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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: view on Wall Street this morning, Nate's Earth of Manual Life, writing,
Speaker 2: we could see economic growth diminish if policy uncertainty increases,
Speaker 2: Corporate profit margins get prim due to higher energy inputcasts
Speaker 2: and higher gas prices will act as a consumer tax.
Speaker 2: Nate joins us now for more. Nate, good morning, Thank
Speaker 2: you for having me. What is the price for all
Speaker 2: this volatility?
Speaker 3: I mean, I think the reality is we have a
Speaker 3: bigger pogost going on, right. We have a lot of
Speaker 3: up and down, we don't have a lot of forward traction,
Speaker 3: and the uncertainty is very, very high. I think the prices,
Speaker 3: that we live in a world where volatility continues to
Speaker 3: be the theme, at least in the near future. To
Speaker 3: your point earlier, the signal is there is and everyone
Speaker 3: wants us to conclude quickly and the duration of it
Speaker 3: to be limited. But the reality is the on the
Speaker 3: ground activity and the idea that multiple players are involved
Speaker 3: could lead this to le lasts a lot longer than
Speaker 3: many people think.
Speaker 2: If you've had the comparisons to twenty twenty two in
Speaker 2: this moment, right, hey, what do you think the MIGHTIA
Speaker 2: difference is off?
Speaker 3: I think the comparison is that you have energy prices
Speaker 3: going up. What we don't know yet is the duration
Speaker 3: of that, or the infrastructure and how wide that is,
Speaker 3: let alone the escalation. Right, there's three big things there
Speaker 3: that we don't have the answer to. Twenty twenty two,
Speaker 3: we saw this dynamic war oil went up for a
Speaker 3: period of time. We saw interest rates go up for
Speaker 3: a period of time, and then eventually things pass. I
Speaker 3: think this time around, you're probably in a similar scenario
Speaker 3: where you do see some damage in the equity markets
Speaker 3: for a period of time, but ultimately we flow through
Speaker 3: it and we have to focus again on the underlying
Speaker 3: fundamentals which are going to be much more positive.
Speaker 1: Well, people are treating this as though it's an inflationary
Speaker 1: shock the way that twenty twenty two was, why don't
Speaker 1: you see it exactly that way?
Speaker 3: Well, this time I think, one, we've experienced it before,
Speaker 3: and the markets, as they've seen one thing before, they
Speaker 3: start to accept the fact that that's a possibility and
Speaker 3: are less concerned about it. The other thing I think
Speaker 3: when you think about it is when we look at
Speaker 3: the dynamics here oil, while very important to economies globally,
Speaker 3: there is solutions to this, and we do think there
Speaker 3: will be a de escalation at some stage, just a
Speaker 3: question of timing right. And the longer we stay at
Speaker 3: high oal prices let's say one hundred or above, the
Speaker 3: more impactful it is to growth rates and inflation. We
Speaker 3: believe that from a developed markets perspective, if you stay
Speaker 3: above one hundred dollars a barrel for let's say a
Speaker 3: handful of months, you're arguably going to decrease growth rates
Speaker 3: by about a half a percent a year, and you're
Speaker 3: going to increase inflation rates about a one percent per year.
Speaker 3: For most major economies, that's very detrimental to the markets,
Speaker 3: both from an interest rate policy perspective, but also from
Speaker 3: an equity perspective.
Speaker 1: It's been treated like a stagflationary shock, which includes people
Speaker 1: selling long term bonds. It seems like what you're talking
Speaker 1: about is somewhat of a different prescription.
Speaker 3: Why well, I think why it's a bit different is
Speaker 3: I think this is short term. I don't think this
Speaker 3: is a secular theme that we are going into a
Speaker 3: stagflation period that's going to last multi years. I do
Speaker 3: think ultimately you're going to have central bank policy members
Speaker 3: look through this and say, hey, we care more about jobs,
Speaker 3: we care more about growth, and we're willing to look
Speaker 3: through a temporary shock attached to higher oil prices if necessary.
Speaker 3: That's not their preference, but they were willing to if
Speaker 3: it's necessary. And ultimately we get to a point where
Speaker 3: we have energy prices get back to a level that
Speaker 3: one more stable and not at this ninety plus or
Speaker 3: one hundred plus level. And I think that's where the
Speaker 3: market is hoping for, and I think that's what's most
Speaker 3: policy as well as political members out there think will
Speaker 3: still be in an environment where we will get to
Speaker 3: a solution here where we don't have to see the
Speaker 3: worst case scenario.
Speaker 2: What do you think that means for the stock bond
Speaker 2: cord lintion. I think that's the problem.
Speaker 3: I think the stock bond correlation has been a problem,
Speaker 3: will continue to be a problem, and this is why
Speaker 3: we continue to look for ways to improve portfolio construction
Speaker 3: beyond just relying on interest rates or lower interest rates
Speaker 3: being your insurance.
Speaker 2: But where do you go again?
Speaker 3: While you go to areas like commodities as an example
Speaker 3: that has been a good hedge in these types of environments,
Speaker 3: you go to things like gold, which maybe not working
Speaker 3: as well in the short term here, but has been
Speaker 3: working very well over the last couple of years, and
Speaker 3: you look at other types of alternatives.
Speaker 2: Once you think going to open working well.
Speaker 3: I think gold hasn't been working well partly because it
Speaker 3: had been working well, right, It had worked very well
Speaker 3: for the last two years. You had a lot of
Speaker 3: players in there. Some of those players decided to exit,
Speaker 3: either for liquidity reasons or for reasons that they made
Speaker 3: a lot of money and they want to protect their profits, right.
Speaker 3: And then you also have what appeared to be the
Speaker 3: two plastic things that did work, which was the US dollar,
Speaker 3: and you had the overall dynamics of the market, such
Speaker 3: as oil, because that's centerpiece of the geopolitical concern work,
Speaker 3: and so got us.
Speaker 2: This trade moved into that. I got asked this question
Speaker 2: twelve months ago, you would have thought I was insane.
Speaker 2: It is five kan't good entry points? If I got
Speaker 2: I think it is.
Speaker 1: Yeah.
Speaker 2: Twelve months ago that would have sounded nuts. But now
Speaker 2: this is a good opportunity.
Speaker 3: We still believe that secularly we will see higher gold
Speaker 3: prices over the next several years going forward.
Speaker 1: I'm just wondering if you ratcheting back your returns profile
Speaker 1: more generally overall, whether you think that investors have to
Speaker 1: expect that in a reindustrialized world with a higher rate
Speaker 1: of potentially inflation, but also lower growth, this means that
Speaker 1: you're just not going to get the same kind of returns.
Speaker 2: You absolutely have to dial back your expectations.
Speaker 3: The reality is we are now in a world where
Speaker 3: equity evaluations are high. We have uncertainty round yield and
Speaker 3: they may not go down a lot. And so I
Speaker 3: think your expectations for total return from your portfolio, whether
Speaker 3: it's from the fixed income side or the equity side,
Speaker 3: have to be lower than what we've seen over the
Speaker 3: last twenty years.
Speaker 1: Is the US still the safe haven market?
Speaker 2: I think for the time being it is.
Speaker 3: But I do think once we get through some of
Speaker 3: this more geopolitical dynamic right now, I think we are
Speaker 3: going to go back to a trade where you do
Speaker 3: see diversification outside the US dollar dynamics start to be
Speaker 3: more on a backfoot, as in dollars starts to depreciate again.
Speaker 3: So we think ultimately over the next several years you
Speaker 3: are better served having a more diversified portfolio. But in
Speaker 3: the short term US dollar is a safe haven trade
Speaker 3: that does provide some level.
Speaker 2: Of hedge stay with US multiple implexsavandans coming up off
Speaker 2: to this, the signal from the president is important, so
Speaker 2: is the reality on the ground. Just as we speaking,
Speaker 2: these headlines crossing the UAA says it's currently responding to
Speaker 2: a missile threat, KATSA saying they intercepted a miss targeting
Speaker 2: the state of Catta. And we've seen headgund after headline
Speaker 2: like that and more still to count.
Speaker 1: Yeah, and the IRSTG coming out and saying this war
Speaker 1: isn't over until we say it's over. Even though the
Speaker 1: President is saying I can stop this at any point.
Speaker 2: Joining us now to discuss is Mark Shaw, the former
Speaker 2: chief of Staff to the form of Vice President Mike Pence. Mark,
Speaker 2: good to see you, great to be here. That this
Speaker 2: is not in the president's traditional playbook. This feels so
Speaker 2: so different. Typically he has something targeted, it's limited, it
Speaker 2: leads to a period of the escalation. This feels so
Speaker 2: open ended. How would you characterize what's evolving in the
Speaker 2: Middle East?
Speaker 4: Well, I think there's some true to that that. Obviously,
Speaker 4: you know Venezuela, he wasn't looking for regime change. He
Speaker 4: left Mondu's number two in place. But at the same time,
Speaker 4: I think the president always likes optionality, which I think
Speaker 4: you've witnessed over the last ten days. Is that explanations
Speaker 4: as to how long this is going to be continued
Speaker 4: to vary a lot, and so I think you'll continue
Speaker 4: to see him want to keep that optionality to whether
Speaker 4: he continues to prosecute this warpoo back.
Speaker 1: How different is this time in terms of the support
Speaker 1: from other republiclkens in Congress for the effort. I mean
Speaker 1: it was sort of pretty unified around Venezuela. Is it
Speaker 1: the same here?
Speaker 4: Well, I think that there's obviously been a growing thread
Speaker 4: of isolation inside their Publican party. I think it's been
Speaker 4: notable that Jade Vance has been pretty quiet and not
Speaker 4: as visible as far as advocating for these policies, and
Speaker 4: I don't think there was as much of an effort
Speaker 4: ahead of time to explain to the American people the
Speaker 4: priority and why we're doing this, which is why I
Speaker 4: think you see the pulling down. Having said that, Lisa,
Speaker 4: if the present's successful here and in many cases this
Speaker 4: milit operation has been successful, but if he also be
Speaker 4: able to transform the Middle East for generations to come,
Speaker 4: I think we'll see a lot of Republicans be on
Speaker 4: board with this. I think the greater political concern in
Speaker 4: the short term is that affordability remains number one issue
Speaker 4: for Americans. And you know, I think that even if
Speaker 4: best case scenario prices you now are an eighty to
Speaker 4: ninety dollars range of barrel, that's still a thirty three
Speaker 4: percent premium for what they were. That's not going to
Speaker 4: help with the affordability issue heading into the midterms of November.
Speaker 1: So what do you think is the most feasible counteraction
Speaker 1: to that by the president heading into the midterms.
Speaker 4: I think the most feasible is to get to you
Speaker 4: to explain why this is a necessary action. Why for
Speaker 4: forty seven years I Ran has been at war with
Speaker 4: the West. Why they've you know, going back to funding
Speaker 4: the Hamas and the Hesbalah and the Houthis, why they've
Speaker 4: killed Americans in Western Song. Why we did this. I
Speaker 4: think that's what he can do best. As far as
Speaker 4: your triggers, I think that one thing that would be
Speaker 4: helpful is if you relieve the Jones Act. But I
Speaker 4: think there's a lot of tension inside the administration because
Speaker 4: you have the protectionist and the Peter Navars. For him,
Speaker 4: that is that is sacricyanc They don't want to see that,
Speaker 4: you know. I think it's disappointed see actually leave providing
Speaker 4: relief for Russian oil. At this point, I think that
Speaker 4: Russia has been partying with Iran for quite some time.
Speaker 4: Iran has been funding, been providing them with drones, and
Speaker 4: they're warn in Ukraine. And our recourse of this is
Speaker 4: to actually reacts. The oil sanks on Russia. I think
Speaker 4: shows the sensitivity they have politically to rise in oil price.
Speaker 2: So there's something very backwards about the whole think we
Speaker 2: now mus Can have from the Ukrainians to help US
Speaker 2: intercept drones. At the same time, we're offering sanctions relief
Speaker 2: to the Russians who they're fighting with at the moment.
Speaker 2: Makes sense of vote off.
Speaker 1: No, thank you, that's basically I mean, ultimately, you're sort
Speaker 1: of putting your thumb on the scale on both sides.
Speaker 1: Anyone who's saying this is going to create a sooner
Speaker 1: resolution to the Ukraine Russian war, please explain to me
Speaker 1: exactly how.
Speaker 2: I could just make the question how perparent they were
Speaker 2: for this? Why the Chinese were able to stump pile
Speaker 2: energy over the last twelve months and America didn't refill
Speaker 2: the ESPN.
Speaker 4: Well, look, I mean, I think that there was a
Speaker 4: lot of depletion of this of the strategical patrolum reserved
Speaker 4: during the buy it and mass depletion, and I think
Speaker 4: there were opportunities to continue to replenish it. I do
Speaker 4: think that there's obviously more oil production out of the
Speaker 4: United States today, and I think that the present deserves
Speaker 4: credit for having lowered energy prices as significant as he did.
Speaker 4: But as we've talked about on your show, I think
Speaker 4: that the reduction energy prices in many cases was masking
Speaker 4: the trade agenda and the extra costs. If all of
Speaker 4: a sudden you've taken that relief off the table, I
Speaker 4: think you're going to see the trade agenda inflation come
Speaker 4: to the voters even more sensitively.
Speaker 2: How much can do you think he has over the
Speaker 2: fate of what's developing before our eyes.
Speaker 4: I think he has more control than anybody else, But
Speaker 4: as you said, I don't think he has a total
Speaker 4: control over this. And you're saying I mean, I mean
Speaker 4: cutters still say one hundred and fifty dollars before this
Speaker 4: is all said and done. They have facilities, they are
Speaker 4: still offline. Bahrain has facilities offline, and so it seems
Speaker 4: to me there's a heck of a lot more volatility here,
Speaker 4: and it's just because the presence signaled maybe this will
Speaker 4: be a shorter term conflict, doesn't mean that that's guaranteed.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this, Abigo,
Speaker 2: what a ups rights in this? This morning, energy prices
Speaker 2: posed a near term headwind to real consumer spending. The
Speaker 2: old price shock is a more two sided risk for
Speaker 2: monetary policy rather than is perhaps appreciated. Abigaut joined us
Speaker 2: now for more good to see you, and good morning,
Speaker 2: Good morning. What did you mean by that last line?
Speaker 5: So, I think if we think about the repricing we
Speaker 5: saw off the back of the increasing oil prices in
Speaker 5: bond markets and expectations around easing from the FED this year,
Speaker 5: I think you saw obviously a clear focus on the
Speaker 5: inflationary impact of the oil price increase, and I think
Speaker 5: perhaps what's underappreciated is that this is coming alongside a
Speaker 5: point where the labor market looks a little vulnerable at
Speaker 5: this juncture still, and you're also it's also coming alongside
Speaker 5: potential growth hits, right, Like, this is something that could
Speaker 5: hit real spending, which is two thirds of the US economy.
Speaker 5: So I think perhaps the point around risk to rates
Speaker 5: being more two sided is this idea that it could
Speaker 5: come at a juncture where the labor market's already looking
Speaker 5: relatively vulnerable and the inflation shock, you know, it will
Speaker 5: depend on the persistence of the increase in price.
Speaker 2: So this is something we've been exploring all morning. We
Speaker 2: talked to Kathy Jones about it. At some point it's
Speaker 2: a tipping point, this starts to become bullish for bonds
Speaker 2: because of the potential output hit that we could see
Speaker 2: from higher energy prices. How close do you think we
Speaker 2: are to that point?
Speaker 5: I think this is one element of the consumer story, right.
Speaker 5: I think one of the things you've got to think
Speaker 5: about is the kind of other drivers that we had
Speaker 5: for the kind of strength that we were expecting from
Speaker 5: the consumer this year. Right, We're expecting that you see
Speaker 5: a strong tax refund season. Tax refunds are up ten
Speaker 5: percent in the latest IRS data on an average basis.
Speaker 5: That's a little bit behind I think kind of some
Speaker 5: expectations of the fiscal stimulus. But that's another thing that
Speaker 5: should prove potentially supportive for household balance sheets. And if
Speaker 5: we think about kind of how this feeds through to
Speaker 5: household balance sheets as well, I think it's the kind
Speaker 5: of everyone outside the top twenty percent of the kind
Speaker 5: of income distribution potentially that's going to wear this kind
Speaker 5: of more. So, I think you've got a way potential
Speaker 5: kind of positive headwinds, positive tailwinds for the consumer versus
Speaker 5: some of the kind of negative impacts potentially from higher
Speaker 5: oil prices. So I think it will depend on how
Speaker 5: those kind of play out in the next couple of
Speaker 5: weeks and months. And I think the key thing here
Speaker 5: with all of the kind of potential impact for the
Speaker 5: economy from the oil price increase is really the extent
Speaker 5: and the persistence of that increase in oil prices, and
Speaker 5: that's I think that's what's going to be key in
Speaker 5: terms of how this feeds into kind of growth and
Speaker 5: also into inflation.
Speaker 1: One of the tailwinds has also been the idea of
Speaker 1: rate cuts. How much is there momentum in the consumer,
Speaker 1: particularly at the lower end should the FED remain on hold?
Speaker 5: Yeah, So, I mean in our expectations, we've got fifty
Speaker 5: basse points of cuts from the FMC this year, and
Speaker 5: in terms of the timing of that, we think it's
Speaker 5: potentially kind of second half, so July October. I think
Speaker 5: at the margin that easing and interest rates is something
Speaker 5: that is supportive and helpful for the consumer, but that
Speaker 5: would in theory bring you interest rates background to around neutral.
Speaker 5: It doesn't necessarily outright stimulate the economy at this point.
Speaker 5: I think for us, when we're thinking about the kind
Speaker 5: of resilience and the potential strength of the consumer, I
Speaker 5: think our fiscal story is actually potentially the more important
Speaker 5: part of the kind of outlook this year for the consumer,
Speaker 5: rather than necessarily the kind of tailwind from monitored policy.
Speaker 1: We've been talking about how that fiscal tailwind could potentially
Speaker 1: be absorbed by higher oil prices. How do you sort
Speaker 1: of weigh where oil prices are versus that fiscal boost
Speaker 1: that people were expecting.
Speaker 5: Yeah, so I think it's I think it's probably one
Speaker 5: of the key things to be thinking about at this juncture.
Speaker 5: I think, as I said, I think the kind of
Speaker 5: persistence and the increase in in kind of oil prices.
Speaker 2: Will be important. We've obviously already.
Speaker 5: Seen gasoline prices rising, and the consumer in the US
Speaker 5: is incredibly sensitive to higher gasoline prices. So I do think,
Speaker 5: you know, there is a potential that some of the
Speaker 5: positive kind of tailwinds we were expecting from fiscal policy
Speaker 5: could be offset, in particular for those lower income consumers
Speaker 5: where you know, you are seeing the fact that savings
Speaker 5: are running kind of below average. You know they've they've
Speaker 5: kind of spent down any excess savings that had been
Speaker 5: built up, and I think, you know, that's the area
Speaker 5: where I would think that you would feel that kind
Speaker 5: of gas price increase most acutely in the consumer.
Speaker 2: My McKey was talking about where FED fund futures. We're
Speaker 2: trending right now, what's your FED bet for you?
Speaker 5: So we're expecting that the FED deliver fifty based prints
Speaker 5: cuts this year rate I think the risk if we're
Speaker 5: thinking about the distribution around that, I think, you know, potentially,
Speaker 5: if you see kind of more of a growth it,
Speaker 5: if you see this kind of labor market vulnerability persisting,
Speaker 5: I think that you could potentially see the risk that
Speaker 5: rate cuts come come sooner than we're expecting. And then
Speaker 5: I think, you know, if we think about the kind
Speaker 5: of risks on the opposite side, you know, the potential
Speaker 5: risk for rates coming later and then holding longer. I
Speaker 5: think that's really going to depend on what we see
Speaker 5: in the inflation data. Obviously, we'll get the February CPI
Speaker 5: this week. We're expecting that you see a slowing in
Speaker 5: terms of the monthly prints there. But we do think
Speaker 5: that will be the low point for the CPI this year.
Speaker 5: So you know, we're expecting that that push is higher
Speaker 5: and we see inflation peaking.
Speaker 2: As independent of what happens in the Middle East, that
Speaker 2: that's the low for this year.
Speaker 5: Yeah, So that was our profile previous thing as well,
Speaker 5: because I mean we're still seeing that tara of pass
Speaker 5: through coming through. I mean you are seeing kind of
Speaker 5: elevated core goods price increases, even if you are seeing
Speaker 5: a little bit better inflation on the services side.
Speaker 2: So the call for fifty basis points is that a
Speaker 2: call based on the economy or the man who's going
Speaker 2: to be the FED share.
Speaker 5: So it's based on the idea that you know, if
Speaker 5: we think about when we're thinking we see inflation peaking,
Speaker 5: we do think that the run rates of inflation will
Speaker 5: begin to peak in the second quarter. And I think
Speaker 5: at that point as well, we're expecting the labor market
Speaker 5: still looks vulnerable. We have the unemployment rate pushing higher
Speaker 5: from here to four and a half ur six by
Speaker 5: the summer. So I think with that dynamic, I think
Speaker 5: that's a point not which in July you should see
Speaker 5: kind of a nough inflation progress for them to think, okay,
Speaker 5: we should remove a little bit of that access restricting it.
Speaker 2: Got it. This is the Bloomberg Survendans podcast, bringing you
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