Speaker 1: Welcome to Bloomberg Opinion listeners. I'm Bonny Quinn. This week,
Speaker 1: there's a question of the mindset of global CEOs now
Speaker 1: they're much less confident than they were that they have
Speaker 1: a global market to play with and that the world
Speaker 1: is getting ever more integrated. Adrian Woldridge on the fate
Speaker 1: of globalization as the US and Allies turn up the
Speaker 1: economic temperature on Russia. Also, there's very little in it
Speaker 1: for China to make this an easy fight and a
Speaker 1: quick fight. For the way, when they're finished in Ukraine,
Speaker 1: in China's do they will turn to China, and at
Speaker 1: that point chinaese Russia. Clara for Marquez and Julie Ran
Speaker 1: on China walking a tight rope between trading partners and allies. Later,
Speaker 1: John Authors joins on how some of globalizations discontented countries
Speaker 1: could potentially profit from deglobalization. We'll also speak with Heavier
Speaker 1: Glass on whether oil sanctions will materialize and how the
Speaker 1: market will cope. First to the idea that this may
Speaker 1: be a pivotal moment for the global system, Adrian Wildridge joins, Adrian,
Speaker 1: are we witnessing not just new atrocities in Europe so
Speaker 1: called blood lands, but also the demise of globalization, that is,
Speaker 1: open market economies driving towards economic integration, bringing freer trade,
Speaker 1: capital flows, migration even and ideally leading to increased prosperity
Speaker 1: for all. It's a very serious possibility. Everything depends on
Speaker 1: what happens. Everything depends on where the putin stays in power.
Speaker 1: But I think this has the feeling of what happened
Speaker 1: after the First World War, that this could be the
Speaker 1: beginning of a series of actions which lead to the
Speaker 1: end of globalization. Yes, the illusion that war is impossible
Speaker 1: given the interconnectedness of the world has now been shattered.
Speaker 1: But it had been under severe threats several times over
Speaker 1: the last twenty years. Why is this particular invasion the
Speaker 1: death knell. Yeah, it has been under a very serious
Speaker 1: threat over the last twenty years. And of course we
Speaker 1: all remember September the eleventh, which many people saw as
Speaker 1: the end of globalization, and we've had a lot of
Speaker 1: protests against globalization linked to globalizations effect on rising inequality.
Speaker 1: But I think to invade a European state in the
Speaker 1: way that Russia invaded Ukraine, for the leader of a
Speaker 1: state to threaten the use of nuclear weapons, to engage
Speaker 1: in what looks to be war crimes. It's something that
Speaker 1: hasn't happened since the Second World War, and it's something
Speaker 1: that's created an extraordinary backlash. We haven't seen a rupture
Speaker 1: in the global economic system like this since September the eleven,
Speaker 1: and we might well only be at the beginning of
Speaker 1: this rupture. There was a scramble to figure out what
Speaker 1: could be done legally and within the global international order. Obviously,
Speaker 1: sanctions economic warfare. That's one of the ways that Russia
Speaker 1: can be punished. But how do you champions sanctions as
Speaker 1: an economic weapon and still forge closer ties with countries
Speaker 1: that very much oppose them. I'm thinking obviously of China,
Speaker 1: which is very opposed to the effort by the US
Speaker 1: to pressure it into enacting sanctions. Well, I think it
Speaker 1: has to remembered that the West, broadly conceived, still constitutes
Speaker 1: about six of global g d P. The autocracies constitute
Speaker 1: about of global g d P, with a number of
Speaker 1: countries floating in the middle. And I think if the
Speaker 1: West can cohere as a unit, the Chinese will be
Speaker 1: confronted with the fact that if they side with Russia,
Speaker 1: they will be siding with a small chunk of the world,
Speaker 1: and they will be progressively excluding themselves from the biggest
Speaker 1: and most dynamic market in the world. So I think
Speaker 1: their self interest would dictate to them to remain neutral.
Speaker 1: They've seen what the West can do if it is
Speaker 1: united and angered. So I think the likelihood of China
Speaker 1: trying to take Taiwan is less now than it was,
Speaker 1: and the likelihood of China acting as a sort of
Speaker 1: rule breaker in the international system is less than it was.
Speaker 1: Does there need to be essentially a new Breton Woods
Speaker 1: type of agreement? And if that's the case, the trouble
Speaker 1: with Bretton Woods was that it was also a little
Speaker 1: bit designed to sort of promote American geopolitical influence. Would
Speaker 1: another type of Bredon Woods agreement even be possible? Oh? Absolutely.
Speaker 1: I think that what we need to do is to
Speaker 1: deepen the relationship between the democracies in order to link
Speaker 1: our political common interests with our economic common interests. So
Speaker 1: deepen and advanced trading relationships. I think that's absolutely the case.
Speaker 1: But that doesn't require a new Breton Woods. I think
Speaker 1: it requires a lot of trading arrangements like t TIP
Speaker 1: to be revived and reinvigorated. So I think in that
Speaker 1: sense it's a deepening and an extension, not the creation
Speaker 1: of new institutions. Now, there are other institutions that do
Speaker 1: need to be created to deal with global problems, primarily
Speaker 1: climate change problems, and I think in order for those
Speaker 1: to be created and to operate well, we have to
Speaker 1: realize that they have to involve non democratic countries, they
Speaker 1: have to involve China, and in the long term they
Speaker 1: have to involve Russia because this is the of the planet.
Speaker 1: So I would argue for deepening trading relationships and for
Speaker 1: very broad institutions that look at very specific things. Well,
Speaker 1: and I suppose that's you know, the final point. Really,
Speaker 1: can globalization as a force ever get weaker given the
Speaker 1: US dollars dominance as a global reserve currency, which after
Speaker 1: all is the currency of most nations if you include
Speaker 1: swaplines and so forth. Yeah, I think it can get
Speaker 1: weaker because China is likely to get significantly stronger over
Speaker 1: the next few years. It's still growing very rapidly. And
Speaker 1: also there are a number of countries that sort of
Speaker 1: strategically staying a bit in the middle, such as India.
Speaker 1: And finally, I think it's important to remember that although
Speaker 1: the majority of the world's GDP, as it were, is
Speaker 1: siding with the West. The majority of the world's population
Speaker 1: did not support the condemnation of the invasion of Ukraine
Speaker 1: in the United Nations, so a large chunk of the
Speaker 1: emerging markets of the world sort of stayed neutral, didn't
Speaker 1: want to annoy China too much. So it's not quite
Speaker 1: as clear cut as it looks. And I think the
Speaker 1: logic of decoupling China from America, of a number of
Speaker 1: emerging countries playing sort of the spoiler role of sometimes
Speaker 1: stiding with America sometimes siding with China, makes globalization look
Speaker 1: a bit more tenuous. And also, I think one of
Speaker 1: the most important things to remember is that there's a
Speaker 1: question of the mindset of global CEOs, of global market makers,
Speaker 1: and I think now they're much less confident that they
Speaker 1: have a global market to play with and that the
Speaker 1: world is getting ever more integrated. They're worried that the
Speaker 1: world will split up into rival blocks. It might be
Speaker 1: Europe plus America against each other in some ways. In
Speaker 1: other words, multiple ways in which the world could fragments,
Speaker 1: and I think that is influencing CEO mentality is to
Speaker 1: be much more focused on regional organizations rather than on
Speaker 1: creating one world companies Adrian Wildridge. There, let's get to
Speaker 1: the question of China's role in the global response to
Speaker 1: Russia's war in Europe now, and specifically what choices China
Speaker 1: needs to make navigating between its trading partners and its allies,
Speaker 1: not to mention it's domestic economic struggles. We're joined by
Speaker 1: Schuloen in Hong Kong and Clara Frera Marquez in Singapore,
Speaker 1: So more and more rhetorical pressure is being placed on
Speaker 1: China too, if not join in with other countries on sanctions,
Speaker 1: at least not interfere with the economic warfare that Europe
Speaker 1: and the US are waging on Russia. But Julie, China
Speaker 1: is not having it. How much do we know is
Speaker 1: China actively helping Russia in any way? I think we
Speaker 1: know very little about what's really behind the scenes, But
Speaker 1: so far there's very little evidence that China is helping Russia.
Speaker 1: China has told it makes their own banks to be
Speaker 1: very careful in its dealings with Russia as well as
Speaker 1: the energy companies, because it's quite easy for China to
Speaker 1: be matching the so called secondary sanctions if you help
Speaker 1: sention the entity in the material matter, the Treasury Department
Speaker 1: can sention the third party company as well. For China
Speaker 1: is very careful with that. Clara, what calculation is China
Speaker 1: in particular making by protecting its relationship with Russia? Is
Speaker 1: it purely for economic logistical reasons? Well? Those I think
Speaker 1: two things to bear in mind. One is the China
Speaker 1: throughout this conflict, who's trying to juggle several imperatives. One
Speaker 1: is its ideological alignment with Russia. Then it's ideas of
Speaker 1: sovereignty and territorial integrity, which are called for China, and
Speaker 1: then of course it's economics. As Uley mentioned, here's still
Speaker 1: trying to balance that. But on top of that, it's
Speaker 1: also seeing this conflict very much to the prism of
Speaker 1: its own relationship with the United States. And in that sense,
Speaker 1: there's very little in it for China to make this
Speaker 1: an easy fight and a quick fight. For the way
Speaker 1: when they're finished in Ukraine and China's do and in
Speaker 1: the view of many commentators we've seen in state media,
Speaker 1: they will turn to China and at that point China
Speaker 1: neese Russia. And this is a truly you've actually said
Speaker 1: that China inc could easily become collateral damage in the
Speaker 1: economic war the US and Europe are waging. But how
Speaker 1: would that materialize? It would be quite difficult for the
Speaker 1: US to actually do anything beyond trying to influence China
Speaker 1: by powers of persuasion. Right. I think US has been
Speaker 1: using re sensions on Chinese companies and uh China complains
Speaker 1: about the abuse and overuse of sensions a lot. But hypothetically,
Speaker 1: say Ali Baba has e commerce and business in Russia, right, Like,
Speaker 1: if Ali Baba continues that subsidiary, what does it mean
Speaker 1: do they provide material support to Russian entities? Technically Ali
Speaker 1: Babba could be placed on a sanction list, which means
Speaker 1: that US some managers can no longer buy Ali Baba's box,
Speaker 1: you know, like they are laws of ways, right, Or
Speaker 1: like the a company who buys technology and supplies from
Speaker 1: the US, that company can be placed on the pre
Speaker 1: human Control list that basically it can no longer imports
Speaker 1: stuff from the US. There are many ways for the
Speaker 1: US to sanction Chinese company Clara. Will there come a
Speaker 1: point where China and indeed India too, In fact, you know,
Speaker 1: to the largest populated countries in the world, where they
Speaker 1: need to choose where there will be so much pressure
Speaker 1: placed on them, and we've seen it this week. Brands
Speaker 1: actually called out India and said that the White House
Speaker 1: was disappointed by new DELI will there come a point
Speaker 1: at which they have to choose? And in that instance,
Speaker 1: wouldn't it make more economic sense for both of them
Speaker 1: to stay on the good graces of the EU and
Speaker 1: the US. Well, I mean, let's take China. So at
Speaker 1: the moment, it hasn't really had to choose because Russia's
Speaker 1: economy has been remarkably resilient. So it was hit with
Speaker 1: the sort of wave of sanctions initially obviously that was
Speaker 1: very painful. That it has to a large extent adapted.
Speaker 1: The Central Bank has been able to intervene and sustain things.
Speaker 1: There's a lot of measures that they've put in place
Speaker 1: as the situation becomes worse in Russia. If the Russian
Speaker 1: economy looks like it's going to fall over, at that point,
Speaker 1: China will be asked to come in and help, and
Speaker 1: they're the choice we have to is the West have
Speaker 1: to make that choice very very clear that if you
Speaker 1: support Russia, you will be putting yourself at risk for
Speaker 1: all the reasons that Shu they mentioned, and beyond especially
Speaker 1: if secondary sanctions are brought in your risking in essence
Speaker 1: your position in the integrated global economy. So India it's
Speaker 1: a slightly different position. And I would say that this
Speaker 1: week they've actually come out against massacre in Butcher and
Speaker 1: condemning the massacre in Butcher, So a little step towards
Speaker 1: the West, but in many other ways, still extremely cautious. Yeah.
Speaker 1: Julie Clara brings up a great point there that that
Speaker 1: there may indeed come a time where China will be
Speaker 1: forced to make a decision where China will be forced
Speaker 1: to pick sides. But China has its own domestic problems,
Speaker 1: not to mention its own domestic ambitions. Its property industry
Speaker 1: is slumping. We know that at zero COVID policy, which
Speaker 1: turned into dynamic clearing and now something else, has also
Speaker 1: been extraordinarily difficult for that economy. And it's saiming for
Speaker 1: a growth rate of five and a half percent this year.
Speaker 1: If it needs to get more involved somehow in this
Speaker 1: war by Russia on Ukraine, can it make its five
Speaker 1: and a half percent growth milestone if it alienates you know,
Speaker 1: any of its trading partners. I think at this point,
Speaker 1: I haven't half growth target is you know it's offensisy um.
Speaker 1: I absolutely like as Clara said, at some point China
Speaker 1: will have to choose right. As we have seen in
Speaker 1: the last basically year during the pandemic, one of trying
Speaker 1: to on this economic fields is exports. China was exporting
Speaker 1: to the rest of the world at racks of page right,
Speaker 1: and then US and the European unions I get biggest fires.
Speaker 1: So China has a lot of insensive to keep exports
Speaker 1: up when as you said, there's so many domestic issues.
Speaker 1: I mean, cities accounting for a quarter of China's GDP
Speaker 1: are in some kind of lockdown bline now, like they
Speaker 1: really really need this exports going Clara, you know, slightly
Speaker 1: obliquely to this topic, you've pointed out that China has
Speaker 1: long studied Soviet and Russian errors as a means of
Speaker 1: avoiding its own errors. In terms of witnessing the fallout
Speaker 1: from Russia's invasion of Ukraine. What does it mean implication
Speaker 1: wise for China's ambitions when it comes to Taiwan. Does
Speaker 1: it not make it less rather than more likely that
Speaker 1: China would make a move now having seen how the
Speaker 1: international response has been well, it's a very complicated question,
Speaker 1: and I think we should be clear at the outset
Speaker 1: that China does not see parallels between Taiwan and Ukraine.
Speaker 1: For China, the two very different situations. However, if the
Speaker 1: West continues to sort of at the end of the
Speaker 1: sanctions ladder act in it in a way that isn't united,
Speaker 1: the risk here is that China sees this as a
Speaker 1: how to guide looking to Russia, as you know, the
Speaker 1: litany of errors that it needs to fix a lot like,
Speaker 1: as you said, the way they see that the end
Speaker 1: of the Stuviet Union. So for example, in this case,
Speaker 1: it would be we need to dedolarize their economy, we
Speaker 1: need to sanction to prove better, we need to work
Speaker 1: on nuclear deterrents, we need to have military parity with
Speaker 1: the United States before we put the gun on the
Speaker 1: table in the relationship with Taiwan. If, on the other hand,
Speaker 1: the West act in a united way, it's a lot
Speaker 1: more off putting. Surely perhaps I could get your thoughts
Speaker 1: on that as well. I think there is one school
Speaker 1: of starts in China. There's the actor looking at Russia
Speaker 1: and what Clara said, and China is not ready right,
Speaker 1: They have to prepare for their own, you know, international
Speaker 1: payment system. What China is going to do with this
Speaker 1: massive foreign exchange reserves basically a lot of it in
Speaker 1: yours treasury, fiance or forth. So there is the schools
Speaker 1: of far saying that China needs to wait for a
Speaker 1: few years to make it truly to be santioned Julie
Speaker 1: When in Hong Kong and Clara Ferrero Marquez in Singapore.
Speaker 1: Listeners do get in touch via Twitter at Vonni Quinn
Speaker 1: or send you an email at v Quinn at Bloomberg
Speaker 1: dot net. Opinions and comments always welcome. As the West
Speaker 1: ups the anti on Russia, the stakes remain pretty moderate
Speaker 1: for Russia, that is, unless and until oil and gas
Speaker 1: become the target of embargoes with US. Now heavier blasts
Speaker 1: in London haveavier winter is coming not for several months.
Speaker 1: But as you point out that you wants to fill
Speaker 1: its underground gas storage to eighty percent of capacity by October,
Speaker 1: it's only at about twenty six percent. Now you've done
Speaker 1: the math, and that's thirty six billion dollars for Vladimir
Speaker 1: putin more than half his annual defense budget, which presents
Speaker 1: a huge moral dilemma. Is there a solution here, Well,
Speaker 1: it's a very difficult situation for the European Union because
Speaker 1: if he wants to fill up gas toll it, it
Speaker 1: really needs to continue buying Russian gas, and that obviously
Speaker 1: means pain Russia. At current prices around two hundred million
Speaker 1: dollars a day for the next six months. Ellen g
Speaker 1: from elsewhere from friendly nations to Europe, such as cat
Speaker 1: out of the United States is going to help. But
Speaker 1: if Europe cannot get Russian gas, then inventories aren't want
Speaker 1: to still up to eighty percent, perhaps they get to
Speaker 1: something like sixty s and that means that next winter
Speaker 1: the situation will be difficult and will result on higher prices. However,
Speaker 1: it seems like some European countries are willing to make
Speaker 1: bigger sacrifices right now. Is it just Hungary, Austria and
Speaker 1: obviously Germany that have to get on board, those are
Speaker 1: the three ones. But I think that some European countries
Speaker 1: are saying publicly that they don't oppose an embargo because
Speaker 1: they know that the Germans are going to block it,
Speaker 1: so it costs them nothing. They can say something for
Speaker 1: public opinion. We want to do the right thing. We
Speaker 1: want to punish Russia, knowing very well that there is
Speaker 1: zero chance whatsoever of a gas embargo because immediately Germany
Speaker 1: and Hungary and House will block it, but above all
Speaker 1: Berlin will block it. So it is quite convenient for
Speaker 1: them just to kind of hide behind them. But certainly
Speaker 1: Germany has a big problem. It relies more on gas
Speaker 1: and other countries. About of all the guys that Germany
Speaker 1: consumes comes from Russia, and Germany doesn't have lergy options
Speaker 1: to import, so we will have to rely on neighbors
Speaker 1: for that. So I don't see the German government changing
Speaker 1: his view right now. But obviously the longer the word
Speaker 1: goes and the stronger the public pressure, the more likely
Speaker 1: Germany may accept some kind of change, perhaps lower in
Speaker 1: every month the percentage, or set in a screw account
Speaker 1: where the money gets paid but it doesn't be used
Speaker 1: by by Russia to buy military equipment. I don't see
Speaker 1: the current situation being able to last forever. You mentioned
Speaker 1: there is something you can to Ricardo Houseman's proposal of
Speaker 1: attacks on Russia's exports of oil and gas. He says
Speaker 1: that Russian producers would bear the costs and not Western consumers,
Speaker 1: which would ensure that Russia doesn't profit for its war,
Speaker 1: but the rest of the world can still import its
Speaker 1: fossil fuels. What kind of consensus would it take for
Speaker 1: this proposal to be enacted? Is it even a possibility.
Speaker 1: It's very difficult to get a consensus in Europe for
Speaker 1: that because Hungary most likely will block it. So it
Speaker 1: will have to be several European countries taking that decision,
Speaker 1: which could happen the French government, who is pushing for
Speaker 1: some sort of penalties on Russian oil, I said that
Speaker 1: he's willing to wait a few more weeks to see
Speaker 1: if the German government chains his view. But I don't
Speaker 1: see a full European Union consensus that includes Hungary on
Speaker 1: this happening anytime soon. And for the Ukrainians a few
Speaker 1: more weeks is a lot different than for the rest
Speaker 1: of the world. Indeed, Goldman's Jeff Carry points out that
Speaker 1: coal is fungible oil less, so gas is almost impossible.
Speaker 1: It's almost completely non fungible. Is there a way around
Speaker 1: this somehow? The only way for gases really aided use
Speaker 1: less and that should be an effort, and I think
Speaker 1: that that has been the biggest piece missing. We saw
Speaker 1: that the population is willing to do significant sacrifices. We
Speaker 1: saw that during COVID, and I think that there is
Speaker 1: a lot of public support for Ukraine. So you link
Speaker 1: that you are helping Ukraine by lowering your thermal state
Speaker 1: a bit and just we're in a jumper at home.
Speaker 1: I think that there will be support for that. But
Speaker 1: burying our reduction in demand and just bringing different supply,
Speaker 1: and for that you need an energy import terminal, which
Speaker 1: Germany lacks. Gonna fast track one, but that's going to
Speaker 1: take a bit of time. In the meantime, there is
Speaker 1: not much solution to Russian gas that just continue buying it. Yeah,
Speaker 1: And how I want to ask you about the huge
Speaker 1: energy problems we're seeing in places like Sri Lanka, Pakistan,
Speaker 1: also Argentina and other Latin American countries. We're seeing massive
Speaker 1: protests and even electoral challenges because of this. Can the
Speaker 1: world cope with any further energy adjustments given that as
Speaker 1: already shortages and inability to pay by many of these countries.
Speaker 1: You're right, and that's a very important situation. Is that
Speaker 1: the province of the wall on energy pree day, the
Speaker 1: invasion of Ukraine. We went already on a tight l
Speaker 1: and demand situation for things like call and natural gas,
Speaker 1: perhaps less so for oil. It's gonna be difficult for
Speaker 1: developing countries and poorer countries to cope with very high
Speaker 1: energy prices because it's not just one particular energy product
Speaker 1: that is expensively was in the case of the seventies
Speaker 1: when the price of oil went through the roof. It
Speaker 1: is every form of energy where there is oil, gas, call, electricity,
Speaker 1: and even if you think about the energy transition, the
Speaker 1: metals use on batteries are very expensive now, so they're
Speaker 1: gonna face a situation in which they cannot just try
Speaker 1: to reduce guys and buy call while call is equally expensive.
Speaker 1: And the main problem for them is that they can
Speaker 1: be outbeait by the richer countries. So one of the
Speaker 1: things is happening at the moment is that Europe is
Speaker 1: getting the extra supply of LNG, but as at the
Speaker 1: cause of poorer countries in particularly Asia simply not getting supplies.
Speaker 1: Have your plus in London, Thank you listeners, don't forget
Speaker 1: to reach out all thoughts, suggestions and o Binion's welcome.
Speaker 1: I'm at monequent on Twitter or emails v Quinn at
Speaker 1: Bloomberg dot Net to the markets now. Very happy to
Speaker 1: be joined by John authors in New York and near
Speaker 1: case are in Washington, d C. John, I want to
Speaker 1: start with you first about a piece you wrote this week.
Speaker 1: We are seeing the partial the solution of globalization as
Speaker 1: the predominant force among market economies. That's just a fact.
Speaker 1: The debate has been raging. It's in full swing that
Speaker 1: this might be the beginning of the end for those
Speaker 1: who enjoyed the spoils of things like freeer trade, more
Speaker 1: open borders. You point out this week, though, that for
Speaker 1: those who missed out on globalizations upside the so called
Speaker 1: discontented countries, there might actually be an opportunity to profit
Speaker 1: from the decline of the liberal world order. There really
Speaker 1: should be such an opportunity. The question is whether those
Speaker 1: countries are going to take it now. I I wrote
Speaker 1: specifically about Mexico because I you know, I worked there
Speaker 1: as a report from Mexico for four years when the
Speaker 1: current president was mayor of Mexico City, so I feel
Speaker 1: qualified to comment on that particular country. Mexico was the
Speaker 1: classic example it through in its lots with globalization, with
Speaker 1: the nap to Trade Agreement, the Mackeladora sect, which is
Speaker 1: the idea of sending components from the US to be
Speaker 1: assembled on the Mexican border and then sent back leveraging
Speaker 1: Mexican cheap labor. And then a few years after and
Speaker 1: after China joined the w t O and Mexico absolutely
Speaker 1: got it in the neck from Chinese competition. China's labor
Speaker 1: was so much cheaper than it justified the cost of
Speaker 1: sending stuff right the way across the Pacific. With Lopez
Speaker 1: Operas or taking over now the former mayor of Mexico City,
Speaker 1: he came in very much with a mandate to move
Speaker 1: back from globalization because quite reasonably, lots of Mexicans felt
Speaker 1: it having delivered for them. And I fear he's doing
Speaker 1: so at just the wrong moment, because they are now
Speaker 1: even Chinese companies looking to relocate to Mexico given the
Speaker 1: desire from everybody to shorten supply chains. There's a chance
Speaker 1: that they opened themselves to globalization at the wrong moment
Speaker 1: and trying to shut themselves off from it at the
Speaker 1: wrong moment. Is there advice that you would offer some
Speaker 1: of these countries, because literally figured out how to grow
Speaker 1: it's used the system so well, whereas other countries didn't.
Speaker 1: China used to be the same size GDP wise as Russia, say,
Speaker 1: thirty years ago. It's now ten times the size of Russia,
Speaker 1: and Mexico used to be about ten times the size
Speaker 1: of China forty years ago, which is horrifying, and China
Speaker 1: has now overtaken Mexico. I think one part of this
Speaker 1: is that if if you can arrange not to have
Speaker 1: a lot of datural resources, it helps. Mexico is well
Speaker 1: endowed in natural resources. Career has more or less none.
Speaker 1: Career had to be much harder, feist year more innovative,
Speaker 1: and that worked in the long run. I think the
Speaker 1: notion we are moving into a multipolar world or whatever
Speaker 1: buzzword you want to use, rather than the big W
Speaker 1: t O style free trade agreements, individual partnerships now seems
Speaker 1: to be the way to go, hammering out a deal
Speaker 1: to provide specific things to specific destinations in a way
Speaker 1: that gives more of a sense of security, more of
Speaker 1: a sense of consistency than we currently get from a
Speaker 1: very ambitious multilateral system that is obviously deeply imperiled at present. Well,
Speaker 1: we're seeing all sorts of chaos, particularly across the countries
Speaker 1: of Southeast Asia. I'm seeing electoral chaos, market chaos, energy chaos.
Speaker 1: Are there other countries we should keep an eye out for.
Speaker 1: Brazil is always a fascinating case. So far, they very
Speaker 1: much did benefit from globalization. The question is whether they
Speaker 1: can move forward from where they are now. India becomes
Speaker 1: an interesting pivot for the global system shortly, and I
Speaker 1: suppose finally that there is this. It's something that's been
Speaker 1: written about, speculated about for a long time. Particularly East Africa.
Speaker 1: There's the notion of the Indian Ocean rim taking over
Speaker 1: as a place of dynamism. You do see quite a
Speaker 1: lot of signs of growth in East from obviously from
Speaker 1: very low levels. It's it's conceivable that that becomes the
Speaker 1: next nerve Sensen, let me bring in near Kesar, who's
Speaker 1: in Washington, d C. Because I want to at once
Speaker 1: broaden this conversation and also maybe narrow it a little bit.
Speaker 1: Because the Federal Reserve is in the background here as
Speaker 1: it always is. You know, it is the central bank
Speaker 1: to the US, but also really to the world. Near
Speaker 1: the Fed's job has become so much more complicated, and
Speaker 1: visibility is so much less now, and we have a
Speaker 1: federal reserve that's going to move the most aggressive pace
Speaker 1: in at least twenty years. More than that, in fact,
Speaker 1: is the Fed's job to a bile this year, Well,
Speaker 1: I suspect it will be, although I don't know how
Speaker 1: much you can worry about the spillover effect outside of
Speaker 1: the US, and I think a lot of the problem
Speaker 1: is that we just don't like the choices we have. Unfortunately,
Speaker 1: I was very open minded to the idea that this
Speaker 1: inflation would be transitory, and I wrote a couple of
Speaker 1: pieces about it actually last year. But I think at
Speaker 1: this point it's gone on long enough that whatever you
Speaker 1: call it, I think the FED is right to move
Speaker 1: more aggressively, and it does appear to be doing that.
Speaker 1: We often talk about the spillover effect in the US anyway,
Speaker 1: in binary terms, you know, will it will it cause
Speaker 1: a recession? Won't it cause recession? But I think it's
Speaker 1: useful to just keep in mind that any amount of
Speaker 1: tightening is going to be painful to some extent, and ultimately,
Speaker 1: you know, whether we slow down the economy but a
Speaker 1: verder recession, or whether we have a model session, or
Speaker 1: whether we have something deeper I don't know that we
Speaker 1: have a choice anymore. I mean, I think at this
Speaker 1: point we've got to bring down inflation, and whatever the
Speaker 1: impact of that will be will be in the US,
Speaker 1: and I suspect it will have effect outside the US,
Speaker 1: but I'm not sure the Fed is worried about that. Yeah, John,
Speaker 1: we can look at all sorts of market indicators of inflation,
Speaker 1: and we like to look at you know, the Cleveland
Speaker 1: expected ten years, the ten year tips break even it's
Speaker 1: at two eighty nine right now, and so on. Are
Speaker 1: these useful these days when we don't know whether the
Speaker 1: Fed will move two hundred twenty five basis points this
Speaker 1: year or if the situation will change entirely in several weeks.
Speaker 1: They're they're useful because the market is a player in this.
Speaker 1: Markets can create their own reality. To some extent, what
Speaker 1: we've seen in the yield curve in the last week
Speaker 1: inverting suggesting the chance of a recession fairly soon. And
Speaker 1: then we get the q T announcement that the Fed
Speaker 1: really is going to very aggressively try to reduce its
Speaker 1: balance sheet. That shifts the curve completely around and into
Speaker 1: some extent that is because the market will take things
Speaker 1: to a certain point and then it will be impossible
Speaker 1: to go beyond them. The market sets demarcate the terrain
Speaker 1: for the FED. Unlike Near, I did think that this
Speaker 1: was more than transitory at a relatively early stage last year.
Speaker 1: But I would also say that since the turn of
Speaker 1: the year there is a huge helping of bad luck
Speaker 1: as well. Like whether you're on Tree team transitory or not,
Speaker 1: you weren't to know that Putin is going to invade Ukraine,
Speaker 1: and you weren't to know that we were going to
Speaker 1: have shutdowns on the scale we've had in China, that
Speaker 1: the zero COVID policy finally bites them. But I don't
Speaker 1: think the FED has a choice either. If they don't
Speaker 1: do anything, you will get very serious inflation, and that
Speaker 1: in itself will damage growth. So because of the need
Speaker 1: for credibility, they have no choice but to proceed on
Speaker 1: the path there on Yet Near. I mean, it's been
Speaker 1: quite interesting because as huge as the moves we've been
Speaker 1: seeing are in the treasury market, there does seem to
Speaker 1: be at least some kind of, if not calm, rationality
Speaker 1: to this market. We're not seeing major moves on the
Speaker 1: part of investors that would indicate that they're panicking or
Speaker 1: anything like that. Well, I think some of that has
Speaker 1: to do with the fact that you know, this FED
Speaker 1: is communicating. I think often so the market has an
Speaker 1: opportunity to digest. But you know, I would add I
Speaker 1: agree with what John hath said. I would add also
Speaker 1: that the value of break evens is that they signal
Speaker 1: to the FED whether market participants believe what the FED
Speaker 1: is saying. And I think the last few months have
Speaker 1: been interesting and instructive because you know, the FED was
Speaker 1: reassured us for a long time that it was serious
Speaker 1: about fighting this inflation, that it would not fall into
Speaker 1: the trap that the nineties, early ninety seven, the late
Speaker 1: nineties and most of the nineteen seventies FED fell into.
Speaker 1: And the break evens were pretty modest. I mean, they
Speaker 1: were hanging around the low twos for a while, and
Speaker 1: then they started to turn up and to meet that
Speaker 1: was a signal that the market was telling the FED
Speaker 1: that it's not entirely convinced that the FED is going
Speaker 1: to step in and do what needed to be done.
Speaker 1: And then you saw it the FED turn it became
Speaker 1: a lot more hawkish, a lot more FED governors came
Speaker 1: out and said that they were seriously, Now we're talking
Speaker 1: about three bases points or more. Ray heighs in the
Speaker 1: FED funds rate, and I think that's really the conversation
Speaker 1: between the Fed and the market primarily in my opinion,
Speaker 1: and the break even. One very interesting thing is if
Speaker 1: you look at the five year five year break even,
Speaker 1: this infuriating the complicated financial construct, which looks at what
Speaker 1: they expect inflations be from the five years starting five
Speaker 1: years from now. That is it its highest for six
Speaker 1: or seven years, but it's still only two point five
Speaker 1: something and it is really never bursts upwards. There was
Speaker 1: always been some confidence that this inflation can be overcome
Speaker 1: within five years, which I hope is right. Yeah near.
Speaker 1: I mean you talked about spillover effects. Obviously, emerging markets
Speaker 1: are watching the FED very carefully, and we're seeing a divergence. China,
Speaker 1: for one, is going in the opposite direction or was
Speaker 1: at least is there a spillover effect the other way around?
Speaker 1: I mean, the fact that there's so much turmoil and
Speaker 1: so many emerging market countries, does that at all impact
Speaker 1: US markets over the coming twelve months. It's interesting to
Speaker 1: look at the way markets are priced the US relative
Speaker 1: to the rest of the world and how they have
Speaker 1: been priced for a long time. I mean, you know,
Speaker 1: the US has really been the big stock market winner
Speaker 1: over the last ten years. I'd say anyone in the
Speaker 1: US with a diversified portfolio will tell you that it's
Speaker 1: just been miserable to own anything, at least stock outside
Speaker 1: the US. And so when you look at that, you
Speaker 1: have to or at least I can't help but think
Speaker 1: that a lot of the bad news that we're hearing
Speaker 1: around the world is to some extent baked into asset
Speaker 1: prices outside of the US in a way that it's
Speaker 1: not inside the US. And the question is why. Is
Speaker 1: it because investors think that the US will somehow avoid
Speaker 1: all of the things that we're seeing around the world
Speaker 1: at the moment? Is it because investors with respect the
Speaker 1: US assets haven't yet digested the possibility that, you know,
Speaker 1: some of this bad news could land on our shores,
Speaker 1: including the inflation by the way, And my guess is that,
Speaker 1: you know, a lot of what we're seeing outside the
Speaker 1: US is already baked in the asset prices there, so
Speaker 1: I don't think it's going to get a lot worse.
Speaker 1: What I worry about is that if we continue to
Speaker 1: struggle in the U S. I with inflation or either
Speaker 1: because you know the FET has to become more aggressive
Speaker 1: and slow down the economy, that we'll have to reprice
Speaker 1: our own assets. And so from an investment perspective, I'm
Speaker 1: more worried about the U S and I am the
Speaker 1: rest of the world Near case Are and John auso is.
Speaker 1: We're not choosing to end all conversations not with you, though,
Speaker 1: as always, we love to hear from you at vaney
Speaker 1: Quinn on Twitter or send your thoughts to Quinn at
Speaker 1: Bloomberg dot net. We're produced by Eric Mullow. Till next
Speaker 1: time on rec Opinion, The Belove