --> 00:00:23,320 Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, SoundCloud, Bloomberg 5 00:00:23,360 --> 00:00:30,400 Speaker 1: dot Com, and of course, on the Bloomberg terminal. Right now, 6 00:00:30,480 --> 00:00:32,400 Speaker 1: we are going to go to Brussels. He is not 7 00:00:32,520 --> 00:00:36,559 Speaker 1: only a foreign minister for Ukraine, but from a family 8 00:00:36,600 --> 00:00:40,280 Speaker 1: of public service to Ukraine's father was ambassador, including a 9 00:00:40,479 --> 00:00:44,519 Speaker 1: long tour of duty to Kazakhstan. Maria. Today, oh with 10 00:00:44,640 --> 00:00:49,600 Speaker 1: Mr Khleba in Brussels, Maria. Good morning, Yes, Tom, good morning. 11 00:00:49,640 --> 00:00:51,880 Speaker 1: And we're now joined by them Culebra, who of course 12 00:00:52,400 --> 00:00:55,040 Speaker 1: is Ukraine's foreign minister. And when this war started, you, 13 00:00:55,240 --> 00:00:57,960 Speaker 1: alongside the rest of the Ukrainian government, you meet the 14 00:00:58,040 --> 00:01:00,800 Speaker 1: decision if we're not going to leave, we're gonna fight 15 00:01:00,880 --> 00:01:04,080 Speaker 1: for our country and we're gonna win this war. I wonder, 16 00:01:04,200 --> 00:01:07,000 Speaker 1: now you've been on almost a global tour, You've met 17 00:01:07,000 --> 00:01:10,039 Speaker 1: pretty much with everyone that can support your cause. What 18 00:01:10,160 --> 00:01:12,800 Speaker 1: is the message that you're sending diplomats when you go 19 00:01:12,840 --> 00:01:17,320 Speaker 1: on this tour Uh, you're not believe in Ukraine. But 20 00:01:17,640 --> 00:01:20,119 Speaker 1: now you can see that Ukraine will win this war. 21 00:01:20,880 --> 00:01:23,440 Speaker 1: Stand by us and share the victory with us for 22 00:01:23,480 --> 00:01:25,839 Speaker 1: the sake of the world. Because this is not only 23 00:01:26,040 --> 00:01:29,360 Speaker 1: the Russia's war against Ukraine. This is the threat that 24 00:01:29,480 --> 00:01:33,280 Speaker 1: Russia and the challenge that Russia poses to the entire world. 25 00:01:33,360 --> 00:01:36,279 Speaker 1: We have to stop them here in order for others 26 00:01:36,319 --> 00:01:38,440 Speaker 1: not to suffer as much as we do. And one 27 00:01:38,480 --> 00:01:41,280 Speaker 1: of the things that you say, and President Lensky repeats 28 00:01:41,319 --> 00:01:43,920 Speaker 1: to is that when you look at the strategic options 29 00:01:44,000 --> 00:01:47,120 Speaker 1: right now, the only strategic option that works for Ukraine 30 00:01:47,520 --> 00:01:50,600 Speaker 1: is winning is a victory. Nothing else will suffice. When 31 00:01:50,600 --> 00:01:52,240 Speaker 1: you say we've got to win, what does it mean 32 00:01:52,240 --> 00:01:55,880 Speaker 1: in real terms, Well, you have to understand that this 33 00:01:55,960 --> 00:01:58,880 Speaker 1: is the world for our existence. Because President Putting does 34 00:01:58,880 --> 00:02:02,160 Speaker 1: not recognize how identity, He does not recognize the right 35 00:02:02,200 --> 00:02:06,040 Speaker 1: of Ukrainian state to exist. This is why we understand 36 00:02:06,080 --> 00:02:08,239 Speaker 1: that we have no other choice but to win this war, 37 00:02:08,400 --> 00:02:11,360 Speaker 1: because it's a war for our existence, and winning it 38 00:02:11,400 --> 00:02:16,280 Speaker 1: means first deal occupying our territories, restoring territorial integrity of 39 00:02:16,440 --> 00:02:20,600 Speaker 1: Ukraine within its internationally recognized borders. We have no intention 40 00:02:20,639 --> 00:02:23,640 Speaker 1: to capture anyone's piece of land, even inach of it. 41 00:02:24,240 --> 00:02:27,800 Speaker 1: We but we want everything that belongs to us to 42 00:02:27,919 --> 00:02:31,240 Speaker 1: be ours. And of course you often hear I know 43 00:02:31,320 --> 00:02:34,480 Speaker 1: this really makes you angry and infuriates Ukrainians when you 44 00:02:34,520 --> 00:02:37,280 Speaker 1: hear things like, oh, but they should just accept the 45 00:02:37,320 --> 00:02:40,120 Speaker 1: ceasefire or perhaps just give away the dam Bass and 46 00:02:40,120 --> 00:02:41,920 Speaker 1: this will put an end to it. What is the 47 00:02:41,960 --> 00:02:45,400 Speaker 1: flaw in that theory? According to you, one of the 48 00:02:45,400 --> 00:02:49,840 Speaker 1: reasons why this war is happening is because since twenty 49 00:02:49,880 --> 00:02:54,320 Speaker 1: and fourteen, some Western countries were countries, you say, some 50 00:02:54,400 --> 00:02:59,280 Speaker 1: Western countries, which human Germany, Germany, France, to some extent, 51 00:02:59,320 --> 00:03:02,440 Speaker 1: the United States and other other other European countries. They 52 00:03:02,440 --> 00:03:07,040 Speaker 1: were always pursuing the policy of half measures towards towards Russia. 53 00:03:07,120 --> 00:03:09,760 Speaker 1: I guess you're scared, you're putting. Well, you know, every 54 00:03:09,760 --> 00:03:12,400 Speaker 1: country is special. Every country has its own reasons to 55 00:03:12,480 --> 00:03:16,520 Speaker 1: pursue one policy or or another. But one of the 56 00:03:16,520 --> 00:03:20,840 Speaker 1: reasons why this war is happening, it's because everyone was 57 00:03:20,880 --> 00:03:24,800 Speaker 1: always telling us Ukraine, you have to consider this to 58 00:03:24,919 --> 00:03:29,040 Speaker 1: pacify Putting, you have to consider that to prevent the 59 00:03:29,080 --> 00:03:33,240 Speaker 1: war from happening. Now, this war happened. It means only 60 00:03:33,280 --> 00:03:36,720 Speaker 1: one thing that this entire policy Ukraine has to consider 61 00:03:36,840 --> 00:03:41,520 Speaker 1: something failed. Doesn't work this way. So instead of asking 62 00:03:41,560 --> 00:03:45,080 Speaker 1: what Ukraine should do for a ceasefire for the end 63 00:03:45,120 --> 00:03:48,440 Speaker 1: of the war, the question should be addressed to Russia. 64 00:03:48,560 --> 00:03:51,720 Speaker 1: What Russia should do? And I would like to command 65 00:03:51,840 --> 00:03:56,360 Speaker 1: now both Germany, France the United States for really changing 66 00:03:56,440 --> 00:04:00,360 Speaker 1: their perspective on this. We still have some discuss but 67 00:04:00,400 --> 00:04:03,360 Speaker 1: in principle they clearly understand that this is a black 68 00:04:03,400 --> 00:04:07,040 Speaker 1: and white situation and it's Russia who bears food responsibility 69 00:04:07,080 --> 00:04:09,600 Speaker 1: for what is happening. And Mr Kula, you mentioned the French, 70 00:04:09,680 --> 00:04:11,480 Speaker 1: and I have to ask you about this because over 71 00:04:11,520 --> 00:04:14,040 Speaker 1: the past for eight hours there's been a huge debate 72 00:04:14,080 --> 00:04:15,800 Speaker 1: as to whether or not and then when my com 73 00:04:15,840 --> 00:04:18,960 Speaker 1: perhaps suggested to Mr Zelenski that he should give away 74 00:04:19,040 --> 00:04:21,120 Speaker 1: some land in order to get a piece deal that, 75 00:04:21,240 --> 00:04:24,080 Speaker 1: of course the French denied this. What's going on here? 76 00:04:24,080 --> 00:04:26,159 Speaker 1: Has anyone ever told you? And when I say anyone, 77 00:04:26,200 --> 00:04:28,680 Speaker 1: of course, I mean global leaders just give away from 78 00:04:28,760 --> 00:04:30,359 Speaker 1: me and give away something in the east. Have you 79 00:04:30,360 --> 00:04:33,400 Speaker 1: been pressured to do that? I was not present in 80 00:04:33,480 --> 00:04:37,280 Speaker 1: the conversation that my President referred to in the conversation 81 00:04:37,320 --> 00:04:42,719 Speaker 1: with President Macron. So I cannot comment on this, but 82 00:04:43,240 --> 00:04:47,360 Speaker 1: before two thousand and fourteen, before the sorry, before twenty 83 00:04:47,400 --> 00:04:51,760 Speaker 1: fourth of February this year, when the war started, yes 84 00:04:51,839 --> 00:04:54,000 Speaker 1: there was some they were not pushing, but they were 85 00:04:54,080 --> 00:04:57,480 Speaker 1: kind of exploring the option of what could be the solution, 86 00:04:58,240 --> 00:05:03,599 Speaker 1: what could Ukraine abandoned in order to make a deal 87 00:05:03,720 --> 00:05:07,360 Speaker 1: with Russia. But I want to make it clear, and 88 00:05:07,360 --> 00:05:10,080 Speaker 1: I think it's everyone who is watching news from Ukraine 89 00:05:10,120 --> 00:05:15,440 Speaker 1: and sees Russian soldiers committing atrocities, Russian army destroying I'll 90 00:05:15,440 --> 00:05:18,040 Speaker 1: see this. It's not Ukraine to blame. This is an 91 00:05:18,120 --> 00:05:23,480 Speaker 1: unprovoked war. Not neither Ukraine, nor Europe, nor NATO, nor 92 00:05:23,560 --> 00:05:26,039 Speaker 1: the nor the United States provoked Putting to do what 93 00:05:26,200 --> 00:05:30,280 Speaker 1: he's doing, and therefore he must bear full responsibility for that. 94 00:05:30,839 --> 00:05:36,560 Speaker 1: And you know, looking for face saving options for Putting 95 00:05:37,160 --> 00:05:40,360 Speaker 1: is a simply false approach. Let's Putting himself find a 96 00:05:40,440 --> 00:05:42,640 Speaker 1: face saving option for for him, And Sir, I have 97 00:05:42,680 --> 00:05:44,640 Speaker 1: to ask you, of course about NATO. Over the weekend 98 00:05:44,680 --> 00:05:47,240 Speaker 1: we had Finland Sweden applying for this. We've heard a 99 00:05:47,279 --> 00:05:49,440 Speaker 1: lot of people saying, yeah, we welcome them. I'm guessing 100 00:05:49,440 --> 00:05:51,760 Speaker 1: for you as a better moment because you tried that 101 00:05:51,880 --> 00:05:54,960 Speaker 1: path two and you didn't get the welcome you're expecting. 102 00:05:55,240 --> 00:05:57,839 Speaker 1: I hope or I wonder are you disappointed or you 103 00:05:57,920 --> 00:05:59,960 Speaker 1: said by that? And when it comes to the europe 104 00:06:00,000 --> 00:06:02,240 Speaker 1: and Union, which we have here in the background, I mean, 105 00:06:02,440 --> 00:06:04,640 Speaker 1: is this your best hope now? Is that the you 106 00:06:04,640 --> 00:06:08,720 Speaker 1: you've given up a NATO. I I believe Ukraine is 107 00:06:08,760 --> 00:06:12,120 Speaker 1: the best hope of the European Union because look how 108 00:06:12,400 --> 00:06:15,120 Speaker 1: the European Union changed in the last two and a 109 00:06:15,160 --> 00:06:18,280 Speaker 1: half months. In the beginning of the war, the perception 110 00:06:18,440 --> 00:06:21,719 Speaker 1: was then NATO is strong, and NATO can act and 111 00:06:21,839 --> 00:06:25,080 Speaker 1: NATO can deliver, and the only thing you can do 112 00:06:25,320 --> 00:06:28,480 Speaker 1: is to express different levels of concern in public statements. 113 00:06:29,120 --> 00:06:32,800 Speaker 1: And the war proved that everything is completely different. It's 114 00:06:32,880 --> 00:06:37,760 Speaker 1: NATO that as alliance as an institution can do very 115 00:06:37,800 --> 00:06:42,080 Speaker 1: literally for anything. Allies, yes, they're very helpful, the Coalition 116 00:06:42,120 --> 00:06:44,760 Speaker 1: of the Willing, the Coalition of the Willing, who represent 117 00:06:44,880 --> 00:06:47,039 Speaker 1: part of the alliance, they are very helpful. We will 118 00:06:47,080 --> 00:06:50,040 Speaker 1: never forget how much how they support us. But NATO 119 00:06:50,120 --> 00:06:56,960 Speaker 1: as an alliance did nothing. EU sanctions, strong political statements, 120 00:06:57,080 --> 00:07:02,599 Speaker 1: economic support, military. If financing military support to Ukraine, European 121 00:07:02,720 --> 00:07:06,520 Speaker 1: Union is back on track as a driving force, as 122 00:07:06,600 --> 00:07:09,200 Speaker 1: someone who shapes the future, who can shape the future 123 00:07:09,200 --> 00:07:12,920 Speaker 1: of youuro and it's Ukraine who gave them the chance 124 00:07:12,960 --> 00:07:16,280 Speaker 1: to demonstrate that they can. And you make that very clear, Metricula. 125 00:07:16,480 --> 00:07:17,840 Speaker 1: Thank you very much. I know you're heading to the 126 00:07:17,840 --> 00:07:20,160 Speaker 1: Hague tomorrow, so too. I know you told me you 127 00:07:20,160 --> 00:07:22,960 Speaker 1: want to pursue this case of criminal charges against Russia 128 00:07:23,000 --> 00:07:24,640 Speaker 1: and the Russian Army. Thank you so much for your time, 129 00:07:24,640 --> 00:07:26,440 Speaker 1: and we appreciate it at such an important hour for 130 00:07:26,480 --> 00:07:29,520 Speaker 1: your country. The pleasure is mine. Thank you, Jonathan Maria, 131 00:07:29,600 --> 00:07:32,280 Speaker 1: Thank you a wonderful interviewed with the Ukrainian Foreign Minister. 132 00:07:36,600 --> 00:07:41,160 Speaker 1: Now to get out front of a sacred oath. Mark Esper, 133 00:07:41,200 --> 00:07:44,480 Speaker 1: you know him as a Secretary of Defense of modest 134 00:07:44,520 --> 00:07:49,680 Speaker 1: controversy for President Trump, but far more, the most coveted 135 00:07:49,800 --> 00:07:53,640 Speaker 1: award at West Point. There is a statue at West 136 00:07:53,680 --> 00:07:56,480 Speaker 1: Point and far more the heritage is seen in the 137 00:07:56,480 --> 00:08:00,760 Speaker 1: theater hotel of one Douglas MacArthur. And when you win 138 00:08:00,840 --> 00:08:04,320 Speaker 1: the leadership Award at West Point and an honor of 139 00:08:04,400 --> 00:08:08,360 Speaker 1: General MacArthur, it's a big deal. One of those winners. 140 00:08:08,480 --> 00:08:12,080 Speaker 1: Mark Esper joined us winner maybe doesn't do it justice. Mark, 141 00:08:12,280 --> 00:08:16,480 Speaker 1: tell me about what General MacArthur would do today with 142 00:08:16,640 --> 00:08:20,280 Speaker 1: all of his controversy within the Republican Party the middle 143 00:08:20,320 --> 00:08:25,000 Speaker 1: twentieth century isolationism, and that what would General MacArthur do 144 00:08:25,160 --> 00:08:30,560 Speaker 1: with this modern defense department that we have. That's a 145 00:08:30,560 --> 00:08:32,800 Speaker 1: great question. And I guess thank you up front for 146 00:08:32,840 --> 00:08:36,840 Speaker 1: the introduction. Tom. You know, I MacArthur what we would 147 00:08:36,840 --> 00:08:39,120 Speaker 1: consider him today to be a combatant commander right because 148 00:08:39,160 --> 00:08:40,959 Speaker 1: of his command in the Pacific and later during the 149 00:08:41,000 --> 00:08:44,800 Speaker 1: Korean War, but you know for West Point, west Pointers 150 00:08:44,960 --> 00:08:48,559 Speaker 1: and and others in the military were we're most recall 151 00:08:48,760 --> 00:08:52,320 Speaker 1: his famous saying about duty, honor, and country, and that 152 00:08:52,480 --> 00:08:54,720 Speaker 1: is the West Point model. He says, those three hallow 153 00:08:54,720 --> 00:08:56,960 Speaker 1: words reverently dictate what you ought to be, what you 154 00:08:57,040 --> 00:08:59,160 Speaker 1: can be, and what you will be. And it was 155 00:08:59,200 --> 00:09:01,680 Speaker 1: that phrase, and that's saying, as it goes, is what 156 00:09:02,200 --> 00:09:04,319 Speaker 1: in some ways guided me during my tenure boat the 157 00:09:04,400 --> 00:09:06,880 Speaker 1: Secretary of the Army and Secretary of Defense. I am 158 00:09:07,000 --> 00:09:10,200 Speaker 1: fascinated by your thoughts of the and this is a 159 00:09:10,320 --> 00:09:12,640 Speaker 1: very sophisticated word, sir. I don't know if you saw 160 00:09:12,679 --> 00:09:17,240 Speaker 1: this at West Point. The ginormous NATO exercises going on 161 00:09:17,400 --> 00:09:21,760 Speaker 1: right now from Estonian Lithuania on down. This is a 162 00:09:21,800 --> 00:09:25,800 Speaker 1: new world we are in. Is our Defense Department ready 163 00:09:25,920 --> 00:09:31,000 Speaker 1: with Secretary Austin for this new world? We are getting ready. 164 00:09:31,400 --> 00:09:34,080 Speaker 1: I think a hallmark of the Trump administration was we 165 00:09:34,200 --> 00:09:37,360 Speaker 1: advanced the National Defense Strategy that I made number one 166 00:09:37,720 --> 00:09:40,920 Speaker 1: my top priority to implement. But this defense strategy also 167 00:09:40,960 --> 00:09:43,920 Speaker 1: described a new era of great power competition to find 168 00:09:43,920 --> 00:09:48,000 Speaker 1: as China as our top strategic adversary and secondly as Russia, 169 00:09:48,400 --> 00:09:51,240 Speaker 1: and to confront these two countries, particularly China. We really 170 00:09:51,240 --> 00:09:54,600 Speaker 1: need to modernize the military from the equipment to our training, 171 00:09:54,880 --> 00:09:57,760 Speaker 1: to our doctrine, and all those things are underway. So 172 00:09:57,800 --> 00:10:00,079 Speaker 1: it's important that the Pentagon continue on with what we 173 00:10:00,200 --> 00:10:03,920 Speaker 1: developed during my tenure, and that we also provide the funding. 174 00:10:03,920 --> 00:10:06,800 Speaker 1: That's really you can't do it without having funding. And 175 00:10:06,840 --> 00:10:10,320 Speaker 1: I've been disappointed by the White Houses the Biden Administration's 176 00:10:10,559 --> 00:10:13,240 Speaker 1: funding request these first two times. They've been flat. And 177 00:10:13,240 --> 00:10:15,880 Speaker 1: thankfully the Congress increased the spending and that's gonna be 178 00:10:15,960 --> 00:10:19,520 Speaker 1: critical to driving change and modernizing the armed forces. Secretary 179 00:10:19,559 --> 00:10:22,280 Speaker 1: as Per based on what we've seen with Russia's invasion 180 00:10:22,440 --> 00:10:26,040 Speaker 1: of Ukraine. How should the US military view what to 181 00:10:26,120 --> 00:10:29,760 Speaker 1: expect with Jijinping and Taiwan, especially as he does seek 182 00:10:30,000 --> 00:10:33,360 Speaker 1: get another term. Yeah, look, it's it's the great question. 183 00:10:33,679 --> 00:10:37,000 Speaker 1: Russia we always defined as a superpower, but a declining power, 184 00:10:37,320 --> 00:10:40,120 Speaker 1: and it's been evident from their actions last ninety days 185 00:10:40,320 --> 00:10:42,640 Speaker 1: and uh in Ukraine that they're not quite the power 186 00:10:42,679 --> 00:10:44,840 Speaker 1: that we thought they were in terms of military capability. 187 00:10:45,080 --> 00:10:47,319 Speaker 1: So this has been a strategic failure across the board 188 00:10:47,600 --> 00:10:50,160 Speaker 1: for Russia. But China is very different, right, It's a 189 00:10:50,240 --> 00:10:53,120 Speaker 1: It's an economy of sixteen trillion dollars, second largest in 190 00:10:53,120 --> 00:10:57,840 Speaker 1: the world, ten times bigger than Russia. Economic interdependencies that 191 00:10:57,920 --> 00:11:01,120 Speaker 1: run around the world. We're seeing just because the shutdowns 192 00:11:01,480 --> 00:11:03,840 Speaker 1: due to COVID in Shanghai and other places, how the 193 00:11:03,880 --> 00:11:06,760 Speaker 1: supply lines reach. So we need to be very careful 194 00:11:06,800 --> 00:11:09,160 Speaker 1: about how we plan and prepared to deal with China. 195 00:11:09,400 --> 00:11:11,640 Speaker 1: We need to send the same and the proper signals 196 00:11:11,679 --> 00:11:15,520 Speaker 1: of resolve and determination to defend young democracies or democracies 197 00:11:15,559 --> 00:11:17,800 Speaker 1: like Taiwan, and make sure they understand that we're going 198 00:11:17,880 --> 00:11:20,920 Speaker 1: to defend this world order. These sets of morms and 199 00:11:21,000 --> 00:11:25,120 Speaker 1: values that have really helped promote prosperity and freedom around 200 00:11:25,120 --> 00:11:27,640 Speaker 1: the world. For the last seventy five years, Secretary Asper, 201 00:11:27,880 --> 00:11:31,280 Speaker 1: the Trumpet administration was known for looking inward to being 202 00:11:31,400 --> 00:11:35,280 Speaker 1: a very nationalistic in the approach to geopolitical concerns. And 203 00:11:35,280 --> 00:11:38,480 Speaker 1: we're at a moment where NATO seems to be coalescing 204 00:11:38,760 --> 00:11:42,240 Speaker 1: in order to deal with Russia and the invasion in Ukraine. 205 00:11:42,320 --> 00:11:46,120 Speaker 1: How much should the US military and beyond sort of 206 00:11:46,160 --> 00:11:50,520 Speaker 1: build on this coalescing of NATO and work with allies 207 00:11:50,520 --> 00:11:53,800 Speaker 1: in order to get some sort of bigger presence, whether 208 00:11:53,840 --> 00:11:55,880 Speaker 1: it's in Asia or at least to figure out how 209 00:11:55,920 --> 00:11:59,839 Speaker 1: to respond if there is an invasion of Taiwan. Yeah, look, 210 00:11:59,840 --> 00:12:02,599 Speaker 1: we absolutely have to. I consider myself a Reagan Republican. 211 00:12:03,120 --> 00:12:06,920 Speaker 1: Ronald Reagan promoted American strength piece through strength. He believed 212 00:12:06,920 --> 00:12:09,400 Speaker 1: in the defense of democracies and the world order as 213 00:12:09,400 --> 00:12:11,640 Speaker 1: we understand it, and believe that we should stand up 214 00:12:11,640 --> 00:12:13,840 Speaker 1: for our friends and allies. And I made an important 215 00:12:14,600 --> 00:12:16,959 Speaker 1: plank of my tenure to really go go out there 216 00:12:16,960 --> 00:12:20,080 Speaker 1: and try and strengthen our allies and grow new partners. Uh. 217 00:12:20,080 --> 00:12:22,400 Speaker 1: And I'm a big believer NATO, and having served in 218 00:12:22,480 --> 00:12:25,560 Speaker 1: NATO's Young Army infantry officer, I believe that we need 219 00:12:25,559 --> 00:12:27,360 Speaker 1: to continue to do this. And it's I'm glad to 220 00:12:27,360 --> 00:12:30,760 Speaker 1: see finally that NATO is coming together, more countries are 221 00:12:30,760 --> 00:12:33,880 Speaker 1: willing to commit more for defense and uh, and that 222 00:12:34,000 --> 00:12:37,160 Speaker 1: we have possibly hopefully new to new countries joining. And 223 00:12:37,440 --> 00:12:40,280 Speaker 1: you know, ironically it's Vladimir Putin who brought the alliance together. 224 00:12:40,440 --> 00:12:43,240 Speaker 1: So uh, the the key thing will be sustaining this 225 00:12:43,360 --> 00:12:46,839 Speaker 1: momentum as we at some point look eastward towards China. 226 00:12:47,280 --> 00:12:52,800 Speaker 1: Marcus Berg, the nation was fractured off of Vietnam. Republicans fractured, 227 00:12:52,840 --> 00:12:57,400 Speaker 1: Democrats fractured. It was equal opportunity. But we're still adjusting. 228 00:12:57,480 --> 00:13:00,959 Speaker 1: And now, as Robert Gates would say, from our our 229 00:13:01,120 --> 00:13:05,280 Speaker 1: our holiday from history, we're still adjusting to the debris 230 00:13:05,320 --> 00:13:09,280 Speaker 1: of Vietnam. Are we adjusting in real time? And how 231 00:13:09,280 --> 00:13:14,240 Speaker 1: do Republicans and Democrats come together to help those with 232 00:13:14,320 --> 00:13:17,719 Speaker 1: the sacred oaths? You know, you're you're right. I mean, 233 00:13:17,760 --> 00:13:20,720 Speaker 1: after the Vietnam War took the army twelve fifteen years 234 00:13:20,880 --> 00:13:24,960 Speaker 1: when I interacted due to really rebuild under again President Reagan, 235 00:13:25,360 --> 00:13:27,360 Speaker 1: and I think now we're coming off the war's last 236 00:13:27,360 --> 00:13:30,560 Speaker 1: twenty years in Iraq and Afghanistan, and again during our 237 00:13:30,600 --> 00:13:34,079 Speaker 1: time and beyond, we began rebuilding the army and all 238 00:13:34,120 --> 00:13:36,600 Speaker 1: the services. So it will take time and money. Look, 239 00:13:36,600 --> 00:13:38,839 Speaker 1: I said on many occasions here the last couple of 240 00:13:38,880 --> 00:13:41,800 Speaker 1: months or so that the greatest threat I see facing 241 00:13:41,800 --> 00:13:45,079 Speaker 1: our country is the extreme partisanship on both sides of 242 00:13:45,120 --> 00:13:47,880 Speaker 1: the aisle that is creating dysfunction in Washington, d c. 243 00:13:48,040 --> 00:13:50,120 Speaker 1: And until we solve that problem, it's gonna be hard 244 00:13:50,120 --> 00:13:52,319 Speaker 1: to challenge to take on the big issues such as 245 00:13:52,720 --> 00:13:55,760 Speaker 1: you know, are growing budget debt, it's what thirty trillion dollars? 246 00:13:56,280 --> 00:13:59,079 Speaker 1: How do we come up with a consensus that with 247 00:13:59,080 --> 00:14:01,600 Speaker 1: regard to a strategy towards China, how do we address 248 00:14:01,679 --> 00:14:04,320 Speaker 1: all these big issues facing our country? And that's gonna 249 00:14:04,360 --> 00:14:06,960 Speaker 1: be key going forward. Going forward is what we wanted 250 00:14:07,000 --> 00:14:09,760 Speaker 1: to accomplish her Mark Asper was an important book for 251 00:14:09,760 --> 00:14:11,960 Speaker 1: those of you on radio. You just need to know. 252 00:14:12,040 --> 00:14:15,680 Speaker 1: There's a certain weight to it, like six plus pages. 253 00:14:15,760 --> 00:14:18,800 Speaker 1: Mark Esper a sacred Oh, it's really can't say enough. 254 00:14:18,840 --> 00:14:21,400 Speaker 1: And of course he leads front and center with a 255 00:14:21,440 --> 00:14:31,000 Speaker 1: gentleman that he worked for at the white House Law, 256 00:14:31,040 --> 00:14:34,320 Speaker 1: you're going far away. Before the advent of financial media, 257 00:14:34,400 --> 00:14:37,600 Speaker 1: there was actually an understanding that bonds were not just 258 00:14:37,800 --> 00:14:40,720 Speaker 1: full faith and credit or f F and C. The 259 00:14:40,720 --> 00:14:43,720 Speaker 1: financial media only quotes full faith and credit. Thank you 260 00:14:43,800 --> 00:14:46,400 Speaker 1: Lisa Bramos, who has made a career of looking at 261 00:14:46,440 --> 00:14:49,680 Speaker 1: credit and high yield, so too, Amanda Line them joining 262 00:14:49,680 --> 00:14:53,120 Speaker 1: his global credit strategistic Golden Sex Right now. In the 263 00:14:53,160 --> 00:14:55,000 Speaker 1: old days, you had a blue book, a Standard and 264 00:14:55,080 --> 00:14:57,440 Speaker 1: Poors blue book, and you thumb through it and you 265 00:14:57,520 --> 00:15:00,400 Speaker 1: looked at corporate bonds and it's say, damn Fuss. The 266 00:15:00,480 --> 00:15:03,720 Speaker 1: giant at Loomas Sales has said, you can enjoy losing 267 00:15:03,840 --> 00:15:07,800 Speaker 1: money at corporate bonds. How much are we losing right now? 268 00:15:08,160 --> 00:15:11,840 Speaker 1: With the aggregate index down ten percent plus? Good morning, Tom, 269 00:15:11,880 --> 00:15:13,920 Speaker 1: thanks for having me so. A couple of weeks ago 270 00:15:14,040 --> 00:15:16,880 Speaker 1: we talked about how both I G and high yield 271 00:15:16,880 --> 00:15:19,760 Speaker 1: total returns were off to their worst start on record. 272 00:15:20,120 --> 00:15:22,240 Speaker 1: So it's been a very, very painful year. I think 273 00:15:22,440 --> 00:15:25,320 Speaker 1: the key risk for bond investors in our view, is 274 00:15:25,360 --> 00:15:29,000 Speaker 1: that that's been entirely driven almost by the rates component, 275 00:15:29,320 --> 00:15:31,600 Speaker 1: and spreads have held in very well. So in the 276 00:15:31,600 --> 00:15:33,760 Speaker 1: event that we do get a recession, which is not 277 00:15:33,800 --> 00:15:36,240 Speaker 1: our economist space case, but if we did get one, 278 00:15:36,640 --> 00:15:39,080 Speaker 1: there's a lot more room for spreads to widen and 279 00:15:39,200 --> 00:15:42,760 Speaker 1: kind of even exacerbate those losses that we've already recorded 280 00:15:42,840 --> 00:15:45,120 Speaker 1: here today. And so that is that is one of 281 00:15:45,160 --> 00:15:47,640 Speaker 1: the key risks to the market. What a what an 282 00:15:47,720 --> 00:15:51,320 Speaker 1: i G investment grade old style bonds? I want to 283 00:15:51,320 --> 00:15:53,840 Speaker 1: buy a general motors behind it's a part of the 284 00:15:53,840 --> 00:15:58,240 Speaker 1: aggregate index. What do you do where equity people say 285 00:15:58,320 --> 00:16:00,800 Speaker 1: I'm going to go to cash or you know, I 286 00:16:00,800 --> 00:16:03,640 Speaker 1: think there's a there's a dialogue about what equity people do. 287 00:16:03,840 --> 00:16:06,200 Speaker 1: What do bond people do when they quote unquote want 288 00:16:06,240 --> 00:16:08,640 Speaker 1: to go to cash? Yeah, they often move up in 289 00:16:08,760 --> 00:16:11,720 Speaker 1: quality or shortened duration. But one of the risks that 290 00:16:11,760 --> 00:16:14,800 Speaker 1: we've highlighted in our recent research is that actually moving 291 00:16:14,920 --> 00:16:17,640 Speaker 1: too far up the quality spectrum. And i G also 292 00:16:17,720 --> 00:16:20,560 Speaker 1: has its risks because those are the companies that are 293 00:16:20,600 --> 00:16:23,040 Speaker 1: likely to move ahead with say debt funded m and 294 00:16:23,120 --> 00:16:27,320 Speaker 1: A or aggressive shareholder returns irrespective of the slowing economy. 295 00:16:27,640 --> 00:16:30,240 Speaker 1: And so we actually like within i G that sweet 296 00:16:30,240 --> 00:16:33,080 Speaker 1: spot of triple B rated firms. Those are companies that 297 00:16:33,120 --> 00:16:36,800 Speaker 1: we believe are committed to staying investment grade, but are 298 00:16:36,920 --> 00:16:40,120 Speaker 1: likely going to behave in a more conservative fashion relative 299 00:16:40,200 --> 00:16:43,920 Speaker 1: to say they're highly rated peers cash rich pharma and 300 00:16:43,960 --> 00:16:46,200 Speaker 1: tech companies for example, that will do M and A 301 00:16:46,320 --> 00:16:50,560 Speaker 1: regardless of the backdrop, Amanda, where are we in terms 302 00:16:50,560 --> 00:16:52,880 Speaker 1: of what we're pricing into the credit market right now? 303 00:16:53,160 --> 00:16:55,280 Speaker 1: Initially you talk about the worst start of the year, 304 00:16:55,360 --> 00:16:57,800 Speaker 1: ever that was largely due to rates. That was not 305 00:16:57,960 --> 00:17:00,680 Speaker 1: due to the extra cushion of yield that accounts for 306 00:17:00,800 --> 00:17:04,399 Speaker 1: potential defaults. Now we're shifting into something else. We're starting 307 00:17:04,400 --> 00:17:07,320 Speaker 1: to see that widen out. How far in that process 308 00:17:07,400 --> 00:17:10,679 Speaker 1: are we? That's right, So we have not priced in 309 00:17:10,800 --> 00:17:14,280 Speaker 1: a lot of default risk and specifically kind of zooming 310 00:17:14,280 --> 00:17:16,720 Speaker 1: in on the high old market, and we do think 311 00:17:16,800 --> 00:17:20,080 Speaker 1: that that's probably appropriate at this stage. So, just to 312 00:17:20,119 --> 00:17:23,000 Speaker 1: set the backdrop, our economists are not expecting a recession 313 00:17:23,000 --> 00:17:25,800 Speaker 1: as their base case this year, and what we've said 314 00:17:25,920 --> 00:17:28,439 Speaker 1: is that even if we do have a downturn and 315 00:17:28,480 --> 00:17:32,399 Speaker 1: growth slow substantially, the high old market is unlikely to 316 00:17:32,560 --> 00:17:35,320 Speaker 1: experience the uptick in defaults that we're kind of used 317 00:17:35,359 --> 00:17:38,440 Speaker 1: to seeing in previous cycles. There are a few reasons 318 00:17:38,440 --> 00:17:41,479 Speaker 1: for that. One is just we didn't have a default 319 00:17:41,480 --> 00:17:43,879 Speaker 1: cycle that long ago, right, so in twenty we had 320 00:17:43,920 --> 00:17:45,760 Speaker 1: a lot of the weaker firms cleaned out of the 321 00:17:45,800 --> 00:17:49,159 Speaker 1: high old market. Energy and metals and mining and kind 322 00:17:49,200 --> 00:17:52,080 Speaker 1: of natural resources are also in a much better position 323 00:17:52,160 --> 00:17:55,600 Speaker 1: now relative to previous cycles, and those are historically the 324 00:17:55,680 --> 00:17:58,600 Speaker 1: vulnerable sectors. And then also we have a lot of 325 00:17:58,640 --> 00:18:00,960 Speaker 1: cash on hand and balance sheets are very strong. So 326 00:18:01,200 --> 00:18:04,280 Speaker 1: um to answer your question specifically, we're not baking in 327 00:18:04,320 --> 00:18:07,119 Speaker 1: a lot of default risk in the high old market 328 00:18:07,200 --> 00:18:10,760 Speaker 1: right now based on current spreads of four fifty. But 329 00:18:10,880 --> 00:18:14,360 Speaker 1: that's that's probably not inappropriate given that, I would say 330 00:18:14,359 --> 00:18:16,560 Speaker 1: the higher quality and the increased strength of the high 331 00:18:16,560 --> 00:18:18,600 Speaker 1: old market movement, Amanda, A lot of people would agree 332 00:18:18,680 --> 00:18:21,360 Speaker 1: with you, and we see this note after note. Basically, 333 00:18:21,400 --> 00:18:23,600 Speaker 1: even if we get a recession, things don't have to 334 00:18:23,640 --> 00:18:25,760 Speaker 1: get that bad in credit because the people have pushed 335 00:18:25,800 --> 00:18:28,639 Speaker 1: out their maturity so far because there was this washout. 336 00:18:29,000 --> 00:18:31,280 Speaker 1: What does that mean in terms of how high the 337 00:18:31,359 --> 00:18:34,199 Speaker 1: Fed can go with the Fed funds rate before we 338 00:18:34,240 --> 00:18:36,320 Speaker 1: have a real problem in credit, which is really the 339 00:18:36,359 --> 00:18:39,800 Speaker 1: market that the Fed watches, and potentially it would respond to. 340 00:18:40,000 --> 00:18:42,840 Speaker 1: Not equity is having a bad day right exactly. So 341 00:18:42,880 --> 00:18:45,440 Speaker 1: our economists expect a terminal value of three to three 342 00:18:45,440 --> 00:18:47,720 Speaker 1: and a quarter percent. A large amount of that is 343 00:18:47,760 --> 00:18:50,960 Speaker 1: already reflected in FED funds futures, for example, and baked 344 00:18:51,000 --> 00:18:53,240 Speaker 1: into the market. UM. I think there's a lot of 345 00:18:53,320 --> 00:18:57,280 Speaker 1: room to go for financial conditions to to tighten and 346 00:18:57,560 --> 00:18:59,720 Speaker 1: really for the FED to deliver on the hikes that 347 00:18:59,720 --> 00:19:01,880 Speaker 1: are already priced in to the market, and I think 348 00:19:01,920 --> 00:19:05,520 Speaker 1: credit investors are expecting that. Really the key risk for 349 00:19:05,680 --> 00:19:08,679 Speaker 1: credit is if we had a freezing up of the 350 00:19:08,720 --> 00:19:12,679 Speaker 1: primary market activities such that corporates, if they wanted to 351 00:19:12,720 --> 00:19:16,600 Speaker 1: access the debt markets could not. Right now, we're actually 352 00:19:16,640 --> 00:19:19,280 Speaker 1: saying that a lot of the muted supply volumes are 353 00:19:19,400 --> 00:19:22,439 Speaker 1: due to an unwillingness to access the market on the 354 00:19:22,560 --> 00:19:25,920 Speaker 1: on the side of corporates, as opposed to an inability. 355 00:19:26,000 --> 00:19:28,600 Speaker 1: And it goes back to exactly what you mentioned. Corporates 356 00:19:28,600 --> 00:19:30,920 Speaker 1: have the luxury of being patient. They spent most of 357 00:19:32,600 --> 00:19:36,280 Speaker 1: one raising cash pre funding years in advance, and so 358 00:19:36,400 --> 00:19:39,000 Speaker 1: they're not really at the whim of the market in 359 00:19:39,080 --> 00:19:42,960 Speaker 1: terms of having to execute in a choppy conditions. I 360 00:19:43,000 --> 00:19:45,240 Speaker 1: know Jonathan talked about this on on Friday Afternoon on 361 00:19:45,280 --> 00:19:48,680 Speaker 1: his program, but really on those windows of stability, you're 362 00:19:48,680 --> 00:19:51,120 Speaker 1: seeing a lot of activity, and we think that's indicative 363 00:19:51,160 --> 00:19:54,640 Speaker 1: of a market that's still remaining open, but yet much 364 00:19:54,680 --> 00:19:57,479 Speaker 1: more challenging in terms of timing that appropriately. You have 365 00:19:57,520 --> 00:20:00,000 Speaker 1: no idea how jettis t K will be, Tom's gonna 366 00:20:00,040 --> 00:20:02,600 Speaker 1: be South, janis that Roy had got the plug there? Amanda, 367 00:20:02,640 --> 00:20:08,800 Speaker 1: thank you. Right now, let's move on with this economic 368 00:20:08,840 --> 00:20:12,000 Speaker 1: analysis of the United States to work global sense off 369 00:20:12,000 --> 00:20:14,639 Speaker 1: of the Milk and Institute meetings. William Lee joins us 370 00:20:14,960 --> 00:20:20,680 Speaker 1: their chief economists. Billy, can the markets constrain or restrict 371 00:20:21,400 --> 00:20:25,440 Speaker 1: the Fed? If we look at the Bloomberg Financial Conditions Index, 372 00:20:26,080 --> 00:20:30,159 Speaker 1: it's sort of doing its job right now making financial 373 00:20:30,200 --> 00:20:35,120 Speaker 1: conditions more restrictive. How will the FED react to that? Well, 374 00:20:35,200 --> 00:20:38,240 Speaker 1: right now, the markets are doing of the Fed's job 375 00:20:38,480 --> 00:20:41,920 Speaker 1: because the market increases our way above whereas as John 376 00:20:42,000 --> 00:20:45,159 Speaker 1: just said, actually increases. But also, uh, the expectations of 377 00:20:45,200 --> 00:20:47,639 Speaker 1: that aggressive policy stands is something that the markets that 378 00:20:47,720 --> 00:20:50,080 Speaker 1: cluly priced in, and I think it's based on some 379 00:20:50,480 --> 00:20:55,280 Speaker 1: misguided information. My my colleague, former colleague Andrew is an 380 00:20:55,320 --> 00:20:58,200 Speaker 1: example of that, where he's focused on the aggregate wage 381 00:20:58,240 --> 00:21:01,680 Speaker 1: price numbers, and I've been looking yet the micro wage 382 00:21:01,680 --> 00:21:04,639 Speaker 1: price numbers, and I really don't see massive size of 383 00:21:04,640 --> 00:21:07,679 Speaker 1: a wage price spirals style. In fact, most of the 384 00:21:07,680 --> 00:21:10,520 Speaker 1: wage increases have been going to where the labor shortages 385 00:21:10,560 --> 00:21:14,320 Speaker 1: are appearing, the low wage workers that be the younger 386 00:21:14,359 --> 00:21:17,600 Speaker 1: tenured workers. Billy your world famous for this. And this 387 00:21:17,760 --> 00:21:22,320 Speaker 1: goes into a death sile analysis. I would guess economists 388 00:21:22,480 --> 00:21:26,920 Speaker 1: like City Group love to aggregate numbers together. What part 389 00:21:26,960 --> 00:21:31,159 Speaker 1: of that death stile analysis matters for Chairman Powell and 390 00:21:31,200 --> 00:21:34,680 Speaker 1: the view forward? Well, Chairman Poule absolutely cares about the 391 00:21:34,680 --> 00:21:39,120 Speaker 1: aggregate number, but do you see aggregate wage price spiral? Uh? Now, 392 00:21:39,160 --> 00:21:42,080 Speaker 1: granted there that has lost credibility since his meetings. The 393 00:21:42,160 --> 00:21:45,439 Speaker 1: average inflation rate break evens that are priced into five 394 00:21:45,600 --> 00:21:48,240 Speaker 1: securities way above three three and a half percent. But 395 00:21:48,920 --> 00:21:51,440 Speaker 1: given that, I think we shouldn't get too carried away 396 00:21:51,480 --> 00:21:54,199 Speaker 1: with how much the Fed has to Titan. Don't forget 397 00:21:54,200 --> 00:21:56,199 Speaker 1: the fit. For the first time in FED history, we 398 00:21:56,280 --> 00:21:59,760 Speaker 1: have two policy tools, the balance sheet and rates, and 399 00:21:59,800 --> 00:22:01,960 Speaker 1: I one of the strategies that they haven't talked about 400 00:22:02,040 --> 00:22:04,919 Speaker 1: enough is using that balance sheet to cool off and 401 00:22:04,960 --> 00:22:07,840 Speaker 1: target those red hot sectors in real estate and consumer 402 00:22:07,920 --> 00:22:11,679 Speaker 1: durables by draining the liquidity from there, especially the mortgage backs, 403 00:22:11,880 --> 00:22:14,520 Speaker 1: and by then easing up on the amount of rate 404 00:22:14,520 --> 00:22:17,320 Speaker 1: increases they'll need that. This is again the first time 405 00:22:17,320 --> 00:22:19,879 Speaker 1: in history of the FED, with two policy instruments, it 406 00:22:20,000 --> 00:22:22,920 Speaker 1: may be able to escape crashing the economy, to bring 407 00:22:22,920 --> 00:22:24,960 Speaker 1: inflation down to its target level and some of that 408 00:22:25,000 --> 00:22:26,720 Speaker 1: in the market, and did in a bit of a 409 00:22:26,720 --> 00:22:28,720 Speaker 1: mess in tween when they trying to wind down a 410 00:22:28,720 --> 00:22:30,960 Speaker 1: balance sheet. They're doing this at a much more aggressive level, 411 00:22:31,119 --> 00:22:33,760 Speaker 1: twice the speed once they get going, Bill, can you 412 00:22:33,800 --> 00:22:35,280 Speaker 1: just add a little bit more kind of to that 413 00:22:35,480 --> 00:22:37,200 Speaker 1: how much they're about to do with a balance sheet 414 00:22:37,240 --> 00:22:38,880 Speaker 1: and how this is going to work through the economy 415 00:22:39,040 --> 00:22:42,840 Speaker 1: through financial conditions. This is one of the most great 416 00:22:42,920 --> 00:22:46,560 Speaker 1: uncharted territory because the FED has really never done balance 417 00:22:46,600 --> 00:22:48,680 Speaker 1: sheet before, and as you said, the last time it 418 00:22:48,720 --> 00:22:50,880 Speaker 1: did it, it it did in a very clumsy way. Right now, 419 00:22:50,880 --> 00:22:53,040 Speaker 1: it has to be very careful and using that that 420 00:22:53,119 --> 00:22:56,160 Speaker 1: mortgage backed securities holdings because that is where the real 421 00:22:56,240 --> 00:22:58,720 Speaker 1: red hot sector is, the real estate market, and draining 422 00:22:58,720 --> 00:23:00,960 Speaker 1: liquidity there is going to be absolutely article. But now 423 00:23:01,119 --> 00:23:03,080 Speaker 1: the treasury run off is something that will be done 424 00:23:03,080 --> 00:23:05,760 Speaker 1: on almost autopilot because it has been trety holders that 425 00:23:05,800 --> 00:23:08,479 Speaker 1: are so short. But I think the key to the 426 00:23:08,480 --> 00:23:11,399 Speaker 1: feeds policy stands is how aggressive doesn't have to be 427 00:23:11,440 --> 00:23:13,720 Speaker 1: with rates on top of that, if you you really 428 00:23:13,760 --> 00:23:16,000 Speaker 1: believe that there's a wage price spiral big priced in, 429 00:23:16,240 --> 00:23:18,440 Speaker 1: then it has to be aggressive, no doubt. But my 430 00:23:18,440 --> 00:23:20,760 Speaker 1: my view of the numbers on the labor market is 431 00:23:20,760 --> 00:23:23,399 Speaker 1: such that you know, if you're above the median wage 432 00:23:23,920 --> 00:23:27,000 Speaker 1: or median profile of the median worker, you're not getting 433 00:23:27,040 --> 00:23:29,880 Speaker 1: the ten twelve percent wage increases. You're getting barely two 434 00:23:29,880 --> 00:23:33,120 Speaker 1: and three for senior managers. So I think the FIT 435 00:23:33,200 --> 00:23:35,360 Speaker 1: has the cool off of it in terms of worrying 436 00:23:35,400 --> 00:23:37,359 Speaker 1: so much about that wage price spiral, there really is 437 00:23:37,400 --> 00:23:39,800 Speaker 1: no sign of it yet taking hold, and I think 438 00:23:39,800 --> 00:23:42,760 Speaker 1: that's something that Wall Street has missed entirely. Even so, 439 00:23:42,960 --> 00:23:45,159 Speaker 1: if the FET is targeting inflation, even if it's not 440 00:23:45,200 --> 00:23:48,080 Speaker 1: coming from the wage price spiral, there are so many 441 00:23:48,119 --> 00:23:51,760 Speaker 1: inflationary pressures coming from China from the supply chain disruptions 442 00:23:51,760 --> 00:23:54,960 Speaker 1: which are not necessarily positive for growth, which are not 443 00:23:55,000 --> 00:23:57,480 Speaker 1: necessarily signs of momentum. But still the FET is shown 444 00:23:57,520 --> 00:24:01,240 Speaker 1: a willingness to target demand in order to respond to 445 00:24:01,280 --> 00:24:04,439 Speaker 1: supply side responses. What's your view on how far they 446 00:24:04,440 --> 00:24:07,439 Speaker 1: would have to go to normalize the supply and demand 447 00:24:07,520 --> 00:24:10,760 Speaker 1: side of the equations. Well, that's our the lesson learned 448 00:24:10,760 --> 00:24:13,520 Speaker 1: from the seventies. You cannot let prices get out of control, 449 00:24:13,560 --> 00:24:15,800 Speaker 1: even though a lot of the inflation is coming from 450 00:24:15,800 --> 00:24:19,200 Speaker 1: the supply side. The Fed's job is to equilibrate supply 451 00:24:19,280 --> 00:24:21,119 Speaker 1: and demand. If you can't get supply up, then you 452 00:24:21,240 --> 00:24:23,400 Speaker 1: certainly have to bring the band down. And the wrong 453 00:24:23,400 --> 00:24:27,119 Speaker 1: way to do it, though, is through hit targeting investment, 454 00:24:27,320 --> 00:24:30,560 Speaker 1: which is the cost of capital right now. I think 455 00:24:30,640 --> 00:24:34,280 Speaker 1: the key to inflation in the future is productivity enhancing 456 00:24:34,320 --> 00:24:37,119 Speaker 1: investment that has to be encouraged, and I think the 457 00:24:37,600 --> 00:24:40,119 Speaker 1: FED to choke that off just for the sake of 458 00:24:41,040 --> 00:24:43,640 Speaker 1: hitting its supercent target in a reasonable amount of time 459 00:24:43,800 --> 00:24:46,479 Speaker 1: would be a serious mistake because that would cost us 460 00:24:46,720 --> 00:24:49,560 Speaker 1: the three to five year horizon in boosting inflation without 461 00:24:49,600 --> 00:24:52,000 Speaker 1: those productivity enhancing investments. Right now, we've got a two 462 00:24:52,080 --> 00:24:54,080 Speaker 1: year treasury yield at about two and a half percent. 463 00:24:54,480 --> 00:24:56,640 Speaker 1: The team over a Bank of America, which will catch 464 00:24:56,720 --> 00:24:59,200 Speaker 1: up with John in a little bit here, believe that 465 00:24:59,200 --> 00:25:00,919 Speaker 1: it will go up to three and a half percent. 466 00:25:01,000 --> 00:25:03,560 Speaker 1: Do you think that would be enough to torpedo this 467 00:25:03,640 --> 00:25:07,760 Speaker 1: economy to actually send the United States into recession? It 468 00:25:07,800 --> 00:25:10,600 Speaker 1: would be enough if we drain liquidity adequately from the 469 00:25:10,680 --> 00:25:12,800 Speaker 1: red hot sectors using the balance sheet. It will not 470 00:25:12,880 --> 00:25:15,480 Speaker 1: be enough by traditional measures. And so so I think 471 00:25:15,480 --> 00:25:17,320 Speaker 1: that this, as they said, there's got to be a 472 00:25:17,359 --> 00:25:19,840 Speaker 1: time when the thing can no longer say the balance 473 00:25:19,840 --> 00:25:22,479 Speaker 1: sheet is the passive tool and the secondary tool. It 474 00:25:22,560 --> 00:25:25,480 Speaker 1: has to become the primary tool for cooling the economy, 475 00:25:25,760 --> 00:25:27,679 Speaker 1: and and and and as far as China's concerned, by 476 00:25:27,720 --> 00:25:30,639 Speaker 1: the way, the real key to watch is whether or 477 00:25:30,680 --> 00:25:35,800 Speaker 1: not China becomes aggressive and takes over more about Taiwan, 478 00:25:36,160 --> 00:25:39,359 Speaker 1: because the lesson learned from Ukraine that shocked the leaders 479 00:25:39,400 --> 00:25:42,760 Speaker 1: over there is that the the world came together and 480 00:25:42,880 --> 00:25:45,600 Speaker 1: became much more cohesive. That will put a stopper, I 481 00:25:45,680 --> 00:25:48,880 Speaker 1: think on military encourasions in Taiwan, but it won't stop 482 00:25:48,880 --> 00:25:52,720 Speaker 1: their cyber attacks or political uh political strategies. So so 483 00:25:52,840 --> 00:25:56,399 Speaker 1: there's the supply constraint is a real issue. Because t 484 00:25:56,640 --> 00:26:00,240 Speaker 1: SMC is global, there is no substitute for advantage IPS. 485 00:26:00,760 --> 00:26:02,640 Speaker 1: We can find other places to find to buy week. 486 00:26:02,800 --> 00:26:05,040 Speaker 1: We can find other places to grow horn, but we 487 00:26:05,160 --> 00:26:08,119 Speaker 1: cannot find another t SMC. But just quickly, within the 488 00:26:08,119 --> 00:26:11,399 Speaker 1: Communist Party, do you think that the leader president, she 489 00:26:11,520 --> 00:26:13,560 Speaker 1: is in a position where he can make a step 490 00:26:13,600 --> 00:26:18,040 Speaker 1: as bold as the one that you just described right 491 00:26:18,040 --> 00:26:20,600 Speaker 1: now if he gets his third term. The one thing 492 00:26:20,640 --> 00:26:23,200 Speaker 1: on she's mind is that he will leave the legacy 493 00:26:23,280 --> 00:26:26,440 Speaker 1: that he created, the path of returning Taiwan to China. 494 00:26:26,760 --> 00:26:29,560 Speaker 1: This is something no one has accomplished, doom shaping, no one, 495 00:26:29,600 --> 00:26:32,280 Speaker 1: not even Joel or Mazy doom and so so this 496 00:26:32,400 --> 00:26:35,680 Speaker 1: has been a China obsession for for decades, ever since 497 00:26:35,760 --> 00:26:37,919 Speaker 1: China open. So you bet you he's going to be 498 00:26:37,920 --> 00:26:40,960 Speaker 1: guilt going after Taiwan. The question is how. And right 499 00:26:40,960 --> 00:26:44,160 Speaker 1: now the world coming together with about Ukraine, I think 500 00:26:44,160 --> 00:26:46,960 Speaker 1: has put a stopper on any overt military actions. But 501 00:26:47,280 --> 00:26:49,360 Speaker 1: wonderful to hear from me, said as always Bill, leader 502 00:26:49,640 --> 00:26:57,200 Speaker 1: of the Milk and Institute. Let's kick off the program 503 00:26:57,200 --> 00:26:59,840 Speaker 1: today with Christian announcing the chief investment officer at Deutsche 504 00:26:59,840 --> 00:27:02,760 Speaker 1: Bank Private Bank. Christian six straight weeks off the clients 505 00:27:03,280 --> 00:27:05,720 Speaker 1: in the equity market in America. Christian, when you buy this, 506 00:27:06,000 --> 00:27:10,280 Speaker 1: when you make a move. Yeah, fortunately a free underweight equities, 507 00:27:10,280 --> 00:27:12,880 Speaker 1: And honestly, we are now thinking also of coming back 508 00:27:12,920 --> 00:27:14,840 Speaker 1: at least to going to a newtube position because we 509 00:27:14,880 --> 00:27:18,840 Speaker 1: are so seeing so various science in the market. There's 510 00:27:18,920 --> 00:27:22,159 Speaker 1: probably no change to zero COVID policy, there's still supply 511 00:27:22,359 --> 00:27:25,200 Speaker 1: chain issues, so everything is superbarious if you look all 512 00:27:25,240 --> 00:27:27,440 Speaker 1: bear index. So I think it's time to go back 513 00:27:27,440 --> 00:27:30,040 Speaker 1: a little bit to a newtube. That's very important. It 514 00:27:30,119 --> 00:27:32,879 Speaker 1: doesn't mean that we are now getting super optimistic, right. 515 00:27:32,920 --> 00:27:35,240 Speaker 1: The environment is certainly a tough one to be very honest. 516 00:27:35,520 --> 00:27:38,320 Speaker 1: Christian ben Leisler's out of the note this morning, or 517 00:27:38,320 --> 00:27:40,720 Speaker 1: he basically says a lot of companies didn't get the 518 00:27:40,800 --> 00:27:44,560 Speaker 1: crisis memo. You see that with a great separation which 519 00:27:44,600 --> 00:27:48,639 Speaker 1: I'm sure you see is well, how does profit matter 520 00:27:49,000 --> 00:27:52,439 Speaker 1: going forward? Yeah, if you if you look at the 521 00:27:52,480 --> 00:27:55,280 Speaker 1: markets and you analyze the market movement of for example, 522 00:27:55,320 --> 00:27:58,040 Speaker 1: the SNP or here in Europe. I think what's very 523 00:27:58,040 --> 00:28:01,919 Speaker 1: interesting in the recent weeks, also including this last six weeks, 524 00:28:01,920 --> 00:28:06,080 Speaker 1: you've seen that very very high correlation of indsease two 525 00:28:06,280 --> 00:28:09,680 Speaker 1: real rates. I think that's important. There's the inflation component. 526 00:28:10,080 --> 00:28:12,240 Speaker 1: It has not been so much about the results of 527 00:28:12,280 --> 00:28:15,040 Speaker 1: the companies. I think that might change down the road. 528 00:28:15,359 --> 00:28:17,440 Speaker 1: For example, if you have the Q two earning season 529 00:28:17,520 --> 00:28:19,879 Speaker 1: coming in then in July, I think, of course there 530 00:28:19,920 --> 00:28:22,719 Speaker 1: will be a lot of focus on how much margin 531 00:28:22,920 --> 00:28:25,560 Speaker 1: pressure was there or is still there because of inflation. 532 00:28:25,600 --> 00:28:27,560 Speaker 1: So I think there's a change. But if you look 533 00:28:27,600 --> 00:28:30,800 Speaker 1: recently at market that was certainly driven by inflation and 534 00:28:30,800 --> 00:28:34,200 Speaker 1: and rerangs for staff. So Christian, you are underweight equities, 535 00:28:34,200 --> 00:28:36,800 Speaker 1: but you are starting to get a little bit more constructive, 536 00:28:36,920 --> 00:28:39,760 Speaker 1: even as you see the prospect for recession continuing to 537 00:28:39,800 --> 00:28:42,440 Speaker 1: climb over the next twelve months. Can you pass through 538 00:28:42,680 --> 00:28:46,920 Speaker 1: how you can be bullish on equities heading into a recession. No, 539 00:28:47,040 --> 00:28:49,120 Speaker 1: I'm not saying I'm bullish on equities, but I'm saying 540 00:28:49,120 --> 00:28:51,880 Speaker 1: we have been underweight equities, which was certainly right call. 541 00:28:52,120 --> 00:28:54,840 Speaker 1: And you have even in bare markets, even recession, in 542 00:28:54,880 --> 00:28:57,920 Speaker 1: markets we have one of the strongest values sometimes in markets. 543 00:28:58,240 --> 00:29:01,959 Speaker 1: And I think if sentiment is all negative, there is 544 00:29:02,000 --> 00:29:05,280 Speaker 1: some room even in a recessionary environment for for some 545 00:29:05,360 --> 00:29:07,800 Speaker 1: market upside you don't want to miss. But it's not 546 00:29:07,880 --> 00:29:10,360 Speaker 1: that I'm saying you get overly optimistic. You do no 547 00:29:10,880 --> 00:29:13,880 Speaker 1: massive overweight and equities. I think that's not the economic environment, 548 00:29:13,920 --> 00:29:15,680 Speaker 1: where in Christingly sounds like you want to get back 549 00:29:15,720 --> 00:29:18,000 Speaker 1: to neutral. So let's talk about that. Where would you 550 00:29:18,040 --> 00:29:22,800 Speaker 1: buy to achieve that? Well? Markets which are mostly underweight. 551 00:29:23,000 --> 00:29:25,720 Speaker 1: Was the US was also China for example, and there's 552 00:29:25,720 --> 00:29:28,720 Speaker 1: a lot of discussion, of course on China. I don't 553 00:29:28,720 --> 00:29:31,880 Speaker 1: see immediate change. Look at the results or the numbers 554 00:29:31,960 --> 00:29:35,160 Speaker 1: we've seen this morning in China. I've I've done called 555 00:29:35,640 --> 00:29:40,000 Speaker 1: colleagues in China. The sentiment is extremely bearish. Um no 556 00:29:40,240 --> 00:29:42,760 Speaker 1: change to zero COVID policy. But if you look longer term, right, 557 00:29:42,760 --> 00:29:44,960 Speaker 1: the market is down more than thirty five percent since 558 00:29:45,000 --> 00:29:47,240 Speaker 1: the peak. I think if you at least go to 559 00:29:47,280 --> 00:29:49,480 Speaker 1: a more neutral position, that cannot be wrong. If you 560 00:29:49,520 --> 00:29:53,200 Speaker 1: buy something thirty five one, not overweight, but going to neutral, 561 00:29:53,200 --> 00:29:55,479 Speaker 1: I think that's that's the actually want to go Christian 562 00:29:55,560 --> 00:29:58,560 Speaker 1: wonderful cantchas as always question now saying at Deutsche Bank 563 00:29:58,840 --> 00:30:02,720 Speaker 1: Private Bank. This is the Bloomberg Surveillance Podcast. Thanks for listening. 564 00:30:03,080 --> 00:30:06,440 Speaker 1: Join us live weekdays from seven to ten am Eastern 565 00:30:06,680 --> 00:30:10,760 Speaker 1: on Bloomberg Radio and on Bloomberg Television each day from 566 00:30:10,760 --> 00:30:16,040 Speaker 1: six to nine am for insight from the best in economics, finance, investment, 567 00:30:16,200 --> 00:30:21,200 Speaker 1: and international relations. And subscribe to the Surveillance podcast on 568 00:30:21,280 --> 00:30:25,120 Speaker 1: Apple podcast, SoundCloud, Bloomberg dot com, and of course, on 569 00:30:25,240 --> 00:30:29,400 Speaker 1: the terminal. I'm Tom Keene, and this is Bloomberg.