Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferroll and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg Terminal. The Churchill States
Speaker 1: was a British protectorate that became the United Arab Emirates
Speaker 1: and the families of the United Arab Emirates came together
Speaker 1: with the power of Abu Dhabi and their oil to
Speaker 1: control a large part of the market and culturally to
Speaker 1: be a huge part of the Arabian peninsula. So he'll
Speaker 1: Ben Mohammed al Missouri joins us right now. He is
Speaker 1: Energy Minister for the United Arab Emirates, and I'm honored
Speaker 1: to say from one of our most prestigious petroleum engineering
Speaker 1: schools the universe, you have Tulsa. He is hugely qualified
Speaker 1: to speak on his these matters. Ministers, thank you so
Speaker 1: much for joining Bloomberg Surveillance this morning. I'd like to
Speaker 1: know the power did ascendant United Arab Emirates has right
Speaker 1: now over Russia. Explained the dialogue explained the change in
Speaker 1: the relationship of you A with Russia in the last
Speaker 1: week's Well, it's great to be with you and to
Speaker 1: address your audiences. Um. First of all, you A, as
Speaker 1: you know, is a member of an alliance called Open Plus.
Speaker 1: That alliance since formed, have been doing a great job,
Speaker 1: in my view, balancing the market, balancing the supply and demand.
Speaker 1: And we we have a history within that alliance and
Speaker 1: we've been through wars. We've been member countries, been through wars,
Speaker 1: been through confort been through sanctions. Some of the members,
Speaker 1: as you know, we're on and Venezuela. But something we
Speaker 1: always do and that's almost a law in the way
Speaker 1: that we work. We have one objective only, which is
Speaker 1: trying to maintain the supply to the market and ensure
Speaker 1: that that supply is affordable. Nowadays when the new politics
Speaker 1: heads and we also the price is going higher, and
Speaker 1: we are increasing the production gradually according to a plan,
Speaker 1: but we cannot under any circumstances see a replacement for
Speaker 1: ten percent of the world production that's from oil gas
Speaker 1: as well. So I don't think practically if we bring
Speaker 1: politics into the organization we can help the consumers would
Speaker 1: start to help the consumers. Whatever you say that, sir,
Speaker 1: but very importantly, and this is your public service to
Speaker 1: desired family as well. Movebadalla and others within Abu Dhabi
Speaker 1: are considering their Russian businesses. Should the United Arab Emirates
Speaker 1: provide sanctions of some form, formal or informal to Mr
Speaker 1: Putin and Russia. Well, I'm not going to talk about
Speaker 1: the politics. I'm here to tell you about the market.
Speaker 1: I'm here to tell you what can we do to
Speaker 1: ensure that the consumers in the US and Europe and
Speaker 1: elsewhere are getting an affordable supply of hydrocarbon? And in
Speaker 1: order for us to do that, we have to use
Speaker 1: every battle that is available. If you if someone is
Speaker 1: asking us to let go of ten percent, then we
Speaker 1: are asking we're telling the consumers that we are going
Speaker 1: to increase the prices higher, and that is something we
Speaker 1: cannot be part of. We have to be we have
Speaker 1: to be wise in what we are asking for. Excuse me, minister,
Speaker 1: I am wondering you keep saying it's important to have
Speaker 1: affordable gas, affordable crude. What's affordable? What barrel? Is sort
Speaker 1: of the line in the sand when it comes to
Speaker 1: a price point for you, well, the price is a
Speaker 1: result and the balance between the supply and demand is
Speaker 1: that's that's where where we are worth argeting that we
Speaker 1: had the five years the five years average, but you know,
Speaker 1: we do our best and the world six months ago
Speaker 1: have convened in COPI and asked us and asked the
Speaker 1: the financial institutions to limit the the financing of new
Speaker 1: oil and gas projects and that and now six months
Speaker 1: after that they are asking some more. Oyal that does
Speaker 1: not go hand in hand. We need now to put
Speaker 1: a strategy and we need to come up with the
Speaker 1: resources to find a new new new battles. The loss
Speaker 1: in the group more than a million battle Minister, you
Speaker 1: raise such an interesting point about the idea that there's
Speaker 1: been a lack of investment which has caused a lack
Speaker 1: of production in this market, which is the reason why
Speaker 1: people say it's so tight. Given that backdrop is the
Speaker 1: level of the price at which there is demand destruction,
Speaker 1: that supply demand push and pull a lot higher than
Speaker 1: it's that it used to be for OPAC, in other words,
Speaker 1: is a hundred dollars a barrel much more sustainable over
Speaker 1: a longer term for you, based on the lack of
Speaker 1: production and a lack of investment. Well, we always look
Speaker 1: at the consumers and we all know that the current
Speaker 1: prices today are not comfortable to many countries and they
Speaker 1: they we need to get the prices to something that
Speaker 1: is reasonable. What is that price level? I think the
Speaker 1: market will dictate that. It's the balance between the supply
Speaker 1: and demand. So if we put more resources, we can
Speaker 1: bring more oil and we can sustain that oil for
Speaker 1: years to come. As you know, where the world is
Speaker 1: almost consuming a hundred million barrels a day every year,
Speaker 1: we lose eight millions of that and then his investment
Speaker 1: who's investing. Very limited countries are investing, or our afford
Speaker 1: to invest because we've been into a rollercoaster from seeing
Speaker 1: at twenty dollars oil to a hundred hundred plus today.
Speaker 1: So it is not encouraging investments. And many countries and
Speaker 1: shareholders have been to have been telling the companies, the
Speaker 1: IOSS who are reliable partners, and the shale oil producers
Speaker 1: as well, we're not going to give you the resources
Speaker 1: to to grow your production. That is troublesome when you
Speaker 1: are hit with a geo political conflict like we are
Speaker 1: having today. So what we need to do we need
Speaker 1: to get our acts together. You will do whatever we
Speaker 1: can as an open plus, but we need the financial markets.
Speaker 1: We need the lenders to start easing on financing oil
Speaker 1: and gas project so we can bring more battles in
Speaker 1: the future. Minister, if you're taking this so seriously, why
Speaker 1: was the OPEC plus meeting this month thirteen minutes long? Well,
Speaker 1: we we we are meeting in a few days and
Speaker 1: we are looking at the market. That was question. Just
Speaker 1: to go back to the meeting early this month, it
Speaker 1: was thirteen minutes long. This is one of the biggest
Speaker 1: energy crisis we've seen it a long long time, and
Speaker 1: you had a gathering that lasted thirteen minutes. Why should
Speaker 1: we take what you're doing seriously if you only meet
Speaker 1: for thirteen minutes. Well, there, when we meet, we look, well,
Speaker 1: we look at the nons and NaNs and uh and
Speaker 1: there are lots of unknowns at that meeting, including how
Speaker 1: many battles are we're going to miss. And another thing
Speaker 1: is is the deal closed with Iran, which is a
Speaker 1: major partner and producer in in into the alliance, and
Speaker 1: how many battles of the stone capacity going to come
Speaker 1: to the market. All of these things are unknown to us,
Speaker 1: so it's very difficult to come and and make other
Speaker 1: than the plans. So we increased the four hundred thousand
Speaker 1: and that's what we have agreed to do earlier. Minister,
Speaker 1: I am fascinated by the view east from Dubai and
Speaker 1: Abu Dhabt India. With all of your remit for the
Speaker 1: Zayd family, can you please explain the India response to
Speaker 1: this war in Ukraine. There's such an interesting relationship between
Speaker 1: the United Arab Emirates in the India. Please explain to
Speaker 1: us the India approach that you see. Well, many many
Speaker 1: countries have have purchased from there, looked at at opportunities
Speaker 1: and some have seen a discount and acted on it.
Speaker 1: And I think I think that's the the the southern
Speaker 1: right decisions of these countries. We don't have an oil
Speaker 1: and gas sanctions or Russians on on Russian oil and gas,
Speaker 1: so I think many countries have elected to go and
Speaker 1: and purchase because there is there has been a discount,
Speaker 1: and I think that's that's what we saw in the
Speaker 1: news if if if that's what you mean, and many
Speaker 1: others are going to do the same. So thinking of
Speaker 1: squeezing barrels outside the market. When a discount is there
Speaker 1: is just illusional. In my view, countries are going to
Speaker 1: go and buy the cheaper available crude effort fits their refineries. Minister,
Speaker 1: we have to leave it there. Thank you very much
Speaker 1: for betting with us this morning. The u A a
Speaker 1: energy minister on some of the big issues in the
Speaker 1: energy markets right now. We now adapt with David Malpass.
Speaker 1: He is President of the World Bank, and I know
Speaker 1: he's laughing at me because he knows I really want
Speaker 1: to quiz him on the end of valuation dynamics, but
Speaker 1: that would be inappropriate this morning with the President of
Speaker 1: the World Bank, Mr Malpass, thank you for joining. I
Speaker 1: want to cut to the chase, David, with wheat down
Speaker 1: from the panic peaks. If you shift at the World
Speaker 1: Bank to aid for whatever ends up in Ukraine, how
Speaker 1: will you affect that process? Hi? Hi Tom. It's a
Speaker 1: worldwide problem. So that with the prospect of wheat shortages
Speaker 1: drove up the price, but the markets are really adjusting some.
Speaker 1: The World Bank puts a lot of money into food aid,
Speaker 1: which is one of the crises facing poor people. We
Speaker 1: we do seventeen billion dollars per year UH in various
Speaker 1: forms of food support. One of the critical things for
Speaker 1: people UH in poor countries is that there they have
Speaker 1: targeted support meaning UH not subsidies that that support everyone
Speaker 1: uh and are costly, but can you target it towards
Speaker 1: the people that need it the most. As we look
Speaker 1: at Ukraine, then we're we put in a lot of
Speaker 1: money already. We were able to disperse in the in
Speaker 1: recent weeks over half a billion dollars, which is very
Speaker 1: fast aid that was much needed by the government at
Speaker 1: the here at the at the beginning of the or
Speaker 1: early in the in in the war. And I'm hopeful
Speaker 1: the headlines that you were you were just giving sound optimistic. Thanks, David,
Speaker 1: I am absolutely fascinated. I say this with great respect
Speaker 1: for the institution. How the World Bank treats Russia moments
Speaker 1: ago Johnson and Johnson with further sanctions as many of you,
Speaker 1: I'm sure I heard in the Bloomberg World Bloomberg making
Speaker 1: decisions in the last forty eight hours on the use
Speaker 1: of our terminal within Russia. David mel Pass, how does
Speaker 1: the World Bank address as sanctioned Russia around your usual mandates.
Speaker 1: Russia is a shareholder of the World Bank and participates
Speaker 1: in board discussions, but we stopped lending to them in
Speaker 1: teen after the Crimea invasion and we've suspended all operations
Speaker 1: and programs UH in Russia and in Belarus. UH. In
Speaker 1: the current environment are people UM Many people have come
Speaker 1: out of Russia UH, and so that's not so much
Speaker 1: an issue for us. The bigger issue is building the
Speaker 1: response for not only Ukraine but also people the refugees
Speaker 1: in the Eastern Europe. How do you build a response, David,
Speaker 1: when you do have these constraints on prices, when you
Speaker 1: do see to Tom's point, we still is incredibly elevated.
Speaker 1: You have seen some of the farming of fields in
Speaker 1: Ukraine decimated. Farmers can't get out there. How much is
Speaker 1: this going to disrupt frankly, your ability to help and
Speaker 1: what you think should be priced into the market. The
Speaker 1: critical is that supply increase outside of of Russia and
Speaker 1: even and of Ukraine. Ukraine may have some comeback in crops,
Speaker 1: but they need to need to have fertilizer and seeds
Speaker 1: and meet the planting cycle. So critical variable for the
Speaker 1: world is how responsive is supply elsewhere. That gets into UH,
Speaker 1: the the UH, the subsidies that are being done that
Speaker 1: sometimes stop people farmers from from producing and increasing their output.
Speaker 1: So that's one. And then as far as the refugees,
Speaker 1: we have a great deal of contact with the other
Speaker 1: agencies that along with the World Bank are responding to
Speaker 1: two refugees in Poland, in Moldova, UH, in Romania, UM,
Speaker 1: and we have programs in each of those that are
Speaker 1: directly UH engaging with the refugees and helping the European
Speaker 1: agencies and the national agencies that are helping those people.
Speaker 1: We hope that your efforts are successful. David, we were
Speaker 1: talking about what this changes if this ceasefire does come
Speaker 1: to fruition, if this is real coming to the table
Speaker 1: on both sides with Ukraine and Russia. How much does
Speaker 1: that change your outlook? How much of an improvement versus
Speaker 1: just removing some of the worst tail risks does this
Speaker 1: present for you? Well, I was watching your market indicators
Speaker 1: this morning, so you were showing the decline in oil prices.
Speaker 1: That helps. I was just in Senegal and Morocco. One
Speaker 1: of the burdens on countries that are that are facing UH,
Speaker 1: that are facing fragility in the region. You know, in
Speaker 1: North Africa, big problem is the weapons inflow coming from
Speaker 1: Europe through Libya into North Africa into Islamic Uh fundamentalism
Speaker 1: that even this morning there was a bombing in Nigeria.
Speaker 1: These are big problems. And on top of that, then
Speaker 1: the price of diesel fuel goes up and of of
Speaker 1: wheat goes up. So the the best response from the
Speaker 1: world can be more production and market access. For Senegal,
Speaker 1: the most important thing in the world really is if
Speaker 1: they were able to where if they were allowed to
Speaker 1: to ship peanuts to the United States right now their
Speaker 1: biggest customers China advised some four hundred thousand tons per year,
Speaker 1: and uh, the the US not because we have so
Speaker 1: many barriers. Also, you know, the ethanol subsidies in the
Speaker 1: US are so punishingly expensive that it distorts common agricultural
Speaker 1: policy in Europe. I just want to make the point
Speaker 1: that there's a lot that the advanced economies can do
Speaker 1: to allow people to sell to those markets and ethanol.
Speaker 1: There there's a David mal Pass we know, we love
Speaker 1: and know from another time in place Mr male Pass.
Speaker 1: One final uh comment, if you will, you have a
Speaker 1: staff that is world class, including Dr Pangestu from Indonesia.
Speaker 1: Marie al capangestu is she speaks of resiliency and food.
Speaker 1: How do you bring food resiliency to the planting season
Speaker 1: of Ukraine. Uh So fertilizer from western Europe would help.
Speaker 1: You know they've been cut off from Belarus. But I
Speaker 1: think cessation of the of the violence is the starting
Speaker 1: point the You know, farmers are resilient by nature. They work,
Speaker 1: they work their tails off and they grow a lot
Speaker 1: for the world, Ukrainian farmers included. So you have to
Speaker 1: stop the war, uh and then quickly provide them enough
Speaker 1: funding for for for seeds and for the fertilizer. Uh
Speaker 1: that I think those steps can't could still be taken
Speaker 1: here in March mon pass thank you not evel conversation
Speaker 1: set and a Tommy wants to thanks for reacting to
Speaker 1: that breaking news to have amount pass that the president
Speaker 1: of the World Bank. There are moments John and Lisa
Speaker 1: of privilege at Bloomberg, and one of them was a
Speaker 1: good long decade or more so ago in a small
Speaker 1: room with Thomas Shelling, the giant of thinking about war,
Speaker 1: the Nobel Laureate, where he sat and I sat mesmerized.
Speaker 1: Is Professor Shelling spoke about how you end wars. Michael
Speaker 1: Kimidge and Leona Fix have taken this to a new
Speaker 1: wonderful extreme in Foreign Affairs magazine. Leona Fixes, with the
Speaker 1: Corbel Foundation in Berlin, were honored that she could join
Speaker 1: us this morning. Leon. I love how you frame if
Speaker 1: Russia wins, if Russia loses. Professor Shelling would suggest, the
Speaker 1: only way to end the war is exhaustion. Do we
Speaker 1: need an exhausted putin? What we certainly need is we
Speaker 1: need a sustainable piece and not a provisional piece. And
Speaker 1: despite the optimistic news of today, this will be the
Speaker 1: main challenge for Ukraine moving ahead in negotiations. So basically,
Speaker 1: how to prevent that any negotiated agreement right now with
Speaker 1: Russia will only leave Ukraine weaker, especially in military terms,
Speaker 1: and could encourage Russia to come back in a couple
Speaker 1: of months or a a couple of years to finish the
Speaker 1: business they've started. And that's the crucial, the crucial point.
Speaker 1: How to prevent an unjust piece, as sit Settle said
Speaker 1: um and prevent also a continuation of a very cool
Speaker 1: war that we've seen so far. If Russia wins or
Speaker 1: Russia loses, is the equal outcome a partition of Ukraine.
Speaker 1: I think the challenge now is that we don't see
Speaker 1: this clear cut options anymore. So Russia is too weak
Speaker 1: to win, but at the same time they are too
Speaker 1: strong to loose, and that makes the situation right now
Speaker 1: so difficult to navigate UM and the Ukrainians have put
Speaker 1: up a formidable resistance as we've seen the last weeks,
Speaker 1: but again they are also too weak to finally, UM
Speaker 1: make Russia withdraw from all parts of Ukraine. So the
Speaker 1: question of territorial concessions that you just raised will be
Speaker 1: a crucial one in negotiations. And for President Zelenski, who
Speaker 1: has been able to gather Ukrainians behind his brave and
Speaker 1: courageous stands UM, he has a little room for compromise
Speaker 1: there because there's no appetite whatsoever to give up on
Speaker 1: Crimea on other parts of Ukraine. But also from the
Speaker 1: Russian side, they will want to leave negotiations with successes
Speaker 1: that they can sell at home, and the minimum success
Speaker 1: from a Russian perspective would be to have liberated quote
Speaker 1: quote um di don bust in eastern Ukraine. Leanna, so
Speaker 1: that we can understand the points of leverage here and
Speaker 1: what exactly brought both sides to the table at the
Speaker 1: place where they are now. Was it the sanctions or
Speaker 1: was it really the resistance that has brought Vladimir Putin
Speaker 1: to a more compromising stance. Absolutely both of it, and
Speaker 1: I want to underline this, without Ukrainian Ukraine's resistance, we
Speaker 1: would not have seen this incredible sanctions package, also because
Speaker 1: there was such an international outcry in the European public,
Speaker 1: in the US public. So what helps Ukraine is to
Speaker 1: strengthen its negotiation position by weakening Russia's position and putting
Speaker 1: further pressure on Russia to not put out maximalist positions
Speaker 1: in negotiations with Ukraine, but to be open for compromises.
Speaker 1: So this is the moment where we have to keep
Speaker 1: up pressure on Russia, and only if Ukraine asks us
Speaker 1: to lose some of the pressure to think about sanctions,
Speaker 1: then we can consider these options. Our main aim should
Speaker 1: be how can we help Ukraine to negotiate a sustainable piece,
Speaker 1: and that should be the goal of all Western policy
Speaker 1: at the moment, Leona. Then it goes to this question
Speaker 1: of what the West response should be in order to
Speaker 1: get Vladimir Putin to continue negotiating and to continue to
Speaker 1: make good how much will there be discussions about loosening
Speaker 1: some of the sanctions in response to a certain period
Speaker 1: of ceasefire. Is that feasible or does that seem wrong
Speaker 1: considering the fact that we're still talking about war crimes.
Speaker 1: This is a discussion that we might have at some point,
Speaker 1: but this is certainly not the discussion that we should
Speaker 1: have right now. We've seen in the past that Russian
Speaker 1: words have always very often not being followed up by
Speaker 1: rushington deeds. So until we really see some credible Russian deeds,
Speaker 1: some credible withdraw, some signals that Russia is seriously willing
Speaker 1: to make concessions and to negotiate, we should not waste
Speaker 1: the issue of sanctions yet. Only if we see that
Speaker 1: there's a credible path ahead and Ukraine asked us to
Speaker 1: do so, then we should again put our efforts into
Speaker 1: the service of Ukraine, even if this might be a
Speaker 1: tough decision to make. As a broader strategic goal is
Speaker 1: certainly to weaken Russia in general, to prevent that Russia
Speaker 1: has further ambitions towards you pen security. But at the moment,
Speaker 1: it really is about keeping up the pressure to help
Speaker 1: Ukraine Leona fix We started with Thomas Shelling, and of
Speaker 1: course he defined our study of deterrence in nuclear threat
Speaker 1: is putin a nuclear threat. He is certainly willing to
Speaker 1: use nuclear coersion as an instrument. Um he has a
Speaker 1: lot many more conventional means at his disposal before he
Speaker 1: would actually consider the nuclear option. We've learned from the
Speaker 1: past that we should never say never when it comes
Speaker 1: to Putine and to Russia. But again this is something
Speaker 1: that at the moment he uses to curse the West
Speaker 1: to deter the West from further support for Ukraine, and
Speaker 1: that is something where the West should not be intimidated
Speaker 1: because especially military support for Ukraine, even if there is
Speaker 1: a negotiated outcome, will be incredibly important again because Ukraine
Speaker 1: should not leave these negotiations weaker than they've entered it
Speaker 1: and be at risk of another Russian aggression in a
Speaker 1: couple of months or or years. Perhaps so not being intimidated,
Speaker 1: but at the same time being cool headed as the
Speaker 1: US President has been when he did not raise the
Speaker 1: alert levels of US nuclear forces. That is at the moment,
Speaker 1: the right strategy, but obviously not to take off anything
Speaker 1: from the list because the Russian press that has proved
Speaker 1: in the past to do, um to do things that
Speaker 1: we've not expected him to do. Leanna Fix thank you
Speaker 1: with the Coba Foundation and fixed income on the Mystery.
Speaker 1: Serradorajapa joins us now with Society General, where they've got
Speaker 1: just terrific dynamic analysis. Sobrato, the dynamics of equities is simple,
Speaker 1: down we go a vix of thirty six, boom, up
Speaker 1: we go with a huge growth rally. Is there any
Speaker 1: presumption of price down in fixed income and the idea
Speaker 1: that we get a hall mary of lower yield and
Speaker 1: higher bond prices. Um. I think we're starting to reach
Speaker 1: some key resistance points. At two fifteen tents, for instance,
Speaker 1: is going to be a level that I'm going to
Speaker 1: be watching to see if tenny years can actually break
Speaker 1: through that level. But to me, really all the focuses
Speaker 1: on the curve, as you guys have been discussing them
Speaker 1: in the two times part of the curve is very
Speaker 1: very close to voting. It could actually invert by the
Speaker 1: end of this this week. I was thinking you could
Speaker 1: invert in the first half. It looks like it's gonna
Speaker 1: happen a lot sooner. So that's really where the focus
Speaker 1: is right now. The nuance to pros and the derivative
Speaker 1: expertise of society general is the idea of a flat
Speaker 1: curve saying yield twos intense or a true inversion or
Speaker 1: a depth of inversion. Do you predict a certain negative
Speaker 1: amount which gives us that depth of inversion which signals recession.
Speaker 1: So I don't think that there's any sort of a
Speaker 1: magic number that we're watching. What typically tends to happen
Speaker 1: is when the curve gets flat or inverted, you tend
Speaker 1: to see that in about a year's time or years lag,
Speaker 1: I should say, you start seeing a meaningful store around
Speaker 1: in growth. And so you know, the the inversion starts,
Speaker 1: you know, first in the back of the curve typically
Speaker 1: and then as we progress it starts moving towards the
Speaker 1: front of the curve. Now you see the two stands
Speaker 1: part of the curve chare Powell is looking at the
Speaker 1: three montenure part of the of the curve and saying
Speaker 1: that part of the curve is not avert, so we're
Speaker 1: not concerned. But the two stands part of the curve
Speaker 1: is saying that the tent that the three month part
Speaker 1: of the curve is going to start. Three month rates
Speaker 1: are gonna start moving higher, and that the that the
Speaker 1: next sort of progression is going to be for the
Speaker 1: front end, uh you front front part of the yield
Speaker 1: curve to start to to flatten. Regardless, I would say,
Speaker 1: within a year's time, you're gonna see, uh that the
Speaker 1: impact of the flatter curve on the broader economy and
Speaker 1: that typically what you know, tends to lead to a
Speaker 1: surround in growth. So about we had on Steve off
Speaker 1: of Federated earlier and he said, when he looks at
Speaker 1: the yield curve, he sees a bond market that's pricing
Speaker 1: in a soft landing. Do you agree? It's hard to know,
Speaker 1: because you know, I think the barn market, the reaction
Speaker 1: bond market is a lot more dire than what you're
Speaker 1: seeing in all the other markets, right like you like
Speaker 1: you're you're discussing earlier financial conditions broadly speaking, are still
Speaker 1: very very accommodative. So really what the bond market seems
Speaker 1: to be a little bit ahead of itself in expressing
Speaker 1: concern about the the the health of the economy, if
Speaker 1: you will. And that's when it gets really really tricky,
Speaker 1: because it's going to be very very hard for the
Speaker 1: FED to be able to raise rates from from the
Speaker 1: zero lower bound to two and fifty you know, basis
Speaker 1: points in a matter of you know, six to eight
Speaker 1: months and not have the economy, um, you know, have
Speaker 1: some sort of hard landing. And that's really where it
Speaker 1: gets very tricky. Um. And that's why I think it's
Speaker 1: it's it's really hard to know. Do you think, Subadre
Speaker 1: that what we're seeing in risk markets and I'm not
Speaker 1: just talking about equities but also in riskier credit that
Speaker 1: basically the bet is that the FED will have to
Speaker 1: backtrack on some of the hawkishness, that they won't be
Speaker 1: able to go that fast, or else they will be
Speaker 1: able to and the economy will have accelerated to enough
Speaker 1: of a degree that it will be able to hold in.
Speaker 1: And basically, are they praising in something that seems increasingly impossible? Yeah,
Speaker 1: I mean I think I would agree with that view
Speaker 1: in the sense that the FED is very, very eager
Speaker 1: to raise rates very fast at least, you know, front
Speaker 1: load these rate hikes because you know they can. The
Speaker 1: unemployment numbers are are very very low, the economy generally
Speaker 1: speaking is very strong. The growth trajectory for this year
Speaker 1: is very strong, so they're very very eager to frontload
Speaker 1: these these rate hikes. You know, we'll have to see
Speaker 1: what happens in the latter half of the year after
Speaker 1: they say deliver a fifty basis point at the main
Speaker 1: meeting and perhaps even at the June meeting and then
Speaker 1: they announced the runoff in the bounty. You know, we'll
Speaker 1: have to see how the market reacts to the market
Speaker 1: still holds up, then they could probably raise rates once
Speaker 1: a meeting for the remainder of the year. If not,
Speaker 1: they're going to have to pause, you know, sometime in
Speaker 1: the latter half of this year, or perhaps even early
Speaker 1: next year. So I think the Fed is very much
Speaker 1: keen on front loading these rate hikes. Whether they can
Speaker 1: keep that sustained pace of of hiking this year and
Speaker 1: well into each next year is is yet to be seen.
Speaker 1: We are not there yet. We are a little bit
Speaker 1: away to three digits from a positive yield on the
Speaker 1: German two year piece. What does that signal? But you know,
Speaker 1: the world is getting to a non negative you know,
Speaker 1: bond yield environment because of the inflation dynamics. So inflation
Speaker 1: is not just a US story, it's it's it's a
Speaker 1: global story. You're starting to see even you know Japanese,
Speaker 1: you know j g B, you'll start to hit up
Speaker 1: against yield curve control restrictions there. So I think that
Speaker 1: the general trend, and especially in Europe, the inflation dynamics
Speaker 1: are a lot more pronounced because of their dependence on
Speaker 1: Russian oil, and they have i would say, a greater
Speaker 1: propensity to or to go into a recession because of
Speaker 1: their dependence on on Russian oil and commodity prices in general.
Speaker 1: The US in some respects is much more insulated because
Speaker 1: we're energy independent. So I think the move now reflects,
Speaker 1: you know, the reality of the inflation adnamics and the
Speaker 1: global inflation dyna mixed with you know, with bonds getting
Speaker 1: out of negative gentry across you know, across the world. Santra,
Speaker 1: thank you sevent for that of silk Chin right now
Speaker 1: on what this devolves down to for investment branch, Shoot joins,
Speaker 1: his chief investment strategist at Northwestern Mutual. We're short term,
Speaker 1: as I'm going to suggest three years, Brent. The emotions
Speaker 1: of the moment, the uncertainty of the moment, causes confusion
Speaker 1: for anyone looking long term. How do you adapt well?
Speaker 1: I think Jonathan of the nail on the head and
Speaker 1: his opening when he talked about this being a positive
Speaker 1: but certainly a lot of uncertainty. But I think the
Speaker 1: most important part is it's a little bit less than
Speaker 1: it was yesterday, and so to me, that is why
Speaker 1: the markets moving higher, and that's a positive in the
Speaker 1: near term. In the longer term, I still think you
Speaker 1: have room for the market to move higher. Um certainly
Speaker 1: the rise and oil prices have put upward pressure on inflation.
Speaker 1: The FED could be raising rights here, but I think
Speaker 1: all in all, the economy is still in a decent place,
Speaker 1: and I think that means that we have room to
Speaker 1: move higher in the near to intermediate term. Bran, do
Speaker 1: you think that, frankly, if we do get some sort
Speaker 1: of resolution or at least not a worsening in this situation,
Speaker 1: that gives the FED the green light to go as
Speaker 1: aggressively as they can. Yeah, I don't know. I mean,
Speaker 1: I guess to me, I think the FED is going
Speaker 1: to try to tighten as much as they need to
Speaker 1: to get the inflation narrative under control just a bit.
Speaker 1: And certainly they've done that with their words. We'll see
Speaker 1: if their actions follow. I still don't believe the FED
Speaker 1: intends to cause any sort of economic recession like overtightening.
Speaker 1: They want to tighten just enough to actually, um, you know,
Speaker 1: keep inflation under control and to keep expectations under control,
Speaker 1: which has been lost in all this. The five year
Speaker 1: five year forward break even is at two forty. That
Speaker 1: is hardly out of control. This isn't This is two
Speaker 1: thousand and twenty two, and to me, that doesn't mean
Speaker 1: the FED. That means the FED doesn't have to overdo it.
Speaker 1: Inflation expectations are not embedded yet and it's not permanent. Meanwhile,
Speaker 1: I was looking at this, uh, this dashboard that Gino
Speaker 1: Martin Adams of Bloomberg Intelligence put out. We're basically only
Speaker 1: ten out of fifteen indicators were flashing yellow or red
Speaker 1: and only five remaining are green, including relative earnings per
Speaker 1: share growth. However, all of these flashing signs, which are
Speaker 1: you actually watching to see whether you should change some
Speaker 1: of your constructive view? Yeah, I think people are focused
Speaker 1: on the yield curve first and foremost. Into me, I
Speaker 1: would take that with a grain of salt. I mean,
Speaker 1: let's think about the tenure Treasury and think about what
Speaker 1: has actually happened with quantitative easing over the past few years,
Speaker 1: and how distorted the term premium is probably on the
Speaker 1: tenure treasury, And so to me, I would take that
Speaker 1: with a grain of salt. Certainly it shows that we
Speaker 1: are aging in the cycle. We are getting further along,
Speaker 1: there is no doubt about that. But a recession could
Speaker 1: still be, you know, two years away, and during that
Speaker 1: time periode, the market can move higher. And I guess
Speaker 1: can kind of put this into numbers because I noticed
Speaker 1: the spread between the ten and two with somewhere around
Speaker 1: eight basis points. This morning, the spread between the ten
Speaker 1: and two year was eight point five basis points to positive.
Speaker 1: What happened after that, you didn't have a rescessant of
Speaker 1: two thousand and one, and you had one of the
Speaker 1: best equity markets in the history of this country. And
Speaker 1: so take it with a grain of salt and realize
Speaker 1: that it is one indicator. And overall, to me, the
Speaker 1: consumer is still in good shape, leading economic indicators are
Speaker 1: still rising, and corporations are still in good shape. And
Speaker 1: so I don't think our recession is imminent, and I
Speaker 1: think we still have him to run, Brent. We were
Speaker 1: weaned on the optimal portfolio some of us a little
Speaker 1: bit older know that price down, yield up can occur.
Speaker 1: It's called a bear market in the bond market. Great,
Speaker 1: does the efficient portfolio work here with bonds in retreat? Yes,
Speaker 1: But I think you need to think about it a
Speaker 1: little differently. And so people think about a sixty is
Speaker 1: just being the SMP in the bond market. We think
Speaker 1: about it as including commodities and gold, and so I
Speaker 1: think people have gotten a lesson in diversification over the
Speaker 1: past few months, and I think they're gonna continue to
Speaker 1: get one going forward. You need to own those as
Speaker 1: hedges against different economic environments, which is what we have seen.
Speaker 1: I think the SMP five hunded is still frankly expensive.
Speaker 1: You get better earnings growth right now, all else being equal,
Speaker 1: outside of the SMP five hundred at a cheaper price.
Speaker 1: And so I'm not suggesting investors run from that, but
Speaker 1: I still want to be in things that are cheap
Speaker 1: because I do think there's still upper pressure on the
Speaker 1: bond market and I think the economy has for the
Speaker 1: room to run. Hi Brent, thank you buddy for Bamida
Speaker 1: spread shitty of Northwestern Many Child. This is the Bloomberg
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Speaker 1: Tom Keene, and this is Bloomberg