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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg day Break Asia Podcast. I'm Doug Chrisner.

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Speaker 2: The mood in global markets earlier today was far less

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Speaker 2: anxious after Iran signaled it wants to de escalate hostilities

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Speaker 2: with Israel. However, that could change. A short while ago,

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Speaker 2: President Trump called for the evacuation of Tehran. He made

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Speaker 2: those remarks hours after urging Iran's leadership to sign a

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Speaker 2: deal to limit the Iranian nuclear program, and then President

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Speaker 2: Trump cut short his visit to the G seven Leader

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Speaker 2: summit and returned to Washington. So we begin there with

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Speaker 2: a closer look at the conflict between Israel and Iran

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Speaker 2: with Middle East analyst Roger Shanahan. He spoke earlier with

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Speaker 2: Bloomberg's Paul Allen and Sherry On. The first question focused

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Speaker 2: on Israel's end goal. Is it crippling Iran's nuclear infrastructs, sure,

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Speaker 2: or the possibility of regime change?

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Speaker 3: Yeah, listen, that's the sixty fourth ousand dollar question, because

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Speaker 3: nobody's quite sure. The initial justification for this campaign was

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Speaker 3: because of an imminent threat of nuclear weaponization on the

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Speaker 3: part of Iran that runs count to US intelligence estimates.

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Speaker 3: Israel has publicly said that regime change is not one

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Speaker 3: of the issues that the Security Cabinet discussed, but the

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Speaker 3: range of targets that Israel has selected would indicate that

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Speaker 3: it's much more than simply trying to degrade their nuclear capability.

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Speaker 3: It's much more broader than that, where we don't know

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Speaker 3: exactly how broad.

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Speaker 4: So we've just had this tweet, well or a social

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Speaker 4: media post by President Trump urging an evacuation of Tehran.

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Speaker 4: The practicalities of that aside, What are the chances of

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Speaker 4: a popular uprising in Tehran if Israel starts targeting the

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Speaker 4: population instead of just key infrastructure.

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Speaker 3: Yeah, listen, one has to be very careful about the

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Speaker 3: way that people, particularly large groups of people react, in

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Speaker 3: your ability to dictate events. There's no doubt that the

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Speaker 3: Iranian regime is deeply unpopular. There's no doubt that Irani

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Speaker 3: population is not happy with their economic lot in life.

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Speaker 3: Every presidential and parliamentary election has seen smaller numbers of

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Speaker 3: people turning out to vote because they don't believe that

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Speaker 3: system is representative. There's deep corruption in the country, But

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Speaker 3: at the same time, people don't normally rise up in

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Speaker 3: the face of external attack from an external actor, particularly

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Speaker 3: if it's from Israel. So if that's the aim, and

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Speaker 3: it's said that it's not, it's unlikely to happen. People

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Speaker 3: in Iran will if they are going to change the government,

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Speaker 3: they're going to do it in their own good time

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Speaker 3: and based on their own circumstances, not those imposed by

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Speaker 3: external actors.

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Speaker 1: Is Israel's goal here bringing the collapse of the Iranian regime?

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Speaker 1: And then my question would be Israel able to achieve this?

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Speaker 1: What course would it have to take in order to

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Speaker 1: get there? Because not achieving this would actually threaten the

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Speaker 1: rise of a more nuclearly powerfull Iran.

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Speaker 3: Yeah, listen, that's the kind of counter argument to expanding

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Speaker 3: your aims. If they're always doubts about Iran's ambitions is

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Speaker 3: regarding weaponizing its ucular capability, then attacking directly, attacking Iran

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Speaker 3: and exhibiting its weakness in its conventional weapons capabilities is

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Speaker 3: likely to have the opposite effect. You know, if you're

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Speaker 3: the Iranian political leaders, you're going to say, well, listen,

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Speaker 3: we're not nuclear capable, we're conventionally weak. Perhaps the best

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Speaker 3: form of defense is an undeclared nuclear capability, like Israel

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Speaker 3: has for instance, but certainly the medium term aims it

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Speaker 3: would appear from Israeli is a further weakening of the

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Speaker 3: Iranian regime. Certainly it's conventional military capabilities, it's military leadership,

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Speaker 3: and that's been ongoing since Israel's response to the seventh

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Speaker 3: of October terrorist attack. And we've seen that in play out,

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Speaker 3: not only obviously in Gaza with Hummas, but in southern

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Speaker 3: Lebanon and southern Bay Route with Lebanese Hezbollah and to

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Speaker 3: a lesser extent, but who he's in Yemen. Iran's external

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Speaker 3: support forces have been degraded, and now this is Israel

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Speaker 3: degrading Iranian political and military capabilities as well.

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Speaker 1: So we have seen President Trump continue to make comments

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Speaker 1: about the conflict, including he wants the evacuation of Tehran.

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Speaker 1: He thinks that Iran wants to talk. What are the

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Speaker 1: signals of how involved the US is at first point?

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Speaker 3: Now, listen, US is involved in a defensive capability at

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Speaker 3: the moment in terms of assistance to Israeli air defense

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Speaker 3: against Iranian attacks. There is no doubt be logistics and

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Speaker 3: intelligence support going on in the background that doesn't hit

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Speaker 3: the headlines, but that happens most days of the week.

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Speaker 5: The issue is.

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Speaker 3: Does President Trump, who has tried to pride himself on

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Speaker 3: staying out of conflict, want to be part of this conflict?

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Speaker 3: And most commentators would say at the moment, there's no

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Speaker 3: real need for the US to become engaged in an

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Speaker 3: offensive capability, but it's you for Israel to do the

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Speaker 3: offensive capability so that they can get them back to

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Speaker 3: the negotiating Tom.

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Speaker 1: Roger, really good to have you with us. Roger Shanahan,

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Speaker 1: Middle East sound lists and author.

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Speaker 2: Welcome back to the Debreak Asia podcast. I'm Doug Prisner.

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Speaker 2: Let's continue to look at how markets are reacting to

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Speaker 2: this conflict between Israel and Iran. I'm joined now by

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Speaker 2: James Abate. He is managing director also the head of

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Speaker 2: Fundamental Strategies at Horizon Investments. James, thank you so much

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Speaker 2: for making time to chat with me. And I have

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Speaker 2: to begin with how you're understanding what is evolving in

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Speaker 2: the Middle East right now. We earlier tonight US Time

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Speaker 2: received an indication that President Trump has called for the

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Speaker 2: evacuation of Tehran, saying that everyone should immediately evacuate Tehran.

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Speaker 2: This situation is dynamic and it's very Dicey absolutely.

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Speaker 5: I mean, let's not forget. I mean the conflict between

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Speaker 5: Israelis and Persians is biblical. I mean those familiar with

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Speaker 5: the Book of Esther and the Feast of Pum you

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Speaker 5: know know that very well. However, you know today Iran's

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Speaker 5: in a very tough spot. There's no friends left in

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Speaker 5: the region. I mean, remember, Persians are not Arabs. And

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Speaker 5: you have US support of israel Is explicit. We just

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Speaker 5: moved a large number are refueling tank or aircraft to

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Speaker 5: the theater to support, you know, continued long range Israeli attacks.

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Speaker 5: Iran has no sponsor, even Russia, who has filled that

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Speaker 5: role in certain points. They have their hands full with Ukraine.

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Speaker 5: And say what you want about Buten, but he has

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Speaker 5: shown signs of riint recently. He has he demonstrated by

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Speaker 5: his classifying the recent attacks on Russia's strategic bombing fleet

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Speaker 5: as a terrorist attack so as not to trigger Russia's

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Speaker 5: war doctrine, which would have led to a much more

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Speaker 5: serious scenario and retaliation, possibly even against NATO and the US.

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Speaker 5: The question, however, is what does Israel want to do?

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Speaker 5: Does it want to stimulate a collapse in the regime,

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Speaker 5: and does the US support this. I think one of

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Speaker 5: the troubling signs for me was that we saw that

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Speaker 5: the Israelis destroyed the Tehran Apartment, headquarters, the Intelligence Ministry,

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Speaker 5: building Justice ministry. So these are things that would be

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Speaker 5: indicative of regime change. And you never know what you're

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Speaker 5: going to You never know what you're going to get

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Speaker 5: when you open up that can of worms. Is the

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Speaker 5: US on board on not just basically florting and giving

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Speaker 5: Iran a lesson about its nuclear aspirations, but is it

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Speaker 5: seriously contemplating a you know, sparking regime change in Iran?

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Speaker 5: And that will change the dynamic for markets.

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Speaker 2: So, in terms of the oil story, so far, from

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Speaker 2: what we understand, critical Mid East exporting infrastructure has been

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Speaker 2: spared from these military strikes and we have yet to

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Speaker 2: see any blockage of the Strait of Horn moves. Does

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Speaker 2: that take most of the risk out of the oil

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Speaker 2: space right now or do you think that there is

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Speaker 2: still some inherent here.

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Speaker 5: There's always some inherent risk. Clearly if the Huthis are

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Speaker 5: able to escalate Jews with regard to you know, further

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Speaker 5: attacks in the area, as well as Iran being able

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Speaker 5: to somehow blockade the you know, straight at home moves

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Speaker 5: that will have profound impacts on Europe more than it

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Speaker 5: will the United States. However, when we look at the

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Speaker 5: price of oil, I don't think this is a scenario

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Speaker 5: akin to what happened back in two thousand and twenty

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Speaker 5: two when Russia invaded Ukraine. We have a very different

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Speaker 5: scenario here in the domestic investment of excess production with

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Speaker 5: the natural gas and liquids. So the price of oil

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Speaker 5: at this point in time I think will be relatively stable. Saudi's,

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Speaker 5: who again are no friends of the Iranians, have been

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Speaker 5: willing to actually increase supply to a great degree, and

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Speaker 5: we'll see alternative shipping lanes being protected. And you know,

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Speaker 5: we may just see a very similar scenario where you'll

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Speaker 5: see the US protect shipping of oil and other transport

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Speaker 5: much like they did back in nineteen eighty sixteen eighty

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Speaker 5: seven under President Reagan. So I don't think this is

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Speaker 5: the same type of risk to a shock that could

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Speaker 5: somehow paralyze economy that are dependent upon fossil fuels at

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Speaker 5: this point in time.

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Speaker 2: So what does that mean for the bond market if

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Speaker 2: they're at the margin had been a little bit of

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Speaker 2: concern about the potential inflationary impact of higher oil on

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Speaker 2: the treasury market. Is it that overstated?

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Speaker 5: Do you think a little bit agreed? I, for one,

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Speaker 5: have been perplected, because in essence, what we're seeing is

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Speaker 5: actually the things that will retard growth not actually contribute

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Speaker 5: significantly to inflation. And when you look at the environment

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Speaker 5: that we're in right now, you know, in terms of

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Speaker 5: what the data has been showing across the board in

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Speaker 5: terms of economic activity, I mean, whether it's the base book,

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Speaker 5: pmis the isms, nonfarm payrolls, et cetera, et cetera, we

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Speaker 5: have an essence a cyclical slowdown in the US, at

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Speaker 5: least for this quarter in the next. And in fact

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Speaker 5: that we're seeing is service catching down to manufacturing. So

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Speaker 5: to the extent with oil price can somehow further crime

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Speaker 5: the consumer and put a further pressure on the services

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Speaker 5: related economy. I think that is more deflationary than actually inflationary.

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Speaker 5: So to me, long treasuries look like an opportunity here

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Speaker 5: relative to other asset classes, particularly if the safety trade

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Speaker 5: comes back into vogue.

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Speaker 2: So does that necessarily mean that you want to lighten

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Speaker 2: up a little bit on US equities?

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Speaker 5: Yeah, we're of the belief that margins in the US

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Speaker 5: stock market and valuations particuleen the large caps the areas

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Speaker 5: of the market relative to expectations, or just remain elevated.

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Speaker 5: I mean, let's look where we are today. We're basically

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Speaker 5: back at levels at the beginning of the year, and

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Speaker 5: what has changed. We're at an environment where valuations are elevated.

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Speaker 5: We're starting to see margin pressure, and that's indicative from

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Speaker 5: the fact that CPI is now less than PPI, which

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Speaker 5: will contribute to margin pressure. The opportunity when you look

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Speaker 5: at the market is that we're going to see potentially

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Speaker 5: if investors look through the environment that we're in currently,

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Speaker 5: I think you'll start to see a rotation to small

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Speaker 5: cap companies at some point, because even though they are

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Speaker 5: depressed and margins are at depressed levels. In fact, if

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Speaker 5: you look at the EBITDA margin of the Russell two

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Speaker 5: thousand on equal weated basis is back to recessionary two

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Speaker 5: thousand and nine levels, whereas the S and P five

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Speaker 5: hundred is at very elevated levels. And if you look

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Speaker 5: at some of the stimulus impacts of the President's tax bill,

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Speaker 5: which one hundred percent bonus appreciation R and D expensing

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Speaker 5: ax breaks for factory of building. In fact, we saw

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Speaker 5: tonight one of the things that came out of the

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Speaker 5: Senate was increasing the tax credit for semiconductor manufacturing in

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Speaker 5: the US, which was even established on the President Biden's

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Speaker 5: Chips and Science Acts. So we're seeing more stimulus being

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Speaker 5: put in place potential for domestic investment, and I tend

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Speaker 5: to think you look at the asymmetry or the opportunity set,

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Speaker 5: it's much more favorable in smaller companies at this point

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Speaker 5: in time than it is in the Magnificent seven or

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Speaker 5: the top heavy s and P five hundred.

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Speaker 2: So given that outlook for the American economy, where do

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Speaker 2: you think that leaves the Fed? Obviously we've got a

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Speaker 2: rate decision this week.

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Speaker 5: Yeah. I think if the FED was simply looking at

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Speaker 5: data dependency and relying upon its page book and the

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Speaker 5: indicators that I mentioned before, such as non farm payrolls,

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Speaker 5: even labor productivity which was negative, which is the leading

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Speaker 5: indicator future layos in most cases. You know, I think

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Speaker 5: if Trump wasn't bullying the Fed, I'd say that would

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Speaker 5: lower rates this meeting by twenty five basis points. And

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Speaker 5: if you simply look at the difference between the FED

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Speaker 5: funds rate and to your treasury. It indicates to twenty

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Speaker 5: five basis point cuts overcoming months. But again, I think

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Speaker 5: the FED wants to show some degree of independence, and

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Speaker 5: we'll likely for goa cut this meeting, but will likely

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Speaker 5: indicate a twenty five base point cut at the next meeting.

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Speaker 5: But I think one thing to be concerned about is

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Speaker 5: the dollar. If we see continued weakness in the dollar here,

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Speaker 5: that would be an indication of potentially future inflation, and

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Speaker 5: I think that that would be the one governing factor

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Speaker 5: on the Fed's aggressive aggressiveness to actually lower interest rates.

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Speaker 2: Before I let you go, James, I want to get

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Speaker 2: your take on markets offshore. How are you viewing opportunities,

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Speaker 2: let's say, in Europe or in Asia right now?

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Speaker 5: You know, I think the environment as it stands now

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Speaker 5: is that emerging markets looked much more attractive, particularly even

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Speaker 5: emerging market debt looked much more attractive than developed markets

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Speaker 5: outside the United States. If you look at Europe, even

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Speaker 5: though you've had a nice outperformance, most of that's been

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Speaker 5: due to the currency, and a lot of it has

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Speaker 5: been due to excitement about infrastructu build as well as

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Speaker 5: defense rebuilding, but you're not getting away from the regulatory

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Speaker 5: stranglehold as well as the demographic issues which are impacting Europe.

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Speaker 5: I think the same issue issue could apply to Japan,

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Speaker 5: although you're starting to see return on equities in return

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Speaker 5: on capital improve in Japan. I would prefer Japan over

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Speaker 5: Europe at this point in time. But I think the

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Speaker 5: real wild card may be to see the dragon rising

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Speaker 5: in China to a certain degree with regard to potentially

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Speaker 5: some stemming of the deflationary spile that they've been in

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Speaker 5: from real estate, as well as maybe some degree of

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Speaker 5: the resolution of the trade issues going on between the

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Speaker 5: United States and China.

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Speaker 2: James will leave it there. It's always a pleasure. Thank

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Speaker 2: you so much. James Debonte, Managing director, also head of

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Speaker 2: Fundamental Strategies that Verizon Investments. Joining us here on the

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Speaker 2: Daybreak Asia Podcast. Thanks for listening to today's episode of

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Speaker 2: the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look

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Speaker 2: at the story shaping markets, finance, and geopolitics in the

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Speaker 2: Asia Pacific. You can find us on Apple, Spotify, the

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Speaker 2: Bloomberg Podcast YouTube channel, or anywhere else you listen. Join

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Speaker 2: us again tomorrow for insight on the market moves from

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Speaker 2: Hong Kong to Singapore and Australia. I'm Doug Prisner, and

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Speaker 2: this is Bloomberg