Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: We begin the week with the US and around having
Speaker 2: reached an interim deal to end hostilities and reopened the straits.
Speaker 3: Of Hall news.
Speaker 2: You sent oil prices lower and sparctor relief rally across
Speaker 2: Asian markets. Officials from both countries sit to MEETNA in
Speaker 2: Switzerland on June the nineteenth, where the agreement will be formally.
Speaker 3: Everyone has discovered from the past six years that these big,
Speaker 3: one off, supposedly one off disruptions can happen with frequency.
Speaker 2: That's Bloomberg's Tracy Allyway. Tracy co hosts the Odd Lats
Speaker 2: podcast and she spends a lot of time looking at
Speaker 2: the long term impacts of geopolitics on the global economy.
Speaker 3: And so the lesson that everyone's been internalizing is that
Speaker 3: you need to build up stockpiles, you need to have
Speaker 3: independence in terms of your crucial supplies, You need to
Speaker 3: have additional capacity.
Speaker 2: And few places have shown the new need for independence
Speaker 2: and extra capacity more clearly than in Asia. Over the
Speaker 2: past few months, after the US and Israel went to
Speaker 2: war with Iran, the straight Up her Moose grounded to
Speaker 2: a halt, choking off supplies of virtually every major commodity,
Speaker 2: including one fifth of the world's oil. But I think
Speaker 2: a lot of great things are going to happen in
Speaker 2: the Middle East right now, and very importantly, the oil
Speaker 2: is plummeting down. At the G seven summit in France,
Speaker 2: President Trump touted a deal the US reached with Iran's
Speaker 2: regime over the weekend, which he says will reopen the
Speaker 2: Straight Up her Moose.
Speaker 3: Essentially, ships are starting to go out now. On Friday,
Speaker 3: it'll be completely opened.
Speaker 2: Across Asia, countries are welcoming the US Iran peace deal
Speaker 2: that would help to stabilize global energy prices and reopen
Speaker 2: a vital shipping route, but many are skeptical that will happen,
Speaker 2: and even if it does for Asia, that shift might
Speaker 2: be too little, too late.
Speaker 4: There is this brewing but not yet impacting food issue
Speaker 4: that will arise in Southeast Asia specifically.
Speaker 2: That's Bloomberg's Joe Wisenthal. He co hosts odd Lots with Tracy.
Speaker 4: The closure of the Strait of Hormuz is going to
Speaker 4: create a food stress in much of the world during
Speaker 4: the next planting season. And if there's food stress, people
Speaker 4: will be buying food and not random manufactured goods in
Speaker 4: China come that time, and so there may be an
Speaker 4: element where China is choosing to reduce its imports so
Speaker 4: that its customers of manufacturers have more capacity come next year.
Speaker 2: Welcome to the Big Take Asia from Bloomberg News. I'm
Speaker 2: wanh Today I'm sitting down with my colleagues Tracee Alloyway
Speaker 2: and Joe Wisenthal, co host of Bloomberg's Odd Lots podcast.
Speaker 2: We recorded this conversation just before news broke that Iran
Speaker 2: and the US may have struck a deal to reopen
Speaker 2: the Strait of Hormuse, and as you'll hear, this discussion
Speaker 2: is arguably just as relevant now as when we taped it.
Speaker 2: While the reopening of the strait would be a welcome relief,
Speaker 2: the structural shifts caused by the conflict have fundamentally changed
Speaker 2: businesses across Asia, and the resulting pressure on food and
Speaker 2: energy supplies and prices isn't going away anytime soon. On
Speaker 2: today's show, we dive into why Asia is feeling more
Speaker 2: economic pain from this conflict than Western nations and what
Speaker 2: the new normal looks like for the region and the
Speaker 2: rest of the world. While the details of the proposed
Speaker 2: new deal between the US and Iran remain unclear. Thing
Speaker 2: is certain. War in Iran and the virtual closure of
Speaker 2: the Strait of Vermouse have effectively slapped a war tax
Speaker 2: on vital products, and it's impacted every corner of the
Speaker 2: global economy. You've probably felt the pinch in one way
Speaker 2: or another, but its effects haven't been distributed evenly. Wealthy
Speaker 2: countries like the US and Japan have opted to drain
Speaker 2: their stockpiles of crude oil. In other corners of the world,
Speaker 2: governments are turning to demand destruction by encouraging industries and
Speaker 2: consumers to use less, but that risks slowing economic growth
Speaker 2: and triggering recession. It's a glaring disparity, and Bloomberg's Tracey
Speaker 2: Allyway says it highlights a structural vulnerability.
Speaker 3: They're often poorer countries. They don't have as big stockpiles
Speaker 3: of oil inventory. And the one thing we've seen developed
Speaker 3: countries do across the world is really start to dig
Speaker 3: into those stockpiles and release barrels in order to I
Speaker 3: guess cush and the higher prices and so for a
Speaker 3: poorer country, I think that's one of the reasons in
Speaker 3: Asia you're seeing the governments really focused on demand destruction
Speaker 3: rather than propping up prices. So you've had I think
Speaker 3: India was encouraging people not to go on flights. People
Speaker 3: are being urged not to drive to work, things like that.
Speaker 3: China is doing pretty much all the heavy lifting in
Speaker 3: terms of demand destruction, or like the bulk of it.
Speaker 3: So I saw a JP Morgan estimate I think saying
Speaker 3: that demand for oil from China had fallen like nine percent.
Speaker 3: I think that's one point five million barrels a day. Yeah,
Speaker 3: it's a pretty big deal. And again it stands in
Speaker 3: stark contrast to a lot of the developed nations like
Speaker 3: the US that are really digging into their stockpiles.
Speaker 2: You know, I don't know if you guys have noticed
Speaker 2: in your time here the prices at gas stations. Do
Speaker 2: you know how much gas in Hong Kong costs? Yeah,
Speaker 2: about thirty three Hong Kong dollars leader, which is its
Speaker 2: equivalent of about sixteen dollars per gallon.
Speaker 1: Wow.
Speaker 2: Right, that's up about fifteen percent since the Ran War began,
Speaker 2: and diesel prices have actually jumped like near fifty percent.
Speaker 2: And I wonder how does this stack up to what
Speaker 2: we've seen in the US. And I guess more importantly,
Speaker 2: how does that feed into inflationary pressures?
Speaker 4: I mean, if we had sixty dollars gasoline in the US,
Speaker 4: that we definitely that's.
Speaker 1: For sure.
Speaker 4: Clearly inflation is trending up in the US for a
Speaker 4: number of reasons.
Speaker 1: One of them is oil. And so you might say, well.
Speaker 4: You stripped that out because that goes into headline red
Speaker 4: and core inflation. But then when you think about like
Speaker 4: everything has oil or energy in it, especially because of
Speaker 4: transport costs, it just builds that upward pressure. Throw in
Speaker 4: all the data center spending, and the story is just
Speaker 4: like building heat and pressure on everything, and oil is just.
Speaker 1: Part of it.
Speaker 2: In some countries with limited resources, governments are left with
Speaker 2: little choice but to turn the lights off. But wealthier
Speaker 2: countries are playing a very different game. Instead of asking
Speaker 2: citizens to cut back, the countries who can afford it
Speaker 2: are spending heavily to absorb the sticker shock at the pump.
Speaker 2: Here in Hong Kong, the government is actually putting aside
Speaker 2: the equivalent of two hundred and thirty million US dollars
Speaker 2: in a subsidy program to help manage soaring fuel prices.
Speaker 2: It does seem like there's this imbalance in how the
Speaker 2: burden of the conflict is being carried. Right, You've got
Speaker 2: developed economies like Hong Kong and Germany able to afford
Speaker 2: these subsidies, while you've got emerging countries who literally can't
Speaker 2: keep the lights on. What do you guys make of
Speaker 2: that disparity? And I guess the question is is this
Speaker 2: something the US policymakers even think about.
Speaker 3: Probably not, to be honest. One of the interesting things
Speaker 3: here is to me is how long the US can
Speaker 3: actually offset the pain of higher prices. They've obviously been
Speaker 3: releasing a lot from the Strategic Petroleum Reserve. The question
Speaker 3: is how long can you actually keep doing it? And
Speaker 3: apparently the US is now getting pretty close to its
Speaker 3: operational minimum. So I think I think the minimum is
Speaker 3: like two hundred and fifty million barrels, and we're now at.
Speaker 4: Three hundred and forty nine million. Yeah, it is the lowest.
Speaker 4: We're back to the post COVID lowers.
Speaker 3: Yeah, that's right. So the issue in the US is
Speaker 3: like crunch time could come right, Like they're going to lose.
Speaker 2: Up buffer pretty soon. Yeah, And I think Asia does
Speaker 2: seem caught in this trap that really is not of
Speaker 2: its own making right. You've got interest rates that are
Speaker 2: rising globally, of course, driven by the war shocks and
Speaker 2: the AI investment boom centered in the US and the West.
Speaker 2: You've got the US dollar really strong right now. What
Speaker 2: do you think is impact of the US dollar strengthening
Speaker 2: on emerging Asian economies?
Speaker 3: Not good. So there's the outlook for economic growth, and
Speaker 3: there's the outlook for the fiscal side, let's say. And
Speaker 3: so if you're spending money to subsidize oil prices, and
Speaker 3: you're running through your stockpiles in some instances, then it
Speaker 3: becomes more expensive the longer it goes on. One of
Speaker 3: the theories I've seen for the falling gold price recently is
Speaker 3: that governments are selling our central banks are selling reserve
Speaker 3: assets in order to raise more foreign FX so that
Speaker 3: they can buy more oil at the higher prices. So
Speaker 3: it exacerbates foreign currency exposure for emerging markets and probably
Speaker 3: weakens their fiscal position in the future, and then in
Speaker 3: terms of economic growth. So obviously, if you can't get oil,
Speaker 3: if you can't get feedstock for plastics, that's pretty much
Speaker 3: in everything, and so you'll see less economic activity. But
Speaker 3: on the other hand, if we see some countries respond
Speaker 3: to higher oil prices by actually building out more clean
Speaker 3: energy capacity, selling more ev for instance. Then like that
Speaker 3: could be a little bit of an economic boost. And
Speaker 3: I'm not saying that it's enough to fully offset the impact,
Speaker 3: but like it's something at least.
Speaker 4: So, like, let's get back to the context of the question.
Speaker 4: It doesn't matter what the price of the dollar is.
Speaker 4: People are going to spend a crazy amount of money
Speaker 4: on memory chips from Korea.
Speaker 1: Period.
Speaker 4: The long could go up, the long could go down,
Speaker 4: it doesn't matter. We're going to be shipping a lot
Speaker 4: of dollars to Korea and Taiwan for key infrastructure for
Speaker 4: the AI build out. And so I think, yes, absolutely,
Speaker 4: like the strength of the dollar is real. But I
Speaker 4: think we're in this very odd moment where because the
Speaker 4: AI race feels existential, that the traditional macro signals that
Speaker 4: we would look at like rates and FX are being
Speaker 4: swamped by the spending that everyone has just chosen to
Speaker 4: make for existential reasons on so many aspects of AI.
Speaker 2: Yeah, and to your point, Asia is the backbone of
Speaker 2: the global AI ecosystem. Factories here produce the chips that
Speaker 2: power the AI revolution. But those factories rely heavily on
Speaker 2: energy and raw materials. Right, So what happens if there's
Speaker 2: ongoing uncertainty or disruption at the Strait of hormoose should
Speaker 2: we do helium?
Speaker 1: Yeah? I was gonna yeah, go for it.
Speaker 4: Now you start, well, I was just gonna say, like,
Speaker 4: both of our minds went to helium at the same time.
Speaker 4: So it's like this is pretty important in advanced semiconductor manufacturing.
Speaker 1: Helium. Please don't ask me exactly.
Speaker 4: Why, but it has to do something with like it's
Speaker 4: a ability to go down to incredibly cold temperatures, which
Speaker 4: is helpful in all kinds of different ways. But there
Speaker 4: is not a lot of elasticity in helium supply, and
Speaker 4: so if there's going to be like one link where
Speaker 4: the persistent closure of the Strait of hormoz might actually
Speaker 4: intersect with that, it would be if they truly run
Speaker 4: out of helium, and then you just really have a
Speaker 4: much harder time making chips.
Speaker 2: Now I want to shift to interest rates for a bit.
Speaker 2: Japan's wholesale inflation accelerated in May at its fastest pace
Speaker 2: in three years, and its producer price index also surged
Speaker 2: to six point three percent. Was quite high that puts
Speaker 2: a lot of pressure on the Bank of Japan to
Speaker 2: hike interest rates, and across Asia you are seeing countries
Speaker 2: raising their inflation projections and pushing interest rates higher. What
Speaker 2: do you think would be the broader impact of prolonged
Speaker 2: inflation across Asia? And what does it mean for US consumers?
Speaker 3: So the inflationary impact is there, right, and it's not
Speaker 3: even necessarily oil. It's also those petrochemicals which go into everything,
Speaker 3: And then the other thing in terms of inflation. Governments
Speaker 3: and companies around the world are learning that it's important
Speaker 3: to build up stockpiles, and it's important to build out
Speaker 3: your energy capacity, or your petrochemical capacity, or your chip's capacity,
Speaker 3: things like that. If you have everyone all at once
Speaker 3: trying to do this, that consumes resources, right, that is
Speaker 3: de facto inflationary. And I think that's probably the lesson
Speaker 3: we have collectively learned from the past few years, is
Speaker 3: that you don't want to be left high and dry
Speaker 3: if there's a big disruption, it is really important to
Speaker 3: have extra stuff, and extra stuff, you know, means higher prices.
Speaker 2: After the break. Why we may not yet have seen
Speaker 2: the full extent of damage caused by the closure of
Speaker 2: the Strait up Armouse, and how the fallout from the
Speaker 2: war is reshaping Asia's relationship with the rest of the world.
Speaker 2: The supply shock caused by the closure of the Strait
Speaker 2: of Hormuse is arguably the biggest ever, but by draining reserves,
Speaker 2: finding workarounds, and managing demand, governments have tried to shield
Speaker 2: their citizens from the pain or delaying it at least
Speaker 2: even if the strait does open this weekend. Bloomberg's Joe
Speaker 2: Wisenthal and Tracy Alloway say that pain might still be coming.
Speaker 2: Richer countries will be able to spend to ease it,
Speaker 2: but poorer countries in Asia don't have those resources, and
Speaker 2: that could spell trouble for everyone. You guys spoke with
Speaker 2: a former farmer, Lorkin Kelly on one of your recent episodes.
Speaker 5: The problem's going to arise in six months and twelve
Speaker 5: months time when their decisions be made today about do
Speaker 5: I plant that fiel Luis or do I reed more.
Speaker 5: Cattle pection and pharmac are gonna say no, we're not
Speaker 5: going to do that.
Speaker 2: You know, across Southeast Asia right now, farmers are now
Speaker 2: skipping this planting season because they can't afford the diesel
Speaker 2: for the tractors. They can't afford the diesel for the
Speaker 2: water pumps, right that they need to cultivate the crops,
Speaker 2: and some are actually choosing to leave crops rotting in
Speaker 2: the ground because they can't afford to harvest. I mean,
Speaker 2: that's huge, right.
Speaker 4: This is so, this is what I was saying earlier
Speaker 4: that perhaps one of the shoes that may be yet
Speaker 4: to drop is a food crisis in Asia.
Speaker 1: And it's perhaps the hierarchy of needs.
Speaker 4: Right, If you're struggling to buy food, you're not going
Speaker 4: to be buying electronics right from China whatever it else.
Speaker 4: And so perhaps one part of the logic for China
Speaker 4: to reduce its imports is to ease a little bit
Speaker 4: of that squeeze.
Speaker 1: But what I've heard, which is.
Speaker 4: That there is this brewing but not yet impacting food
Speaker 4: issue that will arise in Southeast Asia, specifically.
Speaker 3: When it comes to the impact of fertilizer. We're talking
Speaker 3: about longer timeframes because there are planting seasons, as you
Speaker 3: just mentioned. One historical anecdote that I learned from Atom
Speaker 3: two's is that apparently in ancient Roman times, emperors would
Speaker 3: try to time wars so that they weren't during the
Speaker 3: planting season so they wouldn't disrupt food supplies, and also
Speaker 3: so that farmers could actually go off and be soldiers.
Speaker 3: But clearly we seem to have forgotten that lesson. I
Speaker 3: want to stay on food for a bit.
Speaker 2: You know, in Thailand, I was there in bank Cotious
Speaker 2: a couple of weeks ago and talked to our colleagues there.
Speaker 2: I mean, they've done some really great reporting on how
Speaker 2: fishermen in Thailand are keeping their boats anchored because fuel
Speaker 2: eats up more than half of the cost of every trip.
Speaker 2: So you know, they basically can't raise the price of
Speaker 2: their catch, right, so they they're deciding not to go out.
Speaker 2: And I wonder to what extent should policymakers and leaders
Speaker 2: worry about this, you know, turning into a political problem, right,
Speaker 2: this ag issue.
Speaker 4: Yeah, I mean, look, I don't know if I ever
Speaker 4: fully bought the theory, but you know, there was a
Speaker 4: There are many people who argued, for example, that the
Speaker 4: catalyst for the Arab spring was wheat prices that year.
Speaker 4: And you know, our leadership is other things on their mind.
Speaker 4: If we're talking about this is very classic type of
Speaker 4: thing that creates real political disruption. And I don't think
Speaker 4: we should have the hubris to assume that these cycles,
Speaker 4: which will probably have data points going back thousands of years,
Speaker 4: have suddenly stopped.
Speaker 2: And I guess with sanctions, I do wonder to what
Speaker 2: extent that the oil crunch would lead to the weakening
Speaker 2: of essentially one of the US's biggest non military weapons,
Speaker 2: right sanctions.
Speaker 4: There was an interesting article in the Wallhet Journal that
Speaker 4: the North Korean economy is doing surprisingly well. They're actually
Speaker 4: building a lot of housing, and they're sort of quite
Speaker 4: a little evidence of like improving standard of living and
Speaker 4: so forth. And of course here is, you know, one
Speaker 4: of the most sanctioned countries on Earth for a very
Speaker 4: long time. I just think, like the degree to which
Speaker 4: sanctions are a powerful tool, or that they could really
Speaker 4: be used to like crush any enemy, all of it's
Speaker 4: been called into question right now.
Speaker 2: Now, let's say the war ends next week. How do
Speaker 2: you think the world has fundamentally been changed because of
Speaker 2: this war and how it's played out.
Speaker 3: So I think it goes back to, I guess, the
Speaker 3: idea of the choke point economy. So everyone has discovered
Speaker 3: from the past six years that these big one off
Speaker 3: supposedly one off disruptions can happen with frequency, right, so
Speaker 3: each disruption is slightly different in what it actually is,
Speaker 3: but they're happening more often. I mean, I'm sure both
Speaker 3: of us, having been in Hong Kong during the pandemic,
Speaker 3: I will always keep an extra supply of toilet paper
Speaker 3: from now until forever. Basically we all learn that, and
Speaker 3: so I think that impulse is going to stick around
Speaker 3: for a long time.
Speaker 1: The world is very globalized.
Speaker 4: I feel like for me coming here to Hong Kong,
Speaker 4: it's been very helpful reminder like how integrated the world
Speaker 4: still is. But these are the wheels are all spinning
Speaker 4: in the opposite direction of where they were in you know,
Speaker 4: the second half of the twentieth century, trade barriers are
Speaker 4: going up and countries don't trust each other, and that
Speaker 4: is going to have consequences for both productivity and prices.
Speaker 2: This is The Big Take Asia from Bloomberg News. I'm wanha.
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Speaker 3: Bosting Claim met him