Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance, an Apple podcast, Suncloud, Bloomberg
Speaker 1: dot Com and of course on the Bloomberg terminal. Let's
Speaker 1: get to the conversation with Bruce Cassman of JP Morgan. Bruce,
Speaker 1: let's start here just quickly, your reaction to this handline
Speaker 1: and how you'd process a line like that. There are
Speaker 1: certain positive developments as far as negotiate is from our side,
Speaker 1: informed me the President of Russia. Your thoughts on the
Speaker 1: political side. I'm just gonna keep an open mind here,
Speaker 1: recognize the wide range of uncertainty, but also recognize how
Speaker 1: far the conflict has gone so far in terms of sanctions,
Speaker 1: in terms of the damage to the Russian economy, and
Speaker 1: I think the damage that will be inflicted on the
Speaker 1: global me I don't think that will be reversed. I
Speaker 1: don't think the sanctions will be reversed very quickly, even
Speaker 1: if there's good news. So from a macro econ on
Speaker 1: point of view, which is the world I live in.
Speaker 1: We are going to feel the effects of this clearly
Speaker 1: for a while. Dr kesmen, you know I would never
Speaker 1: front run Michael Faroli, but let's do it. Okay, you've
Speaker 1: got a research report coming out tonight, Weekly Prospects. How
Speaker 1: are you going to adjust g d P. I don't
Speaker 1: want to get out in front of your clients or
Speaker 1: Faroli was working with a slide rule, but how are
Speaker 1: you going to adjust American and global GDP this weekend? Well,
Speaker 1: I'm not allowed to front run my faecasts either. But
Speaker 1: what we've been doing as the as a general rule,
Speaker 1: has been increasing the drag as we've continued to see
Speaker 1: more pressure on energy prices. Obviously, the natural gas is
Speaker 1: is a big factor in Europe, crude oil as a
Speaker 1: factor elsewhere. Broadly speaking, what we're doing is raising inflation
Speaker 1: and lowering growth, and we can tinue to move down
Speaker 1: that path. I would emphasize though that we still have
Speaker 1: growth for the US this year running above trend. We
Speaker 1: still have the unemployment rate falling. Uh. These are all
Speaker 1: works in progress in terms of understanding the impact. But
Speaker 1: we've done We've dented our views on the US and
Speaker 1: the global economy. We haven't derailed our view on a
Speaker 1: still solid recovery at least. I thought that was very diplomatic.
Speaker 1: I thought has been handled that well well. Basically, you
Speaker 1: can expect a downward revision perhaps if you are lowering
Speaker 1: the growth estimates, and it leads us to the our word,
Speaker 1: the recession call, and Goldman Sacks put out their note
Speaker 1: with their downgrade of their expectation. They said, the US
Speaker 1: recession chance for the next twelve months, they see it
Speaker 1: as about twenty percent. Is that consistent with what you're
Speaker 1: thinking of right now, Bruce? I think somewhere in the
Speaker 1: range and makes sense to me. I mean, that's just
Speaker 1: recognizing how much uncertainty is here. But I would emphasize
Speaker 1: that the US economy has shown already pretty significant resilience
Speaker 1: in the face of shocks. The underpinnings are healthy. So
Speaker 1: I think what these recession probabilities reflect is how certain
Speaker 1: the potential outcomes are here, not the fragility of the
Speaker 1: U s economy right now. Although Bruce at ten o'clock
Speaker 1: am Eastern, we're going to get that University of Michigan
Speaker 1: sentiment survey. We're expecting it to post a new post
Speaker 1: twenty eleven low. How significant is that in terms of
Speaker 1: consumer spending, and how long this resilience can last. As
Speaker 1: you know, the Michigan survey has already moved down to sharply,
Speaker 1: and I think it's telling us something important, which is
Speaker 1: consumers are worried, and particularly worried about the rise of inflation.
Speaker 1: What's happening in the conflict is pushing higher prices on energy,
Speaker 1: higher prices on food. US inflation is going to stay elevated.
Speaker 1: I think the qualitative signal is important. I don't think
Speaker 1: the level of confidence specifically lines up with spending. The
Speaker 1: key issue here is we're getting hit by a huge
Speaker 1: resiliency test in terms of household purchasing power, and we
Speaker 1: do need households to eat into what is a large
Speaker 1: reservoir of excess savings to make it through this. We
Speaker 1: do think that's gonna happen, but it's not gonna happen
Speaker 1: without some pain in terms of US consumption, in US
Speaker 1: growth overall. Bruce, just quickly, how hard is it going
Speaker 1: to be for the Europeans to avoid recession over the
Speaker 1: next tw half months, Much harder than the US. And
Speaker 1: I think the question there really is how strong is
Speaker 1: their commitment to take the pain of cutting off natural
Speaker 1: gas supply from Russia, and how willing are they to
Speaker 1: offset some of that drag with fistal supports. Right now,
Speaker 1: we're thinking Europe is going to be flirting with quarters
Speaker 1: of growth close to zero uh. And I think we
Speaker 1: do need to see a significant fistful response here, cushioning
Speaker 1: the blow to keep the European recovery going. Hey, Bruce,
Speaker 1: awesome as always, Bruce Kasman and JAKP. Morgan right now
Speaker 1: on the attitude of America towards war and towards the
Speaker 1: moment of this fractious two thousand and twenty two, Mohammed
Speaker 1: units joined US editor in chief Gallop Gallup as a
Speaker 1: poem organization. They've never done work for this party or
Speaker 1: that party. They were seminal in the thirties of saying
Speaker 1: no FDR will win versus alf Landon and they moved
Speaker 1: on there to measuring America's tone. I want to know,
Speaker 1: Mohammed on the death of the American liberal order. We've
Speaker 1: got a reaffirmation of war in Europe. Not the Liberal
Speaker 1: Party or the left of the Democrats, but the sense
Speaker 1: of a liberal order coming out of World War two.
Speaker 1: The end of the Cold War. How have you pulled
Speaker 1: that in recent days? I'll tell you Tom, there couldn't
Speaker 1: have been a better time to come out of the field.
Speaker 1: With our last survey, we do something called the World
Speaker 1: Affair Survey, where we ask Americans basically what role should
Speaker 1: America playing the world and what threats We came out
Speaker 1: of the field literally on the eve of the invasion Ukraine,
Speaker 1: and before any troops or tanks actually crossed the border.
Speaker 1: Americans were pretty focused on this issue, more than we
Speaker 1: usually see. And I can point to many metrics. First
Speaker 1: of all, just the favorability of Russia has hit an
Speaker 1: all time negative high of eighty five percent. So when
Speaker 1: you think about China as a focus in the United States,
Speaker 1: it's only seventy favorability. Russia has now outdone that. For context,
Speaker 1: in two thousand and three, Russia had a sixty three
Speaker 1: percent favorable rating with the American public. When we ask
Speaker 1: Americans about who's the greatest enemy facing the United States,
Speaker 1: not the party think China comes on top at forty nine.
Speaker 1: Russia actually came out right under them at thirty two.
Speaker 1: UM we asked about a series of critical threats to
Speaker 1: the vital interests of the United States. We saw an
Speaker 1: uptake in Americans concern with the military power of Russia increasing.
Speaker 1: Fifteen percent of Americans described that because of time. I
Speaker 1: want to be sure because Lisa and John want to
Speaker 1: get in here, or how isolationist are we right now?
Speaker 1: We're not that isolationists. I would argue that when you
Speaker 1: look at the recent polls of the last week, the
Speaker 1: public is actually far ahead of leadership both here and
Speaker 1: in Europe. UM. Every decision the Biden administration has made
Speaker 1: has been supported by public opinion prior to it being taken.
Speaker 1: So the notion that Americans are isolationists they're checking out,
Speaker 1: is not in any way supported by data. And we
Speaker 1: see a huge difference between now in twenty fifteen when
Speaker 1: there was a war in Ukraine between Russia, UM and Ukraine,
Speaker 1: and Americans were not nearly a styled in her focused
Speaker 1: on but Mohammed, how much are they concerned also about
Speaker 1: the inflationary backdrop and does that contribute to a concern
Speaker 1: about their own well being versus this feeling of injustice
Speaker 1: it's going on with Ukraine. Lisa, you nailed it. Before
Speaker 1: the invasion, Seventy nine percent of Americans said that inflation
Speaker 1: is likely to go a lot in the next six months.
Speaker 1: That was a record high that we haven't seen in
Speaker 1: decades here it so you can only imagine now that
Speaker 1: oil prices have exploded, that concern is only going to skyrocket. Um.
Speaker 1: I do though, caution against thinking that because of that
Speaker 1: financial impact, Americans are going to kind of shy away,
Speaker 1: because the decisions the Biden administration have taken, like no
Speaker 1: longer importing rushing gas and a lot of talk about
Speaker 1: oil prices and gas prices don't seem to have scared
Speaker 1: Americans away from the focus on the importance of this
Speaker 1: conflict for US vital interests. Mohammed, what are you looking
Speaker 1: for to determine a shift in that? Because we were
Speaker 1: just talking with Bruce Kasmin of JP Morgan about the
Speaker 1: resiliency of the American consumer about despite some of the
Speaker 1: concern of inflation, the concern of yet another crisis in
Speaker 1: a crisis riddle riddled area era, that people are going
Speaker 1: out and spending, people are still living. What are you
Speaker 1: looking at for the sentiment to shift to indicate perhaps
Speaker 1: a deterioration in that? Well, are econ on a confidence
Speaker 1: index measure which you basically ask Americans, how are the
Speaker 1: economy doing for you right now and in the future.
Speaker 1: In the foreseeable future remains in a negative. It's been improving,
Speaker 1: but inflation has really been dragging down American's perceptions of
Speaker 1: the economy. So we're starting at a net negative. Um.
Speaker 1: If I would look to something, obviously we're gonna look
Speaker 1: to see how much that now dips, now that prices
Speaker 1: have gone through the roof, not only on gas, butt
Speaker 1: on goods as well. UM. So that is the critical question.
Speaker 1: But we shouldn't assume that because inflation is hitting Americans
Speaker 1: far that they somehow are willing to compromise or switch
Speaker 1: it out for no longer being involved in supporting Ukraine MOhm.
Speaker 1: With this new line that the administration is using around
Speaker 1: the inflation story, the Peuton gas hike, is that resonating?
Speaker 1: Do they still believe that it's Biden's felt is a
Speaker 1: shifting untold? What is your rate on that? One thing
Speaker 1: that we've known, Jonathan from this, at least at this
Speaker 1: point of the Biden administration is they have failed at
Speaker 1: their number one objective, which is too minimize the partisanship
Speaker 1: in American public opinion. My answer to your question is essentially,
Speaker 1: people that's a poor President Biden will buy that line.
Speaker 1: But all the people that don't support President Biden, we're
Speaker 1: complaining about gas prices long before this situation erupted. So
Speaker 1: I think, unfortunately, Party I D is still gonna drive
Speaker 1: primarily how people react to president by its presentation of
Speaker 1: the facts. Right to catcha Mohammed as wise, Mohammed Tunis
Speaker 1: at Gallab. We're looking at Ukraine, the war. Some of
Speaker 1: the news is just flat out grimm and it folds
Speaker 1: over to the repricing. In the Bloomberg world, the repricing
Speaker 1: is most critical on the bye side where the assets
Speaker 1: are held, and that includes Columbia, thread Needle. Ed Al
Speaker 1: Hosseini joins US now their senior interest rate strategies, and
Speaker 1: we're not talking price and yield today, we're talking markdowns
Speaker 1: the ft. With the article on black Rock with a
Speaker 1: huge number given their scale, do you presume that we
Speaker 1: will see markdowns on fixed income in the coming days. Yeah.
Speaker 1: I think investors broadly are crystallizing their losses on Russia holdings,
Speaker 1: and I think the good news so far is that
Speaker 1: we've not seen spillover effects, particularly demand for liquidity demand
Speaker 1: for cash more broadly, So we're seeing margin calls in
Speaker 1: in the you know, grand scheme of things, but they're
Speaker 1: not really triggering a massive run in the in the
Speaker 1: asset management system overall. Explain the pressure and I look
Speaker 1: at f R A O I S, which is one
Speaker 1: of the thermometers here the short term system, and it's rain.
Speaker 1: It's elevated, but range bounded is not broken out to
Speaker 1: a worst statistic. Explain the pressure on the bye side
Speaker 1: to reprice troubled debt. Does that come from guys like
Speaker 1: you do? You call up the managers and say, look,
Speaker 1: you gotta re price this. How does that happen? So
Speaker 1: to the fraud I asked in terms of dollar demands,
Speaker 1: I mean bills, notes and bonds that are gonna be
Speaker 1: marked down. Where does the pressure come from to mark
Speaker 1: them down? Ultimately the asset owners? Right, I think this
Speaker 1: by and large, if you look at Russian assets, there's
Speaker 1: a collective decision here in terms of asset owners saying
Speaker 1: we do not want exposure to to this risk, regardless
Speaker 1: of how it unfolds in the short term. So there's
Speaker 1: a broad movement out of Russian debt and equities. UH
Speaker 1: in the investment world. There's a broad movement of companies
Speaker 1: out of Russia as well, so we're seeing exposure to
Speaker 1: physical assets in Russia getting written down um and altogether
Speaker 1: that means we're taking the slice of Russia that's in
Speaker 1: the financial system out of the equation. Edwards, there is
Speaker 1: an issue right now with respect to an exogenist shock.
Speaker 1: At what point ed do we shift into something that
Speaker 1: looks like a growth scare? And I wonder at what
Speaker 1: point they are the recession talks that we have been
Speaker 1: hearing sort of perkly up through yield curve discussions start
Speaker 1: to become that much louder. Yeah, I think I think
Speaker 1: we're kind of there right now at your conversation. The
Speaker 1: consensus view on US growth is starting to weaken. If
Speaker 1: you look at the Fed's expectations, the FED has a
Speaker 1: print of about four two grow. That's like they get
Speaker 1: marked down a little bit next next week. But by
Speaker 1: and large, I think the good news is we're starting
Speaker 1: for a position of relative strength in terms of corporate
Speaker 1: balance sheets, household balance sheets, UM, the labor market coming
Speaker 1: into into this year, so we have some buffers to
Speaker 1: eat through before the risk of recession UH becomes real,
Speaker 1: But I think that turning point usually happens when things
Speaker 1: are good. So unemployment, so four percent, the yield curve
Speaker 1: almost inverted. This is when you start talking about things
Speaker 1: starting to get worse. And right now I'm looking at
Speaker 1: the interest rate expectations for the rest of the year,
Speaker 1: and we're still pricing in six or even seven rate
Speaker 1: hikes by your end, at least when it comes to
Speaker 1: Fed funds futures. Do you think that the rest of
Speaker 1: the complex of bonds and frankly everything else has factored
Speaker 1: in seven rate hikes. I think we've done a pretty
Speaker 1: good job. Yeah, And I think, especially if you look
Speaker 1: at the credit space, the move wider in credit spreads, spreads,
Speaker 1: investment great high yield. You know, we're about at fifteen
Speaker 1: month wides now. Most of that move has not been
Speaker 1: because the underlying fundamental story has deteriorated. It's been because
Speaker 1: of the interest rate volatility. So I think we've done
Speaker 1: a decent job of pricing that in at the stage.
Speaker 1: So do you think right now that yields in the
Speaker 1: long end are basically going to stay where they are
Speaker 1: around two percent? Or do you think that as we
Speaker 1: contemplate this, I don't want to call it stagflationary, but
Speaker 1: this sort of unfortunately high inflation rate impacting growth for
Speaker 1: a longer period of time that we could go significantly higher.
Speaker 1: The biggest question in debt markets is will the Fed
Speaker 1: have to raise fet funds above two And if we
Speaker 1: have to rice that, how quickly do we need to
Speaker 1: price that in? At the moment we're priced for the
Speaker 1: fat to get two percent by the other next year
Speaker 1: and kind of stay there. That's a relatively low level.
Speaker 1: It's not a level that's really squeezing the economy from
Speaker 1: it from a growth at an inflation perspective, If we
Speaker 1: have to go there, that's a rapid repricing. I think
Speaker 1: that creates him downside for risk and that very likely
Speaker 1: inverts the curve very quickly, potentially as early as the
Speaker 1: second half of this year. We gotta run. We've gotta
Speaker 1: leave it there. Thank you, BUDDYSA White and who send
Speaker 1: me that of Columbia thread NATO right now, Lisa Bramonts
Speaker 1: and I are absolutely thrilled to present to you as
Speaker 1: we've talked to General KIMMITTT, General Hodges, Animal Safrida's and
Speaker 1: of course a wonderful angelis Stonard Brookings, Myra Rodriguez Vobry
Speaker 1: areas managing principle of m R. V associates who is
Speaker 1: beyond esteem in the study of Russia. Her shingle is
Speaker 1: from Harvard of long ago, Mare, Uh Goldman and others. Myra.
Speaker 1: What does our audience need to know right now about
Speaker 1: the loneliness, the a loneness of Vladimir Putin? You know,
Speaker 1: this is a man who for a very very long
Speaker 1: time has been planning this tragic invasion. And for anybody
Speaker 1: who's been observing this, sadly, you know, we're not we're
Speaker 1: not surprised, and you know, I don't actually know how
Speaker 1: alone he is. I don't think so, because he actually
Speaker 1: has a lot, a lot of supporters. Uh. He has
Speaker 1: had support for decade amongst many many Russians, not just
Speaker 1: at the upper echelons of the Kremlin. And he also
Speaker 1: has still a lot of supporters in the former Soviet Union.
Speaker 1: I know, right now we're obviously very focused on Ukraine,
Speaker 1: but he has a lot of supporters in Central Asia,
Speaker 1: and he has done this invasion because he really thought
Speaker 1: he could get away with it. What is the media
Speaker 1: getting wrong in our analysis right now? Is the global
Speaker 1: onslaught of analysis of the military, the humanitarian crisis and such.
Speaker 1: What does it ring true to the analysis right now?
Speaker 1: I think there is a lot of truth in what
Speaker 1: the media is saying. However, I think that unfortunately, what
Speaker 1: my biggest fear is going to happen is that with
Speaker 1: time there will be a level of weariness and there
Speaker 1: will be the next big story and it could be
Speaker 1: coming out of Asia or the Middle East or who knows. Right,
Speaker 1: there's always that unfrictability, and I worry that people are
Speaker 1: going to be weary and tired, and that's what Vladimir
Speaker 1: Putin is also counting on. I think that the media
Speaker 1: also needs to focus on the fact that the not
Speaker 1: only is there, of course, the tragic loss of life
Speaker 1: in Ukraine, there will be decades of incredible dislocation in
Speaker 1: that country from the psychological effects as well of being
Speaker 1: at war. From a market's perspective, obviously a lot less
Speaker 1: important than the human tool, but the markets are also
Speaker 1: going to feel the volatility for for time to come.
Speaker 1: We're seeing a lot of action and medals. Of course,
Speaker 1: we're seeing action uh In in the spreads, but this
Speaker 1: is there's going to be a contagion effect in emerging markets,
Speaker 1: A contagion effect and emerging markets, we've been trying to
Speaker 1: game out at the potential contagion effect for big banks.
Speaker 1: We've seen that certainly in the price action in European institutions.
Speaker 1: How do you assess the potential risk at a time
Speaker 1: where it's not just the operations in Russia with the
Speaker 1: likes of Goldman, Sachs and JP Morgan exiting the region,
Speaker 1: but also all of the instruments tied to it, and
Speaker 1: then all of the instruments tied to the commodities that
Speaker 1: are significantly affected. How are you going about giving your
Speaker 1: fed experience gaming that out. Yeah, that's a great point,
Speaker 1: and I'm glad that you're reminding you of viewers of it.
Speaker 1: From a credit perspective, American banks have very very little
Speaker 1: risks with Russia. If you look at Goldman Sacks announcement
Speaker 1: that it's pulling out, you know, less than one percent
Speaker 1: of our its entire assets are in Russia. JP Morgan
Speaker 1: I happen to be working JP Morgan when it was
Speaker 1: first getting into Russian markets back in the in the
Speaker 1: mid nineties, tremendously exciting period. But the assets as a
Speaker 1: percent of all of the over trillion dollar asset based
Speaker 1: for JP Morgan is very little. So from a credit perspective,
Speaker 1: the risk is low. The market risk, however, is much higher.
Speaker 1: You have all kinds of commodity linked bonds, you have
Speaker 1: securitizations that are also based on Russian assets, You have
Speaker 1: foreign exchange portfolios, and then you have, of course the
Speaker 1: fact that you have all kinds of countries like Street Lanka,
Speaker 1: the former uh f SU, you know, the former Soviet
Speaker 1: Union countries. You have some in Latin America that are
Speaker 1: very interconnected to exports and imports with Russia, not to
Speaker 1: mention Africa of course, So that's really where I worry
Speaker 1: that some of that spillover is going to happen more
Speaker 1: from a market risk perspective rather than a counterparty a
Speaker 1: credit risk perspective. Are there specific banks Myra that you're
Speaker 1: keeping your eye on in terms of this risk expressing
Speaker 1: itself in a more concentrated fashion. Yes, I think definitely Socitation,
Speaker 1: Moral and UNI Credit from Italy. Those two banks are
Speaker 1: much much more supposed to Russia from a credit perspective,
Speaker 1: and so then of course there's also the market risk perspective.
Speaker 1: Of course, City Bank, Goldman socks JP Morgan. Because they
Speaker 1: are the largest trading houses, You're still going to see
Speaker 1: some volatility in their trading portfolios. And it's not just
Speaker 1: going to be Russia on Ukraine. It's going to be
Speaker 1: all of the enormous emerging market portfolios that they trade. Mayra,
Speaker 1: thank you so much. Too short of visit, will do
Speaker 1: it again very soon. Mayro Rodriguez Va Derris, thank you
Speaker 1: so much for the m r V. This is the
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Speaker 1: Tom keene In. This is Bloomberg