Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordert. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. General Karen Gibson of
Speaker 2: Academy Securities writing, as long as Iran retains the ability
Speaker 2: to contest astray, we could face enduring challenges to navigation.
Speaker 2: This may not end until we have an enduring diplomatic solution.
Speaker 2: General Gibson joins us now for more general Good morning,
Speaker 2: good morning. How much closer are we to that diplomatic solution.
Speaker 3: Well, I think the fact that there's an exchange of points, obviously,
Speaker 3: that we continue to talk, and that now we've paused
Speaker 3: and we'll weep forty eight hours to hear what Iran
Speaker 3: has to say. That's a positive development. It will be
Speaker 3: interesting to see what Iran has to say, and this
Speaker 3: is kind of it sounds a bit like what Iran
Speaker 3: has asked for to decouple. Let's address the navigation issues
Speaker 3: first and then get into the details of the nuclear negotia.
Speaker 4: How difficult will that sequencing?
Speaker 5: Big?
Speaker 3: I think depend on a couple of things, And of
Speaker 3: course I don't know what the details are in this
Speaker 3: one page memo. Do we retain the blockade until we
Speaker 3: get a nuclear agreement or is this just about getting
Speaker 3: ships in and out.
Speaker 4: Of the Gulf.
Speaker 1: When it comes to the straight up removes, why would
Speaker 1: Iron be willing to give up that leverage because that
Speaker 1: is really their one piece of leverage over the United
Speaker 1: States and the rest of the world.
Speaker 3: So I don't see how they even give it up.
Speaker 3: I mean, so in what I wrote that you quoted,
Speaker 3: it's their ability to contest. They don't even have to
Speaker 3: control the strait. They just have to have an ability
Speaker 3: to contest and make it more dangerous periodically, and as
Speaker 3: long as there is a drone within range of the straits,
Speaker 3: I think they will retain that ability to contest the
Speaker 3: straits if they choose.
Speaker 1: Even if we are moving into a phase where there's diplomacy,
Speaker 1: and they're going back and forth with these memos and
Speaker 1: then potentially even a meeting. They will just still try
Speaker 1: to maintain this ability to contest it with drones or
Speaker 1: whatever they have speed boats.
Speaker 3: I don't mean to say that they'll actively contest it.
Speaker 3: I just mean it's hard to eliminate that ability. And
Speaker 3: I think as long as there are there's positive progress
Speaker 3: for them economically in terms of lifting sanctions, in terms
Speaker 3: of prolonging the negotiation for a nuclear deal, it is
Speaker 3: in their benefit to demonstrate good faith into allow ships through.
Speaker 3: But they'll always, I think, have that ability.
Speaker 1: Last night the President put out a truth social posts
Speaker 1: saying that he was pausing Project Freedom. That's a humanitarian effort.
Speaker 1: Why would he pause it?
Speaker 3: I think yesterday's or I guess it was now the
Speaker 3: day before. The initial Project fre Freedom mission was interesting, again,
Speaker 3: like so many other things from a narrow military perspective,
Speaker 3: tactically successful. We safely escorted ships through Iran demonstrated there
Speaker 3: could be a cost for that kind of movement with
Speaker 3: their strike on the port in Fugyra for the Amoradis
Speaker 3: or hitting another ship or two, and so I think
Speaker 3: there's a desire to. Let's see if we can negotiate
Speaker 3: something that will ensure additional safe passage rather than do
Speaker 3: these contested navigation the results in strikes elsewhere.
Speaker 6: How important is China to all of this, given the
Speaker 6: fact that earlier this morning we had an official Chinese
Speaker 6: statement say that they were urging Iran to discuss this
Speaker 6: diplomatically and prevent any kind of resumption of kinetic warfare.
Speaker 3: So certainly it's very much in China's interests to have
Speaker 3: this safe navigation through the Strait because they receive so
Speaker 3: much of their oil and petrochemicals, not all of it,
Speaker 3: not even the majority, but they receive a lot of
Speaker 3: it through there. I think they have an ability to
Speaker 3: influence Ran because of the tremendous amount of product that
Speaker 3: they buy from them, But I don't think they want
Speaker 3: to own Iran's response. So we also have the she
Speaker 3: Trump coming up, and I'm sure this will be a topic.
Speaker 6: Well, I just want to tie this all together because
Speaker 6: until now we really haven't seen many official Chinese statements
Speaker 6: other than that they hope that there's restraint in all
Speaker 6: sides and that they never enjoy warfare, et cetera, et cetera. Otherwise,
Speaker 6: there's been pretty much of a back seat. A lot
Speaker 6: of people have been wondering where they're playing in this
Speaker 6: the speculation on various things. At this point, though, do
Speaker 6: you think they are a more key player because of
Speaker 6: the upcoming meetings with g and Trump and because of
Speaker 6: some of these backchannel communications between China and Iran.
Speaker 3: Certainly, I think the She Trump meeting raises their importance
Speaker 3: in this discussion, and it will color much of the
Speaker 3: discussion that will occur between those two leaders. And perhaps
Speaker 3: there's even some leverage they may use in trade negotiations.
Speaker 3: You know, their ability to influence Aron is something that
Speaker 3: they could offer as the two leaders discuss other issues.
Speaker 2: Headlines like this will certainly incentiviize things this from Bank
Speaker 2: of America just Mamsgay. The TI rates as follows, the
Speaker 2: summer of four dollar gas, not the four point fifty
Speaker 2: a gallon on average across this country will certainly lubricate
Speaker 2: the talks.
Speaker 4: I would say in the weeks to come, they might.
Speaker 6: Be lubricating some of the headlines and some of the
Speaker 6: dialing down of the rhetoric. Given the fact that oil
Speaker 6: prices in the United States had the highest average price
Speaker 6: is going back to July of twenty twenty two, heading
Speaker 6: into the midterms and heading into the summer driving season.
Speaker 6: This clearly is going to be on the minds of
Speaker 6: political operatives in.
Speaker 1: DC, and it's on the minds of every American that
Speaker 1: drives past a gas station.
Speaker 4: You see it.
Speaker 1: That is a tax on American families every single day.
Speaker 1: And this is what really hurt the Biden administration and
Speaker 1: obviously Trump, who said he was going to bring prices
Speaker 1: down for American people, understands what's going into the midtermal life.
Speaker 2: General and the seconds we have left. Clearly there is
Speaker 2: some optimism this morning. What is the language that you'd
Speaker 2: look for throughout this morning to validate signs of real progress.
Speaker 3: Well, if ARAN is going to be silent for forty
Speaker 3: eight hours, we may not see anything, but I would
Speaker 3: watch to see their rhetoric. You know, do they say
Speaker 3: we look forward to reviewing this or do they reject
Speaker 3: it out of hand immediately?
Speaker 4: Do they put out.
Speaker 2: Publicly stay with us More Bloomberg surveillance coming up after this.
Speaker 2: Paul Donovan, the chief economist the UBS Global Wealth Management,
Speaker 2: joins us now for more. Paul, welcome to the program.
Speaker 2: We'd lovely reflections on the latest news. But first of all,
Speaker 2: just set the stage for us with the US consumer.
Speaker 2: How close were we to a consumption crunch.
Speaker 7: Well, we're not out of the woods yet. I'm afraid
Speaker 7: what we are experiencing in the United States at the
Speaker 7: moment is, if you'll forgive the technical economic jargon, the
Speaker 7: wily coyote effect, we've run off the edge of the cliff.
Speaker 7: We're running through mid air. But we have not yet
Speaker 7: had economic gravity pulling us down. And that's because US
Speaker 7: consumers have been tapping into their savings rate to pay
Speaker 7: first for the tariffs and now for the higher gasoline prices.
Speaker 7: So as long as consumers are using savings, we can
Speaker 7: carry on with normal levels of consumption elsewhere. But if
Speaker 7: that burden gets too much, if they're no longer prepared
Speaker 7: to continue to draw down their savings rate to afford
Speaker 7: these shocks to consumption from terrorism, from oil prices, then
Speaker 7: economic gravity exerts itself and we drop down into the
Speaker 7: abyss poor.
Speaker 2: Typically, and that sounds terrifying, but typically when it comes
Speaker 2: to central bankers, they track a basket of goods for consumers.
Speaker 2: I remember a note you put out in the last
Speaker 2: few years a really important note about the frequency bias
Speaker 2: of the average consumer, that they pick one thing that
Speaker 2: matters to them and that shapes their perception of how
Speaker 2: high prices are. How's that going to shake their perception
Speaker 2: of how high prices are across the economy, and how
Speaker 2: might it change their attitudes to spend it.
Speaker 7: Well, So this is where I think we need to
Speaker 7: make a distinction in the world of social media hype
Speaker 7: and sensationalism, that consumers are very focused on high frequency
Speaker 7: purchases and that shapes their political perceptions as well. We've seen,
Speaker 7: for example, President Trump's approval rating on the affordability crisis
Speaker 7: in the States is very, very weak, and that's reflecting
Speaker 7: this false perception that inflation is higher than it actually is.
Speaker 7: Because you remember the price of gasoline, you remember the
Speaker 7: price of the Snickers bar. That's what shapes your inflation perception.
Speaker 7: The reality is, however, that consumers are saying everything's terrible,
Speaker 7: inflation is out of control, but they do still have
Speaker 7: the ability to go out and spend. And if an
Speaker 7: American consumer has the ability to go out and spend,
Speaker 7: they will go out and spend. And so that's what
Speaker 7: we're actually thinking, is this divorce between perception and reality
Speaker 7: taking place.
Speaker 6: Well, this to me is the reason why a lot
Speaker 6: of people are talking about the idea of some sort
Speaker 6: of new regime for inflation where consumers can complain about
Speaker 6: it all they want, feel terrible, but they're willing to
Speaker 6: absorb it in a way that maybe they weren't before
Speaker 6: the pandemic.
Speaker 4: Do you see that behavior.
Speaker 6: Trickling out in something that companies are taking advantage of.
Speaker 7: Well, I think certainly if we look at the US
Speaker 7: in particular, the tariffs would pass through to the consumer
Speaker 7: pretty much one hundred percent. Now, what I think we
Speaker 7: are seeing here is exactly the same thing that companies
Speaker 7: feel more confident about passing on the costs. We're not
Speaker 7: necessarily at this stage seeing profit lead inflation where they
Speaker 7: pass on the costs and then a bit more and
Speaker 7: increase their margin. That's not necessarily taking place. But certainly
Speaker 7: I think consumers have been more willing to accept the
Speaker 7: higher prices. And that's because not just in the States,
Speaker 7: but in Europe and the UK and Japan. Consumer balance
Speaker 7: sheets began this year in actually a very strong position.
Speaker 7: We've had unusually good conditions for the consumer, and so
Speaker 7: that has allowed them to weather the shock a bit
Speaker 7: more readily. If consumers have been more constrained, then I
Speaker 7: don't think they would be so willing to accept the
Speaker 7: price increases.
Speaker 6: Do you think then that we could see some sort
Speaker 6: of broadening out, some sort of consumer lead rally taking
Speaker 6: over from what we've seen, which has been dominated by tech.
Speaker 7: Well, I think certainly earnings growth for the time being
Speaker 7: for consumer companies is not going to be too adversely affected.
Speaker 7: If you can pass on the cost one hundred percent,
Speaker 7: then your earnings growth isn't going to be affected unless
Speaker 7: we get to that point where economic gravity suddenly kicks
Speaker 7: in the consumer says, actually, you know what, I'm not
Speaker 7: prepared to keep cutting back on saving. I'm going to
Speaker 7: cut back on consumption. And that might come either because
Speaker 7: there are concerns about job security. It might come because
Speaker 7: you start to see dramatically higher oil prices because of
Speaker 7: physical shortages around the world. It's not going to come
Speaker 7: I think in the next few months. It's something really
Speaker 7: I would be pushing out into late summer early October.
Speaker 7: Perhaps at the outset. That would be something which would
Speaker 7: then start to damage the volume of But right now,
Speaker 7: consumer companies are generally in an okay position.
Speaker 4: I would argue stay with us. More Bloomberg surveillance coming
Speaker 4: up after this.
Speaker 2: Chris Harvey of CIBC writing ATTACKO has catalyzed a sharp
Speaker 2: shift from risk after risk on. We believe geopolitical risk
Speaker 2: has crested, but risks are still lingering. Chris joined to
Speaker 2: stand for more. Chris and Mornic, You've had a great
Speaker 2: year so far. I'll say it for you. I remember
Speaker 2: catching up with you at the very start of the
Speaker 2: year and you said this market was sleeping on a
Speaker 2: lot of macro risk. Then we had to drop off
Speaker 2: in the equity market. I think it was March twenty seventh,
Speaker 2: you dropped a note and said, we're interested in adding
Speaker 2: some risk here, just slowly. Then this market's ripped. Where
Speaker 2: are you in the team now?
Speaker 5: So right now you've had a lot of catos play out.
Speaker 8: Equity markets are we're thinking more consolidation, We're thinking more
Speaker 8: you buy the room or you sell the news.
Speaker 5: Markets are ripping right now.
Speaker 8: That's great, But as you were talking about, we don't
Speaker 8: have a deal done just yet. Things are not moving
Speaker 8: through the straight of horror moves. Oil is not just
Speaker 8: going to it's dropping today, but gasoline prices are not
Speaker 8: going to drop that quick and until we have a
Speaker 8: deal done, it's hard to see this. In addition to that,
Speaker 8: that keeps the FED on hold, and so we're just
Speaker 8: thinking the short term, it's a bit more consolidation. We
Speaker 8: like the market longer term, but near term consolidated.
Speaker 2: Help me understand from where? So is it faith? The
Speaker 2: index level?
Speaker 4: Rally?
Speaker 2: Say the tech win is of the last month. Faith
Speaker 2: the rotation we're seeing so far this morning?
Speaker 4: What is it?
Speaker 5: John?
Speaker 8: It's not so much fade, it's just okay, we had
Speaker 8: that directional move we saw we thought there was ten
Speaker 8: percent upside here. We got a lot of that. Now
Speaker 8: it's about stockpicking right, get the portfolio right. What we've
Speaker 8: been saying all year long is hey, stay away from
Speaker 8: those the contrarian bet. What you want to do is
Speaker 8: you want to buy things that are working. We're still
Speaker 8: of that opinion. But right in you need to have
Speaker 8: good balance sheets, you need to have good fundamentals. Right,
Speaker 8: you have to marry the two. So focus that in
Speaker 8: your stock selection, in your portfolio. That's where the attention
Speaker 8: should be.
Speaker 6: So do you think that semis are expensive or a buy?
Speaker 5: What we think is I'm not going to answer that directly.
Speaker 4: What we think, Come on, Chris, his friends.
Speaker 8: You and I had this conversation earlier this year. It's like,
Speaker 8: don't go bond and fishing. A lot of semis still
Speaker 8: have positive price momentum, they have positive earnings, they have
Speaker 8: good sentiment. Will we say by them, Yeah, they should
Speaker 8: be part of the portfolio. Part of the portfolio should
Speaker 8: be things that are working part of the portfolio. What
Speaker 8: you should be doing is staying away from things that
Speaker 8: are broken. The economy is not going to value out.
Speaker 8: You have to have things that are working in the portfolio,
Speaker 8: but you also have to have good fundamentals, and you
Speaker 8: have to have a good balance sheet, and semis match
Speaker 8: up some of that.
Speaker 6: Some people have noted that this rally feels a little
Speaker 6: bit different in earnings just because the earnings have come
Speaker 6: in so strong, and frankly, it's so broad based. It's
Speaker 6: not coming just from the tech sector. Deuid you Bank
Speaker 6: pointed out that all eleven top level sectors are expected
Speaker 6: to show your over year earnings growth for.
Speaker 4: First time in four years.
Speaker 6: Does that give you confidence or are you saying this
Speaker 6: is a one off for easy comps and a couple
Speaker 6: of other reasons say away.
Speaker 8: So what we've been saying is, hey, go with the
Speaker 8: AI beneficiaries on the bounce, go with the AI beneficiaries.
Speaker 8: You can get them in utilities, you can get them industrials,
Speaker 8: you can get them in tech. That's a pretty broad base.
Speaker 8: The one thing we're still not there is we're not
Speaker 8: there on small caps, right. We're not negative, we're not positive,
Speaker 8: but we need for me, we're not going to hit everything.
Speaker 8: What we want for small caps to work is we
Speaker 8: want race to go down. We want a stronger economy,
Speaker 8: and I'm just not seeing that yet right. And what
Speaker 8: we saw in earning season is if you're AI or
Speaker 8: AI adjacent, great, If you're a general cyclical, you're saying, yeah,
Speaker 8: I'm not really sure about what's going on. And if
Speaker 8: you look at what's happened to small caps since the
Speaker 8: middle part of January, they really have an outperformed, or
Speaker 8: they've only outperformed by a little bit.
Speaker 5: I'm still worried about the back half of the year
Speaker 5: for earnings and earnings growth.
Speaker 8: We need the FED to get involved, we need race
Speaker 8: to go lower for for that to really work longer.
Speaker 2: This is what he and Chris, because I did ask
Speaker 2: if you'd fade the rotation as part of the story,
Speaker 2: because you're seeing that our performance on smalls this morning,
Speaker 2: small caps up by more than two percent off the
Speaker 2: back of this moving crude, off the back of this
Speaker 2: move in yields. Would you fade that? Then specifically, I.
Speaker 5: Would fade that.
Speaker 8: Here's here's something that's really interesting. So we're going to
Speaker 8: have the Russell rebalance in June. If you look at
Speaker 8: the top names in the Russell, I think they account
Speaker 8: for about twenty five percent of the return.
Speaker 5: You're going to graduate those out.
Speaker 8: Okay, So what's going to drive small caps at that
Speaker 8: point in time? Again, you're going to have to have
Speaker 8: the macro on your side. And for the macro to
Speaker 8: be on your side, that means a then that's more
Speaker 8: accommodative rates that are lower and an economy that's accelerating.
Speaker 5: We just don't have that right now.
Speaker 4: I've got to watch you that. Outside of tech, what
Speaker 4: do you.
Speaker 8: Like again, it's the I don't mean to be evasive,
Speaker 8: but it's the AI beneficiary. So in utilities, it's more
Speaker 8: the gen co companies. In industrials, it's the one the
Speaker 8: cooling companies in tech.
Speaker 5: It is.
Speaker 4: It's the secular themes.
Speaker 5: It's more than secular themes.
Speaker 8: It's really it's hard to get involved with these general
Speaker 8: growth themes because we're they're saying, if you listen to
Speaker 8: an earning season, hey, we're not sure. Hey, it's unclear, right,
Speaker 8: And the economy is not accelerating at this point in time.
Speaker 1: When it comes to the FED, though, they need potentially
Speaker 1: a resolution in the conflict in the Middle East to
Speaker 1: understand where inflation's going, right, they do so for small caps.
Speaker 1: Actually it's reliant on what is going on abroad.
Speaker 5: That's right.
Speaker 8: So here's the bold case, right that we get some
Speaker 8: sort of resolution between the US and Iran. The worst
Speaker 8: FED can say, hey, this is a supply shock, we.
Speaker 5: Can look through it.
Speaker 8: FED funds are too restrictive at this point in time,
Speaker 8: we need to lower them. And suddenly small caps begin
Speaker 8: to work. Small caps begin to work, the consumer begins
Speaker 8: to work. Why because helocks become more attractive, Auto loans
Speaker 8: become more attractive, and then the economy begins to accelerate,
Speaker 8: and we can start talking about the housing market getting involved,
Speaker 8: and the housing bill that hasn't become a larger yet.
Speaker 6: I keep thinking about what Max Kettner said at the
Speaker 6: beginning of the show, which is that this equity market
Speaker 6: is increasingly independent from the economy and is increasingly economically
Speaker 6: independent the S and P five hundred. At least if
Speaker 6: the FED were to cut rates because they have an
Speaker 6: excuse to do so, and that would spur some sort
Speaker 6: of rally in small caps and beyond. Would that cause
Speaker 6: a bubble in big tech that seems so far to
Speaker 6: already be flying without that kind of stimulation.
Speaker 5: Yeah, I don't.
Speaker 8: Know if it causes a bubble in big tech. But
Speaker 8: can we talk about a melt up? Yes, we can
Speaker 8: talk about a melt up again. What would happen is
Speaker 8: tech is working. It would continue to work, but now
Speaker 8: you're going to start to bring in all those economically
Speaker 8: sensitive names and oh, by the way, activities should start
Speaker 8: to kick off. The one thing we haven't talked about
Speaker 8: is the credit markets are very, very healthy, very strong.
Speaker 5: We should see more mina activity.
Speaker 8: In addition to that, there are all these storied IPOs
Speaker 8: talking about coming to market. We could see that and
Speaker 8: suddenly we have risk being recycled and a very strong
Speaker 8: reinforcing risk on cycle. Could that be a melt up.
Speaker 8: Could that be I don't think bubble, but could that
Speaker 8: be a melt up?
Speaker 5: Certainly in the back half.
Speaker 2: Of the year, this move in creates oupen We just
Speaker 2: saw a ninety six handle on Brent just moments ago
Speaker 2: at the front end of the future's curve.
Speaker 4: Ninety seven this morning. Yeah, and it's not just the
Speaker 4: front end we keep talking about that.
Speaker 6: The back end also seeing a rally.
Speaker 4: Also the other way.
Speaker 6: Also seeing a selloff. I guess it's the right kind
Speaker 6: of sell off for this market. When you take a
Speaker 6: look at Brent crude, people are expecting a resolution because
Speaker 6: both sides want a resolution. It takes a little bit
Speaker 6: more than that, but that seems to be the tone
Speaker 6: coming out, at least from Iran.
Speaker 4: And the units.
Speaker 2: Just tracking the oil majors in the pre market. Excellent
Speaker 2: Exon closed February at one fifty fifty before this war started.
Speaker 2: This war didn't help. The end of this war might hurt.
Speaker 2: The stock is down to the pre market by five percent.
Speaker 2: It's now trying to get one forty seven. In Ettie Trink, you.
Speaker 6: Saw concerns about what it will cause to rebuild some
Speaker 6: of the facilities in the Middle East and what has
Speaker 6: caused some of their earnings beats. It has been the
Speaker 6: higher prices. If prices go down, well that's a huge
Speaker 6: tailwind for the profitability going forward.
Speaker 1: Exactly, the oil majors were just going to earn, going
Speaker 1: to track WTI potentially lower. I'm shocked at WTI now
Speaker 1: is below ninety dollars a barrel.
Speaker 5: We were talking earlier.
Speaker 1: This week about one hundred dollars a barrel, and for
Speaker 1: really WTI one hundred dollars a barrel. Husband the line
Speaker 1: in the sand for this white house, and I think
Speaker 1: a lot of people have been telling this white house
Speaker 1: that may is when the physical market is going to
Speaker 1: get incredibly tight or drawing on inventories, and you might
Speaker 1: actually see the futures market catch up that physical market. Well,
Speaker 1: when you have optimism about potentially a peace negotiation, the
Speaker 1: straight opening that is going to quickly reverse things.
Speaker 2: Hey, Chris, just to find a word on energy and
Speaker 2: that snacked a great start to the year. Start and
Speaker 2: then where these things got difficult when the world started.
Speaker 2: So just walk us through your thoughts now.
Speaker 8: So the thought is that people have been parking themselves.
Speaker 8: So everyone thought that gold was a geopolitical heads they
Speaker 8: realized that energy is a geopolitical headge So with this
Speaker 8: we start to see the flip back to gold and
Speaker 8: away from oil, and you could see some really big
Speaker 8: moves between those two commodities.
Speaker 2: This is the Bloomberg's Events podcast, bringing you the best
Speaker 2: in markets, economics, angi apol. You can watch the show
Speaker 2: live on Bloomberg TV weekday mornings from six am to
Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify
Speaker 2: or anywhere else you listen, and as always, on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business app