Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I want to just
Speaker 1: thank you our great host Canada, but you'll probably hear
Speaker 1: what I see and I have to be back here.
Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
Speaker 2: Welcome to Trumponomics, the podcast that looks at the economic
Speaker 2: world of Donald Trump, how he's already shaped the global economy,
Speaker 2: and what on earth is going to happen next. We're
Speaker 2: recording this on Tuesday, the seventeenth of June, hours before
Speaker 2: the official end of the fifty first g seventh Summit
Speaker 2: being hosted in Canada, but after the US President unexpectedly
Speaker 2: departed a day early. Maybe we shouldn't be so surprised.
Speaker 2: He's made no secret of his disdain for these official
Speaker 2: gatherings of world leaders, I mean, collective decision making. It's
Speaker 2: not really his thing, nor is sharing the spotlight. Why
Speaker 2: stick around arguing over a stupid communicate when you can
Speaker 2: steal all the headlines by jumping on a plane unexpectedly
Speaker 2: and posting on truth social But headlines aren't the same
Speaker 2: as results, and so far, the president's one man banned
Speaker 2: approach to ending foreign wars hasn't been going very well
Speaker 2: at all. As I mentioned, we're recording this on the Tuesday,
Speaker 2: the seventeenth of June. The conflict between Iran and Israel
Speaker 2: appears to be intensifying today, and obviously we don't know
Speaker 2: what will happen in the region before you listen to this,
Speaker 2: but we can ask what the crisis in the Middle
Speaker 2: East and potentially a soaring oil price would mean for
Speaker 2: the US economy and for Donald Trump. And we've got
Speaker 2: two brilliant voices to speak to that from our Bloomberg
Speaker 2: Economics team in London here with me, which I'm like
Speaker 2: to say is not always the case. Diaddou, chief emerging
Speaker 2: markets economist, who's also a senior fellow at Harvard Kennedy
Speaker 2: School and a great friend of the show. We heard
Speaker 2: him a few weeks ago in Qatar. It was great
Speaker 2: to be here and in Washington. Jenny Welch, our chief
Speaker 2: geoeconomics analyst. Jenny, who's also been on the show several times,
Speaker 2: previously served as the director for China and Taiwan on
Speaker 2: the US National Security Council under the Biden and old
Speaker 2: Trump administrations.
Speaker 1: Thanks so much, Stephanie, an honor to be here.
Speaker 2: Jenny you're someone who's I spent a fair bit of
Speaker 2: time preparing notes for G seven summits, and I was
Speaker 2: remembering that Donald Trump in his first term, he left
Speaker 2: the last G seven that was also held in Canada
Speaker 2: in a half about Canadian milk quotas. Is there any
Speaker 2: point having them these G seven meetings in the age
Speaker 2: of Donald Trump.
Speaker 1: Well, interestingly enough, I think we're going to get an
Speaker 1: answer to that question today on what the remaining G
Speaker 1: seven leader is another guest at the summit accomplished now
Speaker 1: that President Trump has departed it. They were able to
Speaker 1: put out yesterday a statement on the ongoing Israel Ron conflict,
Speaker 1: but even then they had to do a lot of
Speaker 1: backroom dealing to get President Trump to sign on to it. Otherwise,
Speaker 1: the expectations for the summer were pretty low heading into it.
Speaker 1: I think there was a lot of focus really more
Speaker 1: on Trump's bilateral meetings that he was due to hold
Speaker 1: on the sidelines on the summit, then on what the
Speaker 1: leaders themselves are going to accomplish.
Speaker 2: There is so much focus on who gets the bilateral
Speaker 2: with Donald Trump, and I guess the ones who were
Speaker 2: shortchanged have got an excuse. They say, oh, well, they
Speaker 2: had to leave. But did he get anything done before
Speaker 2: he left in any of these meetings.
Speaker 1: Well, we got additional progress. I say progress because there's
Speaker 1: still some unsolved elements of the US UK trade deal,
Speaker 1: but we didn't get progress on Japan, South Korea, India,
Speaker 1: which were kind of the other major trade deals that
Speaker 1: were building anticipation for some sort of announcement at this meeting.
Speaker 1: But Japan had their meeting and was surprisingly not able
Speaker 1: to come out of it with any major announcements. All
Speaker 1: of this, by the way, and just under a month
Speaker 1: until the deadline for reciprocal terrorists coming back in at
Speaker 1: those higher rates. Another leader who also wasn't able to
Speaker 1: have a meeting with President Trump was President Zelenski, who
Speaker 1: was a guest at this year's G seven as he
Speaker 1: has been in years past, and was probably very interested
Speaker 1: in having that conversation in light of negotiations with Russia
Speaker 1: continuing to sell out, concerns about us A continuing not
Speaker 1: to come through, and kind of the broader game plan
Speaker 1: for Russia Ukraine under President Trump.
Speaker 2: The reason that Donald Trump went back to White House
Speaker 2: was apparently to think harder potentially respond to the intensifying
Speaker 2: conflict between Iran and Israel over the last few days.
Speaker 2: I'm sure people listening will have been following most of
Speaker 2: the twists and turns. But just in terms of the
Speaker 2: market and the potential economic impact, just talk us through
Speaker 2: briefly how markets have responded to all intense purposes outbreak
Speaker 2: of war since the end of last week.
Speaker 3: Right the main market that we're talking about that's relevant
Speaker 3: for the global economy is obviously the oil market. All
Speaker 3: prices did go up or have gone up since Friday thirteenth.
Speaker 3: Before the conflict, oil was around sixty seven dollars per barrel.
Speaker 3: Now is around seventy five dollars per barrel. It did
Speaker 3: go up. There are some attacks on refineries in Israel
Speaker 3: and Iran, but nothing major, no major disruption. They're up
Speaker 3: because of worries about potential disruption and oil supply and
Speaker 3: our two risks here. There's one risk, which is basically
Speaker 3: Israel hitting Iranian energy facilities oil and gas and at
Speaker 3: risk here we're talking about Iran's oil productions about three
Speaker 3: percent of global supply. And there is the second risk,
Speaker 3: which is potential Iranian retaliation on all facilities in the
Speaker 3: Gulf and the arp Golf countries. In Saudi, in the Oe,
Speaker 3: in Kuwait and so on, and at risk. Here we're
Speaker 3: talking about one third of global supply or a closure
Speaker 3: of the Strait of Hormus, through which goes one fifth
Speaker 3: of global oil supply, so large quantities, and that will
Speaker 3: have implications for all prices. We looked at the scenarios.
Speaker 3: If you get the first scenario in which you get
Speaker 3: just a disruption an Iranian all supply and you lose
Speaker 3: three percent or most of the three percent of global
Speaker 3: all supply, we're talking about all prices in the mid seventies,
Speaker 3: which is roughly where they are now. If we get
Speaker 3: a major disruption and then shut down of the Strait
Speaker 3: of Humers and the world loses one fifth of its
Speaker 3: global all supply, which is something based by the way,
Speaker 3: is unprecedented, never happened. We're talking about a major oil
Speaker 3: shock that could take all prices to one hundred and
Speaker 3: thirty dollars per barrel.
Speaker 2: Okay, and if in the past we've had oil shops.
Speaker 2: I know you've also looked at what history shares on
Speaker 2: that front. What does that look like for the broader economy.
Speaker 3: Let's just talk about recent history and then we talk
Speaker 3: about the longer history, the recent history, past twelve to
Speaker 3: twenty months, we've had every imaginable geopolitical us has materialized.
Speaker 3: A war in Gaza and devastation and Gaza that has happened,
Speaker 3: an expansion of the war, and to eleven on, a
Speaker 3: c area that has happened. Regime change in the Middle East.
Speaker 3: Look at whos in the presidential palace in Damascus now
Speaker 3: a different person to a year ago. A direct war
Speaker 3: between Iran and Israel. It's not a one day it's
Speaker 3: a multi day war, and that is happening right now.
Speaker 3: So everything that we thought was remote and unlikely has materialized,
Speaker 3: and yet there's no pass through to all prices. In fact,
Speaker 3: even after the increase in all prices over the past week,
Speaker 3: oil today is lower than October six, when it was
Speaker 3: eighty five dollars per barrel. So this decoupling between oil
Speaker 3: and geopolitical risk is something that we have witness over
Speaker 3: the past twenty months. Let's now look at the longer
Speaker 3: time horizon. Over the past fifty years, there's been I
Speaker 3: think seven major turmoils in the Middle East, from the
Speaker 3: nineteen seventy three war all the way out to twenty
Speaker 3: twenty three. October seventh attacks. Of these seven turmoils, three
Speaker 3: of them have had little impact on all prices. Two
Speaker 3: did have an impact on oil, but that was short lived,
Speaker 3: only lasted for a few months, and only the remaining
Speaker 3: two have had the lasting impact on all prices. These
Speaker 3: were the nineteen seventy three war, Arab Israeli War and
Speaker 3: the Iranian Revolution of nineteen seventy nine. These also happened
Speaker 3: to be the oldest two events in our sample. So
Speaker 3: it seems that recently oil is getting decoupling from geopolitical
Speaker 3: events and escalation, but it's also something that has been
Speaker 3: happening over the past few decades as well.
Speaker 2: This is an administration that has talked more about oil
Speaker 2: than most, I mean, has been very keen on expanding
Speaker 2: US energy production. Donald Trump has also talked about and
Speaker 2: his Treasury sectary has talked about wanting to get oil
Speaker 2: prices down as one of the key parts of the
Speaker 2: economic strategy. This sort of decoupling of what's going on
Speaker 2: in the Middle East geopolitical conflict from the oil price.
Speaker 2: Do you think that is changing the way the administration
Speaker 2: will look at the risks of this situation. They will
Speaker 2: feel sort of a sense of reassurance that none of
Speaker 2: this is really going to come back to bite them
Speaker 2: in terms of the price of the pump.
Speaker 1: It does strike me that we don't see the same
Speaker 1: sort of sense of urgency to act and diffuse tensions
Speaker 1: this time around that we might have expected a few
Speaker 1: years ago when the US was more concerned about its
Speaker 1: energy dependence on the Middle East. You know, for example,
Speaker 1: President Trump's comments over the weekend that he was contemplating
Speaker 1: just letting Israel and Iran fight it out, I think
Speaker 1: would have been unthinkable a decade ago, certainly, you know,
Speaker 1: twenty years ago. That being said, you know, it's very
Speaker 1: difficult to see inside this administration's current calculus, for lack
Speaker 1: of a better word, on the conflict. There's been a
Speaker 1: lot of mixed signals, including you know, President Trump's early
Speaker 1: departure from the G seven last night was a rather
Speaker 1: unusual step that had a lot of folks worried, in
Speaker 1: combination with the movement of military assets out to the regions.
Speaker 1: I'm very concerning true social posts. And yet we woke
Speaker 1: up this morning in Washington to seeing US hasn't acted yet.
Speaker 1: What exactly is the next step, I think is something
Speaker 1: that We're continuing to watch Keenlee. Maybe by the time
Speaker 1: this podcast there as we'll have an answer to that question.
Speaker 1: But at the moment a lot of uncertainty about exactly
Speaker 1: what the US strategy is here.
Speaker 2: We've had the most sort of extreme examples of that
Speaker 2: tea coupling of geopolitics from the old price in the
Speaker 2: last two years. But the indication of what you were
Speaker 2: saying is that this has been something that's been coming
Speaker 2: for a long time. I mean, if we look at
Speaker 2: the amount of instability across the world, but particularly in
Speaker 2: the Middle Aged if there's a conflict that becomes much
Speaker 2: more regional in scale, do you think that would be
Speaker 2: the thing that would change the way markets were thinking
Speaker 2: about this moment because it kind of brings into question
Speaker 2: broader global stability, or you just think you can throw
Speaker 2: anything at these markets.
Speaker 3: I mean, right now market seems quite relaxed and calm,
Speaker 3: given the level of escalation that we're seeing now. It's
Speaker 3: not normal to see Daranga and bomb tel Aviv gain bomb.
Speaker 3: That's absolutely not normal. So I think it's important to
Speaker 3: think why there is a decoupling between geopolitics and oil,
Speaker 3: and also to think about the link between oil and
Speaker 3: the global economy. So I think the reasons why geopolitics
Speaker 3: seems to be decoupling from oil, I think there's multiple
Speaker 3: factors here. There's a factor in which there is probably
Speaker 3: more oil storage now than the early nineteen seventies, so
Speaker 3: the world is better prepared for it. There is a
Speaker 3: factor in which we do have more supply from the
Speaker 3: rest of the world. The Middle eas share is still important,
Speaker 3: but it's not just a supply of oil. It's general
Speaker 3: supply of energy. We're talking about dirty energy like coal,
Speaker 3: but also cleaner energy like renewables. And also typically when
Speaker 3: you have an oil price shock, what happens to the world.
Speaker 3: He gets slower growth, you get higher inflation, and you
Speaker 3: get higher interest rates. That's the sort of rule of
Speaker 3: thumb that we have in our global economic models. But
Speaker 3: I think the pass through is weaker now. My colleague
Speaker 3: Jamie Rush brought a piece this week and he looked
Speaker 3: at the reasons, and now there are a couple of reasons. First,
Speaker 3: there has been inflation in the world, so one hundred
Speaker 3: dollars oil today is not one hundred dollars oil a
Speaker 3: decade ago. There is more supply that is actually coming
Speaker 3: from rshield, which is more responsive to higher oil prices.
Speaker 3: And there is also we need less oil to produce
Speaker 3: one dollar of GDP. The energy intensity or the oil
Speaker 3: intensity of our economies have fallen in recent decades and
Speaker 3: thus reducing the responsiveness of the global economy to all prices.
Speaker 3: But also we have reasons why all prices are also
Speaker 3: less responsive to geopolitical risks.
Speaker 2: Jenny, it seems as though, at least to some degree,
Speaker 2: the fear of sort of economic blowback from conflict in
Speaker 2: the Middle East failing to stop conflict in the Middle
Speaker 2: East is less than it would have been in the past.
Speaker 2: But we know this is an administration that has a
Speaker 2: particular divide when it comes to the willingness of certain
Speaker 2: members to be quite interventionist and to be imposing America's
Speaker 2: will on the world, whether it's regard to China or
Speaker 2: other things, and those who are really deeply isolationist, and
Speaker 2: the America first rhetoric goes to the point of really
Speaker 2: just wanting to pull back from US involvements. Depending on
Speaker 2: how things go in the next few days, what kind
Speaker 2: of conclusions do you think we should be drawing the
Speaker 2: way that the administration approaches the situation in Iran. Do
Speaker 2: you think that will hold some lessons about the underlying
Speaker 2: dynamics of the administration.
Speaker 1: I think almost certainly it will, And I think at
Speaker 1: the end of the day, what it's going to reveal
Speaker 1: and what was true in the first Trump administration, but
Speaker 1: I think has come into even sharper relief in his
Speaker 1: second term is the idea that President Trump is ultimately
Speaker 1: the decider, the man in charge. And we saw this
Speaker 1: dynamic in his first term, where he liked, for lack
Speaker 1: of a better term, this team of rivals dynamic of
Speaker 1: having multiple voices within his administration that would cultivate different
Speaker 1: options for him and he could kind of weigh them
Speaker 1: and tease out the complexities of each of them and
Speaker 1: then make ultimately the decision right. And that's what we
Speaker 1: see in this time around. Except this time around it
Speaker 1: is complicated by this dynamic that he is also staffed
Speaker 1: his administration with people that, regardless of their different perspectives
Speaker 1: on issues, are ultimately very loyal to him, and I
Speaker 1: think that that has become especially an important influence on
Speaker 1: how he's approached Iran. In his first term, he was
Speaker 1: surrounded by people who were largely hawks on Iran and
Speaker 1: who urged his sort of maximum pressure campaign with the
Speaker 1: idea that there may ultimately be the second phase of
Speaker 1: eventually getting to negotiations, but you have to start with
Speaker 1: the pressure that was his first term play. Now in
Speaker 1: his second term, he's clearly still has people hawkish on
Speaker 1: Iran around him, but he is not necessarily following their
Speaker 1: advice on going back to that maximum pressure campaign. First
Speaker 1: he launched in with the negotiations, which I think was
Speaker 1: a surprise to a lot of people who had watched
Speaker 1: his first term policy. The question is now he seems
Speaker 1: to be seeing this latest conflict as sort of giving
Speaker 1: him leverage at the negotiating table, even though from Tehran's perspective,
Speaker 1: it is not going to engage at the negotiating table
Speaker 1: while it's involved in an active conflict. And so I
Speaker 1: think the question is how does Trump see this playing out.
Speaker 1: Does he really think that this is going to give
Speaker 1: him leverage? Is he still ultimately focused on a deal
Speaker 1: or is it some part he going to walk away
Speaker 1: from the table and say I can achieve my goals
Speaker 1: through other, albeit military means.
Speaker 2: This is slightly a process question, but I think it
Speaker 2: also matters because it affects how the decisions being made.
Speaker 3: You were in the.
Speaker 2: National Security Council. There is almost no National Security Council
Speaker 2: now in terms of your equivalent, the staff who are
Speaker 2: expert in their field and are writing memos and advising
Speaker 2: the principles. That is a skeleton operation now barely exists
Speaker 2: at all, And as far as we can see, all
Speaker 2: the policy planning, or at least the preparation for policy
Speaker 2: and the option papers is all coming out of the
Speaker 2: State Department. Is your sense that that expertise around the
Speaker 2: Middle East is still there within the State Department, That
Speaker 2: kind of knowledge of the region is feeding into some
Speaker 2: of the deliberations, even if Donald Trump and the people
Speaker 2: around him aren't themselves expert what's your sense of that.
Speaker 1: I think there's two simultaneous truths here. There is still
Speaker 1: a tremendous amount of expertise in the United States government
Speaker 1: on the Middle East that exists at various centers, the
Speaker 1: intelligence community, the State Department, Defense Department. But part of
Speaker 1: the function of the NSC was to coordinate and bring
Speaker 1: up into a higher level those expertise opinions and formulate
Speaker 1: policy options for the principle for the President and his
Speaker 1: senior advisors. The NSC not playing that function as well
Speaker 1: today because it's been so whittled down, and because even
Speaker 1: at senior levels it's been whittled down, I think creates
Speaker 1: questions about whether or not that expertise is still floating
Speaker 1: up to the top, and whether there's the same sort
Speaker 1: of very thought through options that are being presented at
Speaker 1: the same time. I think there has been a tendency
Speaker 1: in the Trump administration, even before the recent gutting of
Speaker 1: the NSC, for decisions to be made outside what we
Speaker 1: would call the normal policy process, for the President to
Speaker 1: be making these decisions based on his conversations with individuals,
Speaker 1: including people who are not in government, but he is,
Speaker 1: for example, very much influenced by people outside of government
Speaker 1: who are major voices in the MAGA community, and for
Speaker 1: those conversations to be happening simultaneous and not necessarily taking
Speaker 1: into stock some of the internal government expertise and policy
Speaker 1: options that are normally the foundation of those conversations.
Speaker 2: The desks officers' worst nightmare is when all these unofficial
Speaker 2: conversations happened that they can't control. Yeah, I'm just sort
Speaker 2: of interested. I'm looking at you, because we were sitting
Speaker 2: in Doha not long ago, just after Donald Trump had
Speaker 2: been to the region. Donald Trump went to the region,
Speaker 2: had all these conversations with the various leaders in different
Speaker 2: countries seem to go down pretty well, and they played
Speaker 2: their part with their commitments of investments in the US
Speaker 2: and other things. The US unexpectedly actually becomes in behind
Speaker 2: Israel on this effort quite aggressively. How will those same
Speaker 2: leaders who saw him a few weeks ago be thinking
Speaker 2: about that, and specifically how their own people will be
Speaker 2: reacting to that.
Speaker 3: I think in terms of the leader, they're already probably
Speaker 3: disappointed now when we sat down a few weeks ago
Speaker 3: and we said that Trump's visit was a success for them.
Speaker 3: It was a success because Trump was perceived to have
Speaker 3: gotten funds from the region in return for common the
Speaker 3: region now and not escalating with Iran. And he sat
Speaker 3: next to the Amir of Qatar saying, I'm talking to
Speaker 3: Iran because my friend, the Emir of Qatar is getting
Speaker 3: me to do this, and I like him, and this
Speaker 3: is why we're doing this. How do the leaders feel.
Speaker 3: I think they feel a bit. Obviously all is high
Speaker 3: and that's good for their economies, but the risk of
Speaker 3: instability is much bigger, and the risk of instability is
Speaker 3: that they're caught between the two fires, Iran and Israel.
Speaker 3: There is a risk of retaliation from Iran on their
Speaker 3: energy facilities, on their land or maritime borders. And there's
Speaker 3: also the risk of the people, the fact that people
Speaker 3: in the region are probably not happy with that, and
Speaker 3: they may take out their anger on the leaders. So
Speaker 3: I think everyone in the Middle East is watching, it's
Speaker 3: probably feeling nervous about this.
Speaker 2: Many people who voted for Donald Trump will not particularly
Speaker 2: care about the Middle East, but they had heard this
Speaker 2: mantra from the president that he was either not going
Speaker 2: to get involved in the rest of the world or
Speaker 2: was just going to very quickly achieve piece he wasn't
Speaker 2: going to get involved in what he would call Democrat wars.
Speaker 2: How much will they be concerned in the administration about
Speaker 2: the broader impact on the Mega Coalition of having this
Speaker 2: very obvious involvement, because you can see Donald Trump wanting
Speaker 2: to be the strong man in Middle East, wanting to
Speaker 2: take big gambles and do things that people hadn't dared
Speaker 2: to do before with Iran. But if the result is
Speaker 2: kind of what it's been in the past, which is
Speaker 2: American president's kind of stumble in and then can't get out.
Speaker 2: How much does that hurt him? How much will you
Speaker 2: worry about that?
Speaker 1: It's a fair question, especially because right now we're serving
Speaker 1: the MAGA movement does seem quite divided on this issue,
Speaker 1: and we even sol overnight President Trump taking aim at
Speaker 1: someone who has been an ally in the movement, so
Speaker 1: to speak for him, Tucker Carlson on this very point
Speaker 1: of who is ultimately the decider of what makes America
Speaker 1: great again? And President Trump saying he is, and he
Speaker 1: decides that making sure that around doesn't have a nuclear
Speaker 1: weapon is very much about making America grade again. But
Speaker 1: I think, ultimately, and this is a bit of a
Speaker 1: bold claim as a foreign policy expert, I think it
Speaker 1: tends to be, with rare exceptions, that foreign policy is
Speaker 1: not necessarily the major determinant of domestic political opinion towards
Speaker 1: a president, unless they really botch things and we get
Speaker 1: dragged into a major and very deadly war. It's probably
Speaker 1: going to be other things, and namely the economy and
Speaker 1: namely what happens, for example, with the Big Beautiful Bill
Speaker 1: and how it affects DUX policy, in the coming years
Speaker 1: and people's sense of how much money is in their wallet.
Speaker 1: I think is probably going to be what drives more
Speaker 1: of how people perceive the effectiveness of the President and
Speaker 1: his ability to come through our major promises that he's made.
Speaker 1: I think it's a whole host of other issues that
Speaker 1: are at play.
Speaker 2: We'll be down not to Iran but the irs. Yeah. Maybe,
Speaker 2: Jenny Sad, thank you very much, thanks for listening to
Speaker 2: Trumpnomics from Bloomberg. It was hosted by me, Stephanie Flanders
Speaker 2: and I was joined by Jennifer Welch and Ziad Daud
Speaker 2: from Bloomberg Economics. Trumpnomics is produced by Sammasadi and Moses
Speaker 2: and m with help from Chris Martlu and Amy Keen,
Speaker 2: with special thanks to Rachel Lewis Krisky. Sound design is
Speaker 2: by Blake Maples and Brendan Francis. Newnan is our executive
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