1 00:00:00,040 --> 00:00:06,720 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:11,640 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,480 --> 00:00:18,680 Speaker 2: with Lisa Bromwitz and Amrie Hordert. Join us each day 4 00:00:18,720 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,400 --> 00:00:24,880 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,920 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,280 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,919 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,000 --> 00:00:37,000 Speaker 2: Terminal and the Bloomberg Business app. So here's the LASS 10 00:00:37,080 --> 00:00:40,040 Speaker 2: this morning. The President ramping gun pressure on other countries, 11 00:00:40,080 --> 00:00:43,080 Speaker 2: demanding support for escorting vessels through the strain of for merge. 12 00:00:43,080 --> 00:00:46,040 Speaker 2: Trump threatening NATO with a quote very bad future and 13 00:00:46,080 --> 00:00:48,840 Speaker 2: to delay his summit would shine of President Jiji pink 14 00:00:49,159 --> 00:00:52,279 Speaker 2: nom and rule. The former senior US Intelligence official and 15 00:00:52,320 --> 00:00:55,639 Speaker 2: senior advisor at csis non welcome back to the program. 16 00:00:55,760 --> 00:00:57,960 Speaker 2: We seen reports over the past few days of moving 17 00:00:57,960 --> 00:01:01,200 Speaker 2: additional assets into the region and what does the next 18 00:01:01,240 --> 00:01:02,480 Speaker 2: phase of this conflict look like? 19 00:01:03,560 --> 00:01:04,119 Speaker 3: Good morning. 20 00:01:04,360 --> 00:01:08,160 Speaker 4: The United States is not preparing for a greater involvement. 21 00:01:08,200 --> 00:01:10,080 Speaker 4: It would lead to boots on the ground, but the 22 00:01:10,200 --> 00:01:12,760 Speaker 4: commitment of the United States does remain focused on a 23 00:01:12,800 --> 00:01:15,600 Speaker 4: coercive approach to this. There is no sign of a 24 00:01:15,640 --> 00:01:18,959 Speaker 4: diplomatic engagement in the near term. So you basically have 25 00:01:19,000 --> 00:01:22,240 Speaker 4: a situation where the United States approaches to beat down 26 00:01:22,280 --> 00:01:26,200 Speaker 4: Iran's missile and drone capacity, to hit the regime on 27 00:01:26,280 --> 00:01:30,800 Speaker 4: its police, its interior forces, and the hopes that this 28 00:01:30,880 --> 00:01:34,199 Speaker 4: might provoke some sort of unrest to open the Strait 29 00:01:34,240 --> 00:01:36,959 Speaker 4: of Hormuz. And at the same time the regime regime 30 00:01:37,040 --> 00:01:40,640 Speaker 4: is trying to outlast this by striking economic targets that 31 00:01:40,800 --> 00:01:43,880 Speaker 4: echo into the world economy to put pressure on the 32 00:01:43,959 --> 00:01:47,240 Speaker 4: United States. Each side is trying to outlast the other. 33 00:01:47,680 --> 00:01:50,400 Speaker 5: Norm when it comes to Carg Island, how significant was 34 00:01:50,440 --> 00:01:52,360 Speaker 5: that hit over the weekend from the President. 35 00:01:53,360 --> 00:01:57,640 Speaker 4: Well, the United States certainly destroyed every military site on 36 00:01:57,840 --> 00:02:02,680 Speaker 4: the island, and the island is indeed the primary artery 37 00:02:02,800 --> 00:02:07,520 Speaker 4: for Iran's outlet of oil. It has no secondary outlet 38 00:02:07,560 --> 00:02:11,040 Speaker 4: of any any consequence. The port of Jask, which Iran 39 00:02:11,080 --> 00:02:13,359 Speaker 4: has attempted to open in the Gulf of Oman, has 40 00:02:13,400 --> 00:02:19,480 Speaker 4: a very modest output, but the the Harg Island appears 41 00:02:19,520 --> 00:02:23,360 Speaker 4: to be operational for all of its oil output capacity. 42 00:02:23,360 --> 00:02:25,360 Speaker 4: I think there are a couple of ships that burst 43 00:02:25,919 --> 00:02:28,799 Speaker 4: very quickly after the U. S military operation, and I 44 00:02:28,800 --> 00:02:31,000 Speaker 4: think that's consistent. But the President was trying to do 45 00:02:31,240 --> 00:02:33,640 Speaker 4: trying to message the Iranians, Look, we can touch you 46 00:02:33,720 --> 00:02:36,959 Speaker 4: here if we wish. We're going to touch the military elements, 47 00:02:37,000 --> 00:02:39,000 Speaker 4: but we can take this farther. Why don't you win 48 00:02:39,080 --> 00:02:42,760 Speaker 4: the conflict. I don't think it changed the Iranian position, 49 00:02:42,800 --> 00:02:44,760 Speaker 4: but it certainly sent a message in. 50 00:02:44,800 --> 00:02:47,120 Speaker 5: Terms of the military strike on carg Island. What does 51 00:02:47,160 --> 00:02:51,520 Speaker 5: this mean for the operational capacity of the IRGC, Well. 52 00:02:51,280 --> 00:02:54,240 Speaker 4: It doesn't really touch the IRGC's capacity per se. The 53 00:02:54,280 --> 00:02:58,000 Speaker 4: iergy c's capacity is derived from its missiles, it's derived 54 00:02:58,000 --> 00:03:02,160 Speaker 4: from its drones, and it's derived from its internal military 55 00:03:02,200 --> 00:03:06,240 Speaker 4: placements that suppress the people. So it's got plenty of 56 00:03:06,320 --> 00:03:11,560 Speaker 4: capacity that doesn't rely upon of the economy, doesn't rely 57 00:03:11,680 --> 00:03:16,240 Speaker 4: upon the banking capacity. It's accessible reserve, so it's not 58 00:03:16,320 --> 00:03:20,080 Speaker 4: a money issue that keeps the iergacy going at present. 59 00:03:20,680 --> 00:03:22,560 Speaker 6: What role do you think the ground trips would play 60 00:03:22,560 --> 00:03:24,840 Speaker 6: You mentioned it does seem like there could be a 61 00:03:24,840 --> 00:03:28,360 Speaker 6: preparation to send a special unit of marines over potentially 62 00:03:28,400 --> 00:03:30,880 Speaker 6: even to carg Island. Do you understand or have an 63 00:03:30,960 --> 00:03:32,160 Speaker 6: understanding of what that would look like. 64 00:03:33,280 --> 00:03:37,920 Speaker 4: I think that's very unlikely at present. The US commander's 65 00:03:37,960 --> 00:03:40,080 Speaker 4: first option at this point would not be to create 66 00:03:40,120 --> 00:03:43,160 Speaker 4: a force protection problem for himself. His goals to create 67 00:03:43,200 --> 00:03:47,040 Speaker 4: a force protection problem for the Iranians. This unit, although 68 00:03:47,080 --> 00:03:51,320 Speaker 4: capable certainly of ground operations, probably would have its first 69 00:03:51,400 --> 00:03:57,119 Speaker 4: goal to improve counter drone operations and improve protection capacity 70 00:03:57,160 --> 00:04:01,560 Speaker 4: for units. Although some ground operations could conceivably be part 71 00:04:01,560 --> 00:04:06,440 Speaker 4: of its mission, it's a relatively small force for such 72 00:04:06,480 --> 00:04:08,040 Speaker 4: an activity, Norman. 73 00:04:07,840 --> 00:04:10,160 Speaker 6: Are you seeing an off ramp evolving here? 74 00:04:11,160 --> 00:04:14,160 Speaker 4: Not? At present, the conflict will likely continue for some 75 00:04:14,240 --> 00:04:18,560 Speaker 4: weeks on each side. But this said, the United States 76 00:04:18,600 --> 00:04:25,120 Speaker 4: and Israel have absolutely eroded Iran's missile and drone capacity 77 00:04:25,240 --> 00:04:28,320 Speaker 4: to a far, far greater agree than Iran ever anticipated. 78 00:04:28,600 --> 00:04:30,400 Speaker 3: And the golf partners, particularly the. 79 00:04:30,440 --> 00:04:33,560 Speaker 4: United Arab Emirates in Saudi Arabia, have done an absolutely 80 00:04:33,560 --> 00:04:39,120 Speaker 4: spectacular job of defense, as well as Bahrain, Kuwait and 81 00:04:39,120 --> 00:04:41,560 Speaker 4: the Qataris. And I think you're seeing that years of 82 00:04:41,680 --> 00:04:46,640 Speaker 4: investment of training, equipment, and the leadership of these programs 83 00:04:47,120 --> 00:04:50,760 Speaker 4: has done spectacular work. And indeed Fujera's ability to put 84 00:04:50,760 --> 00:04:55,200 Speaker 4: itself back online demonstrates just the redundancy of the systems 85 00:04:55,200 --> 00:04:58,599 Speaker 4: and the leadership of the Amorti oil program under individuals 86 00:04:58,640 --> 00:05:01,479 Speaker 4: such as doctor sultanage Job, where it's really coming to 87 00:05:01,520 --> 00:05:05,840 Speaker 4: the forefront of keeping the world's economic programs going but normal. 88 00:05:05,839 --> 00:05:07,800 Speaker 5: At what point do the Gold allies have to go 89 00:05:07,800 --> 00:05:09,720 Speaker 5: to the White House and say enough is Enough's a 90 00:05:09,720 --> 00:05:11,719 Speaker 5: lot of reporting over the week about Mohammed bin Salman 91 00:05:11,839 --> 00:05:14,560 Speaker 5: urging harsh action against Iran, But at one point do 92 00:05:14,640 --> 00:05:17,000 Speaker 5: they say this is just too harsh Right now in 93 00:05:17,040 --> 00:05:18,840 Speaker 5: our economies, I. 94 00:05:18,760 --> 00:05:20,960 Speaker 4: Don't see that happening yet. Now, certainly there's going to 95 00:05:20,960 --> 00:05:24,640 Speaker 4: be an economic blow. Remember these countries derive their economic 96 00:05:25,560 --> 00:05:29,479 Speaker 4: gains from tourism, from transit. Dubai Airport was hit today 97 00:05:29,480 --> 00:05:32,360 Speaker 4: by a drone. That's a single drone attack. That's obviously 98 00:05:32,360 --> 00:05:35,080 Speaker 4: a messaging attack by the Iranians. It's meant to disrupt, 99 00:05:35,160 --> 00:05:40,320 Speaker 4: it's not meant to cause massive damage. So that economic 100 00:05:40,360 --> 00:05:43,279 Speaker 4: blow is there. But these countries at the same time 101 00:05:43,880 --> 00:05:47,120 Speaker 4: have shown tremendous resilience. So you're looking get it up. 102 00:05:47,160 --> 00:05:51,159 Speaker 4: Going to Abu Dhabi in Dubai and Saudi Arabia. They've 103 00:05:51,279 --> 00:05:54,680 Speaker 4: shown tremendous capacity to keep their economies going during all 104 00:05:54,720 --> 00:05:58,680 Speaker 4: of this. Expatriates are generally quite comfortable in these environments 105 00:05:58,720 --> 00:05:59,880 Speaker 4: by many many reports. 106 00:06:00,560 --> 00:06:04,040 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. 107 00:06:13,440 --> 00:06:16,000 Speaker 2: We begin this hour with stocks pushing higher on the 108 00:06:16,080 --> 00:06:18,279 Speaker 2: S and P five hundred by about seven tenths of 109 00:06:18,320 --> 00:06:21,000 Speaker 2: one percent. Stephen Parker of JP Morgan Private Bank with 110 00:06:21,040 --> 00:06:23,720 Speaker 2: a seventy four hundred to seventy six hundred year end 111 00:06:23,800 --> 00:06:26,599 Speaker 2: SMP target and right in the following, we've not changed 112 00:06:26,600 --> 00:06:30,240 Speaker 2: our base case forecast for growth, but acknowledge increasing downside 113 00:06:30,360 --> 00:06:33,599 Speaker 2: risk the longer energy prices remain elevated. Stephen joins us 114 00:06:33,600 --> 00:06:35,360 Speaker 2: now for more. Stephen, good morning, morning. It's going to 115 00:06:35,400 --> 00:06:37,120 Speaker 2: see it. So let's talk about what we've seen so far. 116 00:06:37,240 --> 00:06:40,400 Speaker 2: Five percent move on stocks, sixty bases points of widening 117 00:06:40,400 --> 00:06:42,040 Speaker 2: on high yield spreads from the ties of the year 118 00:06:42,080 --> 00:06:45,040 Speaker 2: so far. Is that a sign of resilience or complacency? 119 00:06:45,680 --> 00:06:47,479 Speaker 1: You know, I do you think the markets are probably 120 00:06:47,520 --> 00:06:49,839 Speaker 1: a bit complacent given the move that we've seen in 121 00:06:50,000 --> 00:06:52,080 Speaker 1: energy markets. We've always said to clients, so when it 122 00:06:52,080 --> 00:06:56,440 Speaker 1: comes to geopolitics, geopolitics rarely have long term impacts on markets, 123 00:06:56,680 --> 00:06:59,240 Speaker 1: but we have to acknowledge that, particularly when energy is 124 00:06:59,240 --> 00:07:01,240 Speaker 1: at the center of the storm here, they can certainly 125 00:07:01,240 --> 00:07:04,520 Speaker 1: have a bigger impact on markets in the short term. 126 00:07:04,720 --> 00:07:06,840 Speaker 1: You mentioned the pullback that we've seen in the US. 127 00:07:06,880 --> 00:07:10,040 Speaker 1: We've seen a bigger impact in international markets, particularly in 128 00:07:10,040 --> 00:07:12,760 Speaker 1: places like Europe and Asia who are more exposed and 129 00:07:12,760 --> 00:07:15,080 Speaker 1: more at risk to these higher prices. But there does 130 00:07:15,120 --> 00:07:16,840 Speaker 1: seem to be a bit of complacency in markets. 131 00:07:16,920 --> 00:07:19,640 Speaker 2: Where do you see that complacency concentrated at the moment. 132 00:07:19,560 --> 00:07:22,480 Speaker 1: Well, I think the investors are just looking at the 133 00:07:22,520 --> 00:07:26,080 Speaker 1: fact that the expectations for energy prices are to recover 134 00:07:26,200 --> 00:07:28,120 Speaker 1: and be back around eighty dollars in the not too 135 00:07:28,200 --> 00:07:30,760 Speaker 1: distant future, and in that sort of world, then we 136 00:07:30,800 --> 00:07:34,000 Speaker 1: can get back to the fundamental story around US equity 137 00:07:34,040 --> 00:07:36,640 Speaker 1: markets and double digit earnings growth, which is what we expect. 138 00:07:36,840 --> 00:07:38,840 Speaker 1: The challenge is if we end up in a situation 139 00:07:38,880 --> 00:07:41,760 Speaker 1: where we're looking at triple digit oil not just for 140 00:07:41,800 --> 00:07:43,640 Speaker 1: the next month or two, but for the next three 141 00:07:43,720 --> 00:07:46,360 Speaker 1: to six months, then you have to start asking yourself 142 00:07:46,400 --> 00:07:48,920 Speaker 1: about the outlook for growth and the outlook for inflation. 143 00:07:49,120 --> 00:07:52,920 Speaker 6: Are people more accurately pricing. In that perspective. Internationally, you 144 00:07:52,960 --> 00:07:55,240 Speaker 6: talked about the hit to international markets. 145 00:07:55,400 --> 00:07:56,080 Speaker 3: Well, I think you're. 146 00:07:55,920 --> 00:07:59,240 Speaker 1: Seeing two things. One, places like Europe and Asia are 147 00:07:59,280 --> 00:08:02,040 Speaker 1: more exposed to higher prices in the near term, and 148 00:08:02,040 --> 00:08:05,080 Speaker 1: the risks of those prices remaining higher are there for 149 00:08:05,120 --> 00:08:08,000 Speaker 1: a longer time period. The US is buffered by a 150 00:08:08,040 --> 00:08:11,240 Speaker 1: greater percense of energy independence. I think you're also seeing 151 00:08:11,280 --> 00:08:13,640 Speaker 1: a bit of a flight to safety of flight to quality. 152 00:08:13,640 --> 00:08:15,760 Speaker 1: You're seeing it in the rally and the dollar. You're 153 00:08:15,760 --> 00:08:18,120 Speaker 1: also seeing it in the recent out performance of tech. 154 00:08:18,480 --> 00:08:20,880 Speaker 1: Not too long ago, we were talking about tech being 155 00:08:20,920 --> 00:08:24,160 Speaker 1: under pressure, the rotation into more cyclical parts of the market. 156 00:08:24,320 --> 00:08:26,800 Speaker 1: I think investors are looking at this environment and saying 157 00:08:27,000 --> 00:08:30,160 Speaker 1: the long term structural fundamentals, the earnings growth, the upgrades 158 00:08:30,200 --> 00:08:32,360 Speaker 1: that we're seeing in the tech sector, and that's bringing 159 00:08:32,400 --> 00:08:35,360 Speaker 1: money back into the US and supporting US equity markets. 160 00:08:35,400 --> 00:08:37,760 Speaker 6: Do you think this has materially shifted the narrative that 161 00:08:37,800 --> 00:08:39,480 Speaker 6: took hold in the first two months of the year, 162 00:08:39,720 --> 00:08:43,000 Speaker 6: which is diversify outside of the United States, diversify outside 163 00:08:43,000 --> 00:08:46,240 Speaker 6: of tech. Has that pulled it full circle and actually 164 00:08:46,360 --> 00:08:49,160 Speaker 6: caused the leadership to come from the United States and 165 00:08:49,200 --> 00:08:50,000 Speaker 6: from big tech. 166 00:08:50,160 --> 00:08:51,720 Speaker 1: I think perhaps in the near term, but I do 167 00:08:51,760 --> 00:08:54,600 Speaker 1: think that longer term there is still that diversification story. 168 00:08:55,120 --> 00:08:58,040 Speaker 1: In particular, we think there are interesting opportunities in emerging 169 00:08:58,040 --> 00:09:00,760 Speaker 1: markets who have been hit the hardest in this recent 170 00:09:00,840 --> 00:09:03,720 Speaker 1: move higher in oil prices. But still there's a really 171 00:09:03,760 --> 00:09:07,400 Speaker 1: interesting story, particularly in Asia around the tech story. There 172 00:09:07,679 --> 00:09:11,520 Speaker 1: the hardware sector. We've seen massive earnings upgrades in places 173 00:09:11,559 --> 00:09:15,440 Speaker 1: like Taiwan, Korea, India. We think that story continues, and 174 00:09:15,480 --> 00:09:17,920 Speaker 1: we're looking to build a shopping list with our clients 175 00:09:17,920 --> 00:09:21,040 Speaker 1: to say, if this volatility continues, what are we thinking 176 00:09:21,040 --> 00:09:24,120 Speaker 1: about adding emerging markets would be sparely in that bucket at. 177 00:09:23,960 --> 00:09:25,920 Speaker 2: The top of a shopping list over at Newberger Berman 178 00:09:26,200 --> 00:09:28,760 Speaker 2: just on the program months ago. The bond market, they 179 00:09:28,800 --> 00:09:32,199 Speaker 2: believe all roadally to lower bondiards here even if you 180 00:09:32,280 --> 00:09:34,800 Speaker 2: fix this crisis over in the Middle East, lower bonyards, 181 00:09:34,800 --> 00:09:37,280 Speaker 2: if you don't lower bond yards, because if you don't, 182 00:09:37,400 --> 00:09:39,920 Speaker 2: ultimately it's going to hit growth and yield to the 183 00:09:39,960 --> 00:09:41,640 Speaker 2: long end of the curve, are going to roll over. 184 00:09:41,880 --> 00:09:43,840 Speaker 2: Is there an opening kit in the bond market? 185 00:09:44,200 --> 00:09:45,839 Speaker 1: You know, our view of around rates is that we're 186 00:09:45,880 --> 00:09:49,120 Speaker 1: probably more rangebound. We came into this year a little 187 00:09:49,160 --> 00:09:51,120 Speaker 1: bit more conservative than the market. We thought we would 188 00:09:51,160 --> 00:09:53,280 Speaker 1: see one cut from the FED. That's still our base 189 00:09:53,320 --> 00:09:55,480 Speaker 1: case view. The challenge is going to be this push 190 00:09:55,520 --> 00:09:58,360 Speaker 1: and pull between potential for lower growth and potential for 191 00:09:58,400 --> 00:10:00,400 Speaker 1: higher inflation. That's why it's going to be in interesting 192 00:10:00,400 --> 00:10:02,080 Speaker 1: to listen to what we hear from the Fed this 193 00:10:02,160 --> 00:10:04,240 Speaker 1: week as they try to set the narrative, as they 194 00:10:04,240 --> 00:10:07,000 Speaker 1: try to guide markets in terms of which one they're 195 00:10:07,040 --> 00:10:10,160 Speaker 1: going to prioritize. I still think that there's room potentially 196 00:10:10,200 --> 00:10:13,160 Speaker 1: for another cut, but we don't think necessarily that rates 197 00:10:13,160 --> 00:10:14,920 Speaker 1: are going to move meaningfully lower from here. 198 00:10:15,000 --> 00:10:17,040 Speaker 5: How do they guide the market in this moment when 199 00:10:17,120 --> 00:10:19,800 Speaker 5: in the past, when we saw energy price spikes, they 200 00:10:19,840 --> 00:10:21,880 Speaker 5: just called it transitory and they were wrong. 201 00:10:22,760 --> 00:10:24,720 Speaker 1: Well, I think what's going to be interesting is to 202 00:10:24,720 --> 00:10:27,480 Speaker 1: listen to their comments on not just energy markets, because 203 00:10:27,520 --> 00:10:30,480 Speaker 1: I think those are more difficult to prognosticate, not just 204 00:10:30,520 --> 00:10:32,520 Speaker 1: for us, but also for the FED. I think it's 205 00:10:32,520 --> 00:10:34,360 Speaker 1: going to be interesting to listen to what they say 206 00:10:34,400 --> 00:10:37,640 Speaker 1: about labor markets. Obviously, recent data has been a bit 207 00:10:37,679 --> 00:10:40,640 Speaker 1: weaker than what we would like to see. The question 208 00:10:40,720 --> 00:10:42,280 Speaker 1: is going to be about not just sort of the 209 00:10:42,440 --> 00:10:44,960 Speaker 1: demand for labor, but the supply of labor, and if 210 00:10:45,000 --> 00:10:48,120 Speaker 1: they indicate that that is front and foremost at the 211 00:10:48,160 --> 00:10:50,800 Speaker 1: top of their mind, that could indicate that they're willing 212 00:10:50,840 --> 00:10:52,599 Speaker 1: to let inflation run a little bit hotter at the 213 00:10:52,640 --> 00:10:53,960 Speaker 1: expense of supporting labor markets. 214 00:10:54,000 --> 00:10:56,319 Speaker 5: You mentioned semiconductor some of these companies you like. Have 215 00:10:56,400 --> 00:10:58,800 Speaker 5: you thought about other issues with the strader form moves 216 00:10:58,840 --> 00:11:01,720 Speaker 5: besides oil? A third of global helium gooes to shade 217 00:11:01,800 --> 00:11:04,319 Speaker 5: removes that is needed when you make semi conductors. 218 00:11:04,559 --> 00:11:06,880 Speaker 1: Yeah, I mean what we're seeing everyone is looking at 219 00:11:06,920 --> 00:11:09,280 Speaker 1: the first order effects, which is higher energy prices, higher 220 00:11:09,280 --> 00:11:12,240 Speaker 1: gasoline prices. But as you point out, Amory, there are 221 00:11:12,520 --> 00:11:17,240 Speaker 1: long term, meaningful impacts around supply chains, broadly speaking, in 222 00:11:17,280 --> 00:11:20,240 Speaker 1: different industries around the world. And the challenge is if 223 00:11:20,240 --> 00:11:22,360 Speaker 1: these things get turned off, they don't just get turned 224 00:11:22,400 --> 00:11:24,920 Speaker 1: on with a flip of the switch. One of the 225 00:11:24,920 --> 00:11:26,920 Speaker 1: themes that we've been talking about a lot with clients 226 00:11:27,040 --> 00:11:30,199 Speaker 1: is this idea of the shift from globalization to global fragmentation, 227 00:11:30,600 --> 00:11:32,800 Speaker 1: and the idea that countries and companies are going to 228 00:11:32,800 --> 00:11:37,000 Speaker 1: be more concerned about supply chain resiliency rather than supply 229 00:11:37,080 --> 00:11:40,240 Speaker 1: chain efficiency. And so one of the areas of focus 230 00:11:40,240 --> 00:11:43,280 Speaker 1: has been on this idea of national champions and strategic 231 00:11:43,320 --> 00:11:47,120 Speaker 1: industries as the US, as Europe, as Asia look to 232 00:11:47,200 --> 00:11:51,320 Speaker 1: develop these national champion companies in places like power and infrastructure, 233 00:11:51,440 --> 00:11:53,119 Speaker 1: security and defense, and technology. 234 00:11:53,160 --> 00:11:55,080 Speaker 2: I'm going to ask you a really unfair question. Surprise 235 00:11:55,120 --> 00:11:57,720 Speaker 2: yourself and forgive me. Forgive me for doing this. But 236 00:11:57,760 --> 00:11:59,040 Speaker 2: as I sit here and listen to this and you 237 00:11:59,040 --> 00:12:01,800 Speaker 2: bring up chips and about geopolitics, a lot of this 238 00:12:01,880 --> 00:12:04,000 Speaker 2: is scenario analysis, but I think it's a scenario that 239 00:12:04,040 --> 00:12:07,679 Speaker 2: we need to explore. How would you react if China 240 00:12:07,760 --> 00:12:10,319 Speaker 2: use this as an opportunity to go after Taiwan. 241 00:12:11,640 --> 00:12:14,080 Speaker 1: I think that question is coming up more and more 242 00:12:14,120 --> 00:12:14,959 Speaker 1: in our conversation. 243 00:12:15,080 --> 00:12:16,319 Speaker 2: What do you say back to clients? 244 00:12:17,000 --> 00:12:18,880 Speaker 1: I think we have to acknowledge that it is a 245 00:12:18,960 --> 00:12:21,559 Speaker 1: significant risk, and I think that markets would react more 246 00:12:21,600 --> 00:12:24,720 Speaker 1: aggressively to that type of news even than what we're 247 00:12:24,720 --> 00:12:28,480 Speaker 1: seeing as it relates two energy prices. I do think 248 00:12:28,520 --> 00:12:30,679 Speaker 1: at the end of the day, there is still an 249 00:12:30,720 --> 00:12:33,960 Speaker 1: economic agreement amongst the world, and the impact that that 250 00:12:34,040 --> 00:12:37,760 Speaker 1: might have on the economy probably reduces some of the 251 00:12:37,840 --> 00:12:39,920 Speaker 1: risks there, but it's a risk that we need to acknowledge. 252 00:12:39,920 --> 00:12:41,640 Speaker 1: And at the end of the day, when it comes 253 00:12:41,679 --> 00:12:45,040 Speaker 1: to geopolitics, we don't manage portfolios around tail risks, and 254 00:12:45,800 --> 00:12:48,520 Speaker 1: in the long run, that's a losing strategy. It's why 255 00:12:48,559 --> 00:12:51,280 Speaker 1: we lean into diversification. It's why we think about global 256 00:12:51,280 --> 00:12:55,000 Speaker 1: investing stocks and bonds, but also diversifiers in a portfolio 257 00:12:55,080 --> 00:12:57,600 Speaker 1: related to higher inflation, which has been top of mind 258 00:12:57,640 --> 00:12:58,040 Speaker 1: for our client. 259 00:12:58,120 --> 00:12:58,720 Speaker 3: And that's the risk. 260 00:12:58,800 --> 00:13:02,439 Speaker 2: It's because those supply chains diversified enough stay with us. 261 00:13:02,760 --> 00:13:15,320 Speaker 2: More Bloomberg surveillance coming up after this. Francisco at lunch 262 00:13:15,360 --> 00:13:18,000 Speaker 2: of Bank for America writing this, Brent could well average 263 00:13:18,040 --> 00:13:20,480 Speaker 2: one hundred dollars a barrel for the year if the 264 00:13:20,520 --> 00:13:23,719 Speaker 2: war impacts oil balances significantly into the third quarter, and 265 00:13:24,040 --> 00:13:27,440 Speaker 2: could average near one thirty if the disruptions extend into 266 00:13:27,440 --> 00:13:30,640 Speaker 2: the fourth quarter. Francisco joins us now for more. Francisco, 267 00:13:30,720 --> 00:13:32,760 Speaker 2: welcome to the program, sir. I want to start with 268 00:13:32,800 --> 00:13:35,600 Speaker 2: a key assumption of yours in your research, we do 269 00:13:35,720 --> 00:13:39,880 Speaker 2: not embed any permanent supply loss from this war. Francisco, 270 00:13:40,040 --> 00:13:41,360 Speaker 2: why is that line so important? 271 00:13:43,640 --> 00:13:46,040 Speaker 7: Thanks for having me, John, and great to see you again, 272 00:13:46,600 --> 00:13:49,679 Speaker 7: it's very important because if we end up with some 273 00:13:50,360 --> 00:13:54,680 Speaker 7: meaningful destruction of energy acids, we are going to have 274 00:13:54,720 --> 00:13:58,040 Speaker 7: to We're going to see former points increasing very quickly 275 00:13:58,040 --> 00:14:03,120 Speaker 7: in the curves in this curves that that mister Hassett 276 00:14:03,160 --> 00:14:07,280 Speaker 7: was referring to his comments. So of course we've seen 277 00:14:07,840 --> 00:14:12,080 Speaker 7: Hart Island, Iran's main oil loading terminal being struck over 278 00:14:12,080 --> 00:14:15,600 Speaker 7: the weekend, and there was a clear point made that 279 00:14:15,760 --> 00:14:20,120 Speaker 7: energy infrastructure was still intact even though military acids had 280 00:14:20,160 --> 00:14:21,560 Speaker 7: been specifically targeted. 281 00:14:21,600 --> 00:14:23,200 Speaker 3: So I think it's it's very important. 282 00:14:23,200 --> 00:14:28,600 Speaker 7: But of course in wars, as you know, it's difficult 283 00:14:28,640 --> 00:14:34,400 Speaker 7: to find sometimes a closure and and and you know 284 00:14:34,440 --> 00:14:36,600 Speaker 7: we are we are always one step away from a 285 00:14:36,640 --> 00:14:40,600 Speaker 7: major escalation on the energy side, and that's I think 286 00:14:40,600 --> 00:14:41,760 Speaker 7: the fear the all market has. 287 00:14:41,880 --> 00:14:44,520 Speaker 2: There are supply chain realities though that we could discuss 288 00:14:44,960 --> 00:14:48,280 Speaker 2: right now. If you shut in production, how hard is 289 00:14:48,320 --> 00:14:50,720 Speaker 2: it to restart it and get back production to where 290 00:14:50,760 --> 00:14:51,400 Speaker 2: it was before? 291 00:14:52,920 --> 00:14:54,520 Speaker 7: Well, I mean, I think I think there are some 292 00:14:54,600 --> 00:14:58,000 Speaker 7: concerns around that, but again, most oil fields across the 293 00:14:58,000 --> 00:15:01,880 Speaker 7: Middle East are are conventional, so I would expect a 294 00:15:01,920 --> 00:15:04,440 Speaker 7: lot of the production to come back relatively quickly. 295 00:15:05,000 --> 00:15:07,480 Speaker 3: Refineries are another point of concern. 296 00:15:07,840 --> 00:15:10,680 Speaker 7: We saw the Terran refinery, or at least the run 297 00:15:11,000 --> 00:15:14,880 Speaker 7: refinery fuel depots being targeted. The refined itself is unclear 298 00:15:15,560 --> 00:15:19,440 Speaker 7: what's its scarence status, but I think I think generally 299 00:15:19,520 --> 00:15:22,240 Speaker 7: most assets should be able to come back within a 300 00:15:22,280 --> 00:15:26,960 Speaker 7: month or two months and when the war ends. And 301 00:15:27,000 --> 00:15:29,560 Speaker 7: now having settled that, another key assumption in our numbers 302 00:15:29,600 --> 00:15:32,520 Speaker 7: is that Hormos is going to be reopening sometime soon 303 00:15:33,240 --> 00:15:37,080 Speaker 7: to and record the majority of this traffic, which might 304 00:15:37,160 --> 00:15:41,440 Speaker 7: also be maybe too far fretter an assumption. That's one 305 00:15:41,600 --> 00:15:45,240 Speaker 7: very very important concern. Hormos, as you pointed out, is 306 00:15:45,640 --> 00:15:48,320 Speaker 7: the joke point for a lot of the commodity flow 307 00:15:48,440 --> 00:15:49,600 Speaker 7: in and out of the world. 308 00:15:50,240 --> 00:15:52,760 Speaker 6: Francisco, do you have a day circled on the calendar 309 00:15:52,800 --> 00:15:55,920 Speaker 6: this week to John's point earlier where you start to 310 00:15:56,160 --> 00:15:59,000 Speaker 6: challenge some of your assumptions and shift to some of 311 00:15:59,000 --> 00:16:01,840 Speaker 6: the one hundred and thirty dollar a barrel base cases. 312 00:16:03,680 --> 00:16:06,480 Speaker 7: Well, look, I mean, we know the hoodies were able 313 00:16:06,480 --> 00:16:10,200 Speaker 7: to disrupt traffic in Babblement that for about twenty eight months, 314 00:16:10,280 --> 00:16:14,160 Speaker 7: so I wan't to remind everybody of that flows were 315 00:16:14,880 --> 00:16:17,000 Speaker 7: down from nine million barrels a day to. 316 00:16:17,640 --> 00:16:19,360 Speaker 3: Four point one four point two. 317 00:16:19,760 --> 00:16:22,240 Speaker 7: Now, the difference between mavem Mon Devn and Hormosis that 318 00:16:22,240 --> 00:16:27,800 Speaker 7: there's clear alternatives that allowed shippers to reroute. Those seventy 319 00:16:27,880 --> 00:16:31,320 Speaker 7: vessels that used to cross, a lot of them rerouted 320 00:16:31,440 --> 00:16:36,000 Speaker 7: through the cape. So also I think a big relief 321 00:16:36,040 --> 00:16:40,800 Speaker 7: valve for Bible that here there's no clear rerouting. So 322 00:16:40,840 --> 00:16:43,760 Speaker 7: I think I think the options are not great to 323 00:16:43,840 --> 00:16:47,440 Speaker 7: reopen the strait pretty good in the line of all 324 00:16:47,560 --> 00:16:52,680 Speaker 7: the capabilities that that Iran might have. And also, to 325 00:16:52,720 --> 00:16:54,800 Speaker 7: be honest, this quickly becomes a bit of a guerrilla 326 00:16:54,840 --> 00:16:58,080 Speaker 7: war like we saw in Yemen, and I think shippers 327 00:16:58,080 --> 00:17:01,640 Speaker 7: themselves will will be very very costures not to take 328 00:17:01,640 --> 00:17:04,919 Speaker 7: that route if there's risk of their vessels sending up 329 00:17:04,960 --> 00:17:08,960 Speaker 7: in fire, and we've seen twenty of those already being attacker, 330 00:17:09,080 --> 00:17:12,360 Speaker 7: so I think so it's a difficult time for shippers, 331 00:17:12,359 --> 00:17:13,080 Speaker 7: for insurers. 332 00:17:13,720 --> 00:17:15,360 Speaker 3: Everyone's kind of waiting for a resolution. 333 00:17:15,560 --> 00:17:18,760 Speaker 7: But if it doesn't come up in the next few weeks, 334 00:17:19,080 --> 00:17:20,439 Speaker 7: I mean I'm going to give it maybe until the. 335 00:17:20,480 --> 00:17:23,359 Speaker 3: End of the month. Things can get very very complicated 336 00:17:23,359 --> 00:17:24,200 Speaker 3: for weight prices. 337 00:17:24,359 --> 00:17:26,399 Speaker 6: We had Jeff Curry of Carlisle on last week, and 338 00:17:26,440 --> 00:17:28,560 Speaker 6: he was talking about how even if the straight up 339 00:17:28,560 --> 00:17:31,720 Speaker 6: removes is opened this week or next week, there is 340 00:17:31,760 --> 00:17:35,480 Speaker 6: going to be an extra risk premium placed not only 341 00:17:35,520 --> 00:17:38,240 Speaker 6: on oil, but a whole bunch of different commodities, partly 342 00:17:38,280 --> 00:17:40,560 Speaker 6: because there'll be nations that are stockpiling and kin to 343 00:17:40,600 --> 00:17:43,000 Speaker 6: what China has done, and partly because people will understand 344 00:17:43,040 --> 00:17:46,240 Speaker 6: that there is that risk of transporting goods on the seas. 345 00:17:46,800 --> 00:17:48,200 Speaker 6: Do you agree with that thesis? 346 00:17:49,480 --> 00:17:51,719 Speaker 7: Yeah, I think the war is going to it's going 347 00:17:51,760 --> 00:17:54,640 Speaker 7: to transform the way we think about commodities more fundamentally. 348 00:17:55,400 --> 00:17:59,399 Speaker 7: Remember in the nineteen nineties, Japan pushed for just in time, 349 00:18:00,080 --> 00:18:02,919 Speaker 7: and in the twenty twenties it's been China's just in 350 00:18:03,000 --> 00:18:05,040 Speaker 7: case strategy. 351 00:18:04,640 --> 00:18:05,760 Speaker 3: Of inventory accumulation. 352 00:18:06,200 --> 00:18:10,520 Speaker 7: So they've been building up huge oil reserves, and we've seen, obviously, 353 00:18:10,760 --> 00:18:13,240 Speaker 7: in part because trade tensions, in part of it because 354 00:18:13,280 --> 00:18:15,720 Speaker 7: of political slash military tensions, we've seen a big buildout 355 00:18:15,720 --> 00:18:19,520 Speaker 7: in commodity inventories. I think this trend only speeds up 356 00:18:21,600 --> 00:18:25,960 Speaker 7: once the war's over, and I think that provides support 357 00:18:25,960 --> 00:18:27,840 Speaker 7: to long dated commodity prices. 358 00:18:28,119 --> 00:18:29,680 Speaker 3: Sooner or later, and we'll. 359 00:18:29,520 --> 00:18:32,000 Speaker 7: See I think a bit of a bit of a 360 00:18:32,040 --> 00:18:35,520 Speaker 7: mad rush once we are out of the war, but again, 361 00:18:35,560 --> 00:18:37,680 Speaker 7: we need to finish. We need to see this war 362 00:18:37,760 --> 00:18:40,600 Speaker 7: coming out to an end, because if we don't, I 363 00:18:40,600 --> 00:18:42,920 Speaker 7: think the risks of recession will grow by the week 364 00:18:43,760 --> 00:18:46,399 Speaker 7: as we head into April, and definitely if we are 365 00:18:46,400 --> 00:18:47,520 Speaker 7: still in the same place in. 366 00:18:47,440 --> 00:18:49,760 Speaker 3: May looking into a third quarter. 367 00:18:50,200 --> 00:18:52,200 Speaker 7: I've already mentioned we could see spikes t one hundred 368 00:18:52,240 --> 00:18:55,639 Speaker 7: and sixty hours of barrel. If things keep going, we 369 00:18:55,680 --> 00:18:58,920 Speaker 7: could see Brent breaking two hundred doors of barrel. I 370 00:18:58,960 --> 00:19:01,119 Speaker 7: think it may take a longer to get there, but 371 00:19:01,560 --> 00:19:03,040 Speaker 7: it's important to understand that. 372 00:19:04,880 --> 00:19:07,119 Speaker 3: We don't have that much time, and. 373 00:19:08,000 --> 00:19:11,280 Speaker 7: Obviously at US a little more instaly than all regions. 374 00:19:10,920 --> 00:19:15,000 Speaker 7: But I think in particular Europe is very very exposed, 375 00:19:15,800 --> 00:19:19,280 Speaker 7: as are many other Asian countries, particularly in Northeast Asian countries. 376 00:19:19,440 --> 00:19:21,640 Speaker 5: Francisco, I know you that you track what is going 377 00:19:21,680 --> 00:19:23,879 Speaker 5: on in terms of the OPEC countries, and we've learned 378 00:19:23,880 --> 00:19:27,160 Speaker 5: this morning at Bloomberg that the UAE production has fallen 379 00:19:27,160 --> 00:19:29,280 Speaker 5: to about two million barrels a day. It was closer 380 00:19:29,280 --> 00:19:32,159 Speaker 5: to three point six in February. What other countries do 381 00:19:32,160 --> 00:19:35,080 Speaker 5: you see production really falling off a cliff when it 382 00:19:35,080 --> 00:19:35,879 Speaker 5: comes to the Gulf. 383 00:19:37,040 --> 00:19:39,960 Speaker 7: Well, so it is known that the Iraq has been 384 00:19:40,040 --> 00:19:45,920 Speaker 7: a curtailing output as Haskubai remember that, I mean, I 385 00:19:45,960 --> 00:19:48,679 Speaker 7: mean we think probably about ten to eleven million barrels 386 00:19:48,680 --> 00:19:52,880 Speaker 7: a day of production has been curtailed in the past 387 00:19:52,920 --> 00:19:55,359 Speaker 7: two weeks, so it's about ten percent of the world supplies, 388 00:19:56,240 --> 00:19:57,560 Speaker 7: about twenty percent. 389 00:19:57,640 --> 00:19:59,040 Speaker 3: This will pass us through hormus. 390 00:20:00,080 --> 00:20:05,520 Speaker 7: So we've seen about profunctional academy our health. The other 391 00:20:05,560 --> 00:20:08,600 Speaker 7: big issue I think is refined petroleum products. Refineries have 392 00:20:08,680 --> 00:20:11,480 Speaker 7: been shut down across the board. And the issue with refineries, 393 00:20:11,680 --> 00:20:14,399 Speaker 7: as you know, we don't really have a strategy paternal 394 00:20:14,440 --> 00:20:18,120 Speaker 7: reserve for petroleum products. We have it for crue oil, 395 00:20:18,880 --> 00:20:21,080 Speaker 7: so it's a little bit in mislabeled. Real reserve is 396 00:20:21,080 --> 00:20:22,959 Speaker 7: really so it's through the crudel oid reserve. So if 397 00:20:23,000 --> 00:20:27,399 Speaker 7: we lose refining capacity, that impacts petrochemical units. You pointed 398 00:20:27,400 --> 00:20:32,760 Speaker 7: out to weddings in India for LPGs like propane, and honestly, 399 00:20:32,880 --> 00:20:37,119 Speaker 7: like it's the supply chain, there's locations that are building 400 00:20:37,160 --> 00:20:40,199 Speaker 7: up in the background that are gigantic. I mean, remember 401 00:20:40,280 --> 00:20:42,840 Speaker 7: one percent of energy is roughly one percent of GDP, 402 00:20:43,080 --> 00:20:45,119 Speaker 7: So if you take out ten percentage points of oil, 403 00:20:45,280 --> 00:20:46,760 Speaker 7: and oil is about a third of energy. 404 00:20:46,800 --> 00:20:48,639 Speaker 3: Plus obviously we're losing on gas. 405 00:20:49,040 --> 00:20:52,240 Speaker 7: We are looking at potentially seven or eight percentage points 406 00:20:52,240 --> 00:20:56,480 Speaker 7: of energy sucked out the world's system right now, and 407 00:20:57,560 --> 00:20:59,840 Speaker 7: that's going to have a big knockdown effect on GDP 408 00:21:00,040 --> 00:21:04,760 Speaker 7: very soon if those if that disruption doesn't get resolved. 409 00:21:04,800 --> 00:21:06,320 Speaker 5: I'm glad you brought up products because a lot of 410 00:21:06,320 --> 00:21:08,840 Speaker 5: the conversations I had over the weekend was centered around 411 00:21:08,920 --> 00:21:13,080 Speaker 5: jet fuel, diesel LPG. When it comes to these golf exports, 412 00:21:13,119 --> 00:21:15,199 Speaker 5: are they having to start to pick and choose what 413 00:21:15,240 --> 00:21:17,520 Speaker 5: they're going to export, what's the most important for the 414 00:21:17,520 --> 00:21:19,560 Speaker 5: global economy. 415 00:21:19,680 --> 00:21:23,240 Speaker 7: Well, we are seeing very little petroleum, very little in 416 00:21:23,320 --> 00:21:25,280 Speaker 7: terms of patronu products flowing to the golf. I mean, 417 00:21:25,320 --> 00:21:28,680 Speaker 7: my understanding is whatever's been flowing has been Iranian crude 418 00:21:28,680 --> 00:21:31,119 Speaker 7: oil to tune of one point five to two million. 419 00:21:30,840 --> 00:21:31,440 Speaker 3: Barrels a day. 420 00:21:32,600 --> 00:21:35,720 Speaker 7: And again those those are crude vessels heading for China, 421 00:21:36,760 --> 00:21:39,639 Speaker 7: which I think sets a very interesting next set of 422 00:21:39,720 --> 00:21:43,640 Speaker 7: days with harg Island now being a bit in limbo. 423 00:21:44,480 --> 00:21:50,080 Speaker 7: But also importantly, I think the petroleum products are already 424 00:21:50,160 --> 00:21:55,120 Speaker 7: experiencing huge distress. Jet fuel prices are two hundred and 425 00:21:55,119 --> 00:21:58,440 Speaker 7: fifty hours in barrel already, right, So we've seen that, 426 00:21:58,560 --> 00:22:03,320 Speaker 7: and and we've seen in fact Dubai crewe oil over 427 00:22:03,320 --> 00:22:06,320 Speaker 7: one hundred and fifty dollars a barrel. Again that's crude 428 00:22:06,320 --> 00:22:08,879 Speaker 7: oil for the delivery in the Persian Gulf. And of 429 00:22:08,920 --> 00:22:12,879 Speaker 7: course we know China has been curtailing, has actually banned 430 00:22:13,200 --> 00:22:16,399 Speaker 7: the export of petroleum product fuels like gasoline, jet fuel, 431 00:22:16,400 --> 00:22:19,439 Speaker 7: and diesel, which is in part exacerbating this problem. So 432 00:22:19,480 --> 00:22:21,600 Speaker 7: I think the question is who else is going to 433 00:22:21,640 --> 00:22:24,720 Speaker 7: do it? Who else is going to preserve or limit 434 00:22:24,800 --> 00:22:29,480 Speaker 7: those petroleum product exports. And of course we know who 435 00:22:29,520 --> 00:22:32,280 Speaker 7: is most dependent on those petroleum product exports. Number one 436 00:22:32,280 --> 00:22:35,719 Speaker 7: exporting in the world petroleum products America seven million barrels 437 00:22:35,720 --> 00:22:37,960 Speaker 7: a day. So not a bad time for US refiners, 438 00:22:38,240 --> 00:22:43,520 Speaker 7: but obviously a point of concern as those petroleum fuels 439 00:22:43,560 --> 00:22:48,119 Speaker 7: that are being exported also impact domestic prices for gasoline 440 00:22:48,119 --> 00:22:50,960 Speaker 7: at home in America, So lots of question marks as 441 00:22:50,960 --> 00:22:53,359 Speaker 7: countries go on to protect their own market. 442 00:22:54,240 --> 00:22:57,800 Speaker 2: This is the Bloomberg's Evandans podcast, bringing you the best 443 00:22:57,800 --> 00:23:01,120 Speaker 2: in market economics angier politics. You can watch the show 444 00:23:01,200 --> 00:23:04,119 Speaker 2: live on Bloomberg TV weekday mornings from six am to 445 00:23:04,280 --> 00:23:08,040 Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify, 446 00:23:08,160 --> 00:23:10,399 Speaker 2: or anywhere else you listen, and as always, on the 447 00:23:10,400 --> 00:23:12,840 Speaker 2: Bloomberg Terminal and the Bloomberg Business app.