Central Banks, Ukraine, And The Economy

President today. Rates are going higher. I think the concern are one of the several concerns in the marketplace is what's the risk of this Fed reserve going too far, too fast, maybe pushing this economy into recession. Danielle di Martino, Booth CEO and chief strategists at Quill Intelligence, joins us. Danielle, how is your federal reserve performing rate here? How and how do you expect them to perform for the remainder

of the year. Well, you know, I think that that we can expect Federal Reserve officials to attempt to stay the course oh over the next few months. People forget that this is a mid term election year, and if there's one unwritten rule at the Fed, it's that you don't appear overtly political during an election year. So I think the reason that so many FED officials, including the two most doublished the vice share of the F one, John Williams, who was just on Bloomberg and Leo Brainerd.

I think the reason that they've been corralled by J. Powell is that they want to be consistent in their broadcasting, that they're going to to be methodical and that they're going to raise rate, and that they're they've got a goal of getting to neutral, and that they're going to try and stay the course into the election, even though those last few words they're not saying, but I think that that's really the message right now. How do you set yourself a goal of getting to neutral when you

have no idea where neutral is? I just you know, nobody can I ask all people all the time, what's neutral? What's your our star? And nobody he has an exact answer. It's always kind of a wishy, washy spongy guess well, and it's going to be right. Because J. Powell was determined in two thousand eighteen that he was going to get to three, it was as if he had this neutral goal in mind. Now. You know, you listen to Christopher Waller yesterday, governor who used to be the director

of research at the St. Louis Fete under Bullard. He said, two point and that is the number that it seems like things started to break last time in the markets. So I think that they can. They can, they can have as many models as they want. I think that they're simply looking back in time and saying, well, look, credit credit broke when we were approaching two and a half percent, So let's let's just shoot a little bit

under that and call it two point four. By the way, I have Danielle has a big fan who listens to the show every day. We got a lot of fans. No, I mean listen to our show every day. Okay, he and I talk, but he also has heard Danielle speak a few times. He's a big fan. He wants he's writing in right now. He wants to do you agree with the change in work. That's the you know, the Bloomberg function about inflation peaking and the market pricing in

fewer hikes. You know, I think I don't think that the market has priced anything definitively in look at where the tenure you'ld is right now and this is just off of a stormer than expect University of Michigan expectations number that that just crossed the wires a two minutes ago. Right now, markets are extremely volatile and I and and pricing of future inflation is is really it's undetermined right well, but everybody has been saying this is the peak, you know,

or this is likely the peak. I don't. I don't know if I personally buy that. Also, the biggest asset managers in the world are betting that the terminal rate is going to be about three percent, which I know because black Rock came out today and said, Nope, it's going to be closer to two. What do you think, you know? I think uh, I think that what we're seeing and what few two two people are talking about is we're seeing that that freight that trucking in America

hit a wall on in early March. That is a sign to you and I think that this is what everybody's kind of kind of globbing onto. That's a sign that demand in the United States has really come under pressure, and that's why we're not seeing all these crazy supply Chaine disruption inflationary impulses, despite what's going on in Ukraine and despite what's going on in China. I think the demanding the United States is really what's hit a wall, and that that is what is going to anchor core

inflation moving forward. But we don't know what food prices are going to do, and we're hoping that gas prices are coming down. And by the way, University of Michigan is a pure play the upside surprise, a pure play on the fact that we gave back all of the games at the gas pump and came and and pump gas prices came down, and that's all you're looking at,

because it's still at recessionary readings. And I think that that is something that shouldn't be shouldn't be lost, and we should know that there is no uh Ohio State sentiment index because we are focused on the game of football. I admit that the University of Michigan is a great school. It's an incredible academy. It's an institution for higher learning, and I love ann Arbor. It's a great place to go, except for when they're playing Ohio State, because then they

lose and it's so depressed. I know, I know, I just wanted to get get that in there. All right, So Danielle, just real quickly, here is my federal Reserve going to deliver a soft landing for me? Or are we gonna risk recession? Maybe next year? Oh heck no. And I don't think recession is the next year proposition. Oh look, look, what have we had a tenure expansion, a twelve year expansion right now we're talking about a two and a half year expansion, give or take. Why

is the why? Why is the general operating assumption that we're going to go into recession as slowly as we have. We've really protracted elongated expansion. When this expansion in the entire cycle has been compressed into a time machine. I think that I think that I think it's species to say you're gonna have your eighteen months runway. I think people are worried that you know, this monitor, uh what do you call it? Modern monetary theory has brought in

an incredible inflation. And now look, Ira Jersey says, not a question of um, you know, if we're gonna have a recession, but what kind it's gonna be? I couldn't agree more. We've only tacked on two trillion dollars more in corporate debt since Operate the nineteen so more things can break. Yep. Absolutely. Daniel D. Martino, Booth CEO and

Chief Strategies a quick intelligence giving us her thoughts. We have a great pleasure ed prices in the studio with a senior fellow and former British trade official senior foul at at n y u and former British trade official. Uh he's a political economist. He represented Her Majesty's government to Wall Street and uh US official sector from seventy one and um he's Uh. I guess you specialize in German economic history, but you look at obviously the entire world.

Is that fair? Yes? I think, like you know, German history is always in my mind. I think it's a good a good benchmark for a lot of things, particularly if we're gonna talk about inflation. Of course, yeah, the Weimar Republican the hyper inflation is um the big scare and that's why Germans hate it so much. But I think we all hate inflation. I mean, Ronald Reagan hated inflation as much as any German. Um. Uh. Somebody asked

me today, who's your least favorite German politician. And I was thinking, Um, first of all, I didn't any I like, I like a lot of them on both sides of the aisle. There's very there's not as much differentiation there as there is here, at least of the two parties. But I thought, you know what, when I was the G twenty in Hamburg, um, angl a miracle got like a standing ovation from all the other leaders. She was clearly leading the free world right um and and it

was amazing, like she was the hero. And now in hindsight, we realized she's been appeasing Vladimir Putin for years and making Germany dependent on Russian oil and gas. They're basically fun funding his war in Ukraine, these atrocities, um that we're that we're watching. How does how does Anglo miracle go down in history? I mean it's that's a profound question, right And to use the word appeasement um of Germans is sort of metso ironic and you have, you know,

you have to sit down and think about that. That's why you chose it was. I appreciate it. Um, Yeah, how does she go down in history? Right now? Not that well? And I suppose if you want to think about why the Germans were taking in all that gas and why they were appeasing Russia, maybe there was some sort of back in their mind war guilt. You know, we invaded the Russians twice, we caused a lot of damage, and maybe we have some sort of historical responsibility to

bring the Russians back into the European fold. And again, ironically, they are not in the European fold, and they seem to have used this relationship with Germany to to break away from what you might call norms. It's crazy. I was over there for the last six years in Berlin, and I kept running into like Dan Yet, the U S Energy Minister. At every time, I'll tell you, Dan,

what are you doing here? He's like, I'm trying to get these guys to buy our l en g I'm trying to get them to build more terminals so they can accept our gas and not buy all the stuff from Vladimir Putin and a shut down Nords dream too. Obviously he was unsuccessful. I mean, I guess they wish they would have now, But is it even possible for Western Europe to cut off Russian oil and gas or

would they be kind of shooting themselves in the foot. Well, it's certainly possible for Putin to shoot them in the foot and cut off at least some of that gas. Right, So I think it's definitely it's now become clear that that's a major security risk. Uh. And so whether it's possible to the upside, whether they can actually pivot back

to US oil production, one would hope. Um, Now, of course, I mean, you guys, tell me what you think about this, but you're immediately going to drive into the wall of the climate lobby. Um. Possibly correctly, right, But it's on the one hand, on the other hand, situation, Um, so we need to pump. Do you want to finance war crimes? Do you want to mind more dirty call? Do you want to roast to death? Which way like atomic weapons? Or slowly? So we we heard from Christine Leguard I

m F this morning. It gives us your sense of how the world's banks to fair. The e c B, the Bank of England. How coordinated are they in terms of trying to bring down inflation? We've got a reopening economy. How are they in Canada? Don't forget forget fends, they're all fighting the same inflation. Right, Hopefully they're on the phone with each other, one would hope. Yeah, I think I think the central bank has talk to each other

all the time. How coordinates coordinated there are in actual policy terms remains to be seen, and I think the CBS behind But if you're asking me my sense of it, I think all central banks around the world are realizing

two two things right. Number one, fat currency is a massive experiment, and number two, we've been running an experiment within an experiment with endless que So an M T right, MMC, Please don't get me started on M T R. So, I mean how much money did we spend, not just monetary policy, right, how much money do we spend in fiscal um since the pandemic started, and we at least brought ourselves out of a recession quickly. But the questions are we headed right back down there with massive inflation

um to join it. I think the answer is yes, So a nine trillion dollar balance sheets and absurdity. And if you remember, we were talking about inflation being transitory passing, we kind of moved from passing to persistent, and now I think we need to move from persistent to pernicius and the Fed really does need to get a handle on this. I understand that there's a war in Ukraine. I understand that there are all sorts of other financial markets reasons for like, you know, keeping the juice going,

But this is going to become a disaster. Eight could be ten, and if it's ten, you could imagine twins. So you think they should be quicker with much QT, much quicker with QT, much quicker with hikes. So you're not in the camp that the CPI inflation reading we just got is the peak. I don't think it matches if it's the peak. I mean, what if it goes back, goes back down to seven? I mean, who cares? This

is a major problem. This is eating into people, and this is something like I guess one of my questions has always been, dude, those costs don't go back down, right, I've been watching My from in January is fifty grand. In February, mid February they raised it to fifty three. You know, now the beginning of March it was did get no, I'm talking we're talking about the forward f

one fifty for Matt Miller. It's a big issue that just that's a general term I really am trying to decide between a GMC Sierra four X and the Chevy Stilverado. But in any case, the point is the prices stay elevated, right, they still sift of gas and food. Hopefully they'll come back down. Prices upwardly sticky. Let's be weird like that. And I've been looking at the Toyoto Super myself like that thing looks like a beast. So you know what

I mean. Share development with BMW is a kind word. Yes, yes, I'm trying to be right now. Yeah, you cause I'm a fan. Okay, cool, I'm driving a Subaru, so if you want me to leave right nice? No, No, that's a boxer motor. I love it and very reliable that Consumer Reports ranks Subaru as one of the greatest brands of all car brands in the world. So I'm feeling good about my choice. Yeah, thank you. What's our fed dude?

Next there? And I mean fifty basis points? Do I have multiple fifty basis point moves from my federal reserve? I'd like to see that. Um No, probably. I mean they're they're very hesitant, aren't they about even suggesting they'll do one? I mean they've said they might, um, but my guess on it says they're gonna be four coming off. I'd like to see that too. Um. But I think that if they do that, there's a moment in markets right where the markets are like, oh what is this?

H If you do it once, you've kind of broken the seal. And so they're facing two panics, right They're facing either the real economy panicking because we can't buy the things that we want to buy, and on the other hand, they're facing the financial market panic potentially in which markets stone around in side. You imagine four fifty basis point hikes. That sounds crazy, but it brings us only to two and a quarter percent. Still nothing. So

what does normalization mean? Yeah, okay, normalization doesn't mean anything right now, We're still going to be in a very loose environment even with that kind of even with that kind of piking, Good time to buy a house, all right, Ed Brice, thank you so much, and senior fellow n y U, former British trade official. Remember the Economic Club of New York? Do they actually have it like a clubhouse?

That's a big deal, that's that's a big old club. Actually, did they have a clubhouse to I mean, where do they think they meet? They probably meet it like the Metropolitan Club or something. And I mean I took economic time. Can I get in there? I don't know what you have to do to join it? Alright, thank you so much.

We appreciate it. Looking at the wall, worry a new brick has recently been added over the past couple of months, and that is geopolitical risk, as you have a hot war now in Ukraine, and that there is another issue for investors to digest. Sedec Wabba joins us. He is founder, chairman and managing partner of I Squared Capital. Sedec. You know, we have this hot war in Ukraine. It feels so twentieth century that people, I think, I have a hard

time kind of really appreciating the impacts. How do you think about that in terms of your investment outlook great to be with you, Matt, and I appreciate the invite. My biggest concern is the impact the war who is having on global inflation and US inflation in particular. So the numbers came out two days ago, eight point five percent increase in March compared to seven point nine you

had one point to percent increase in one month. That increase will continue, and I suspect inflation will be around ten plus by the summer. So that puts enormous pressure on the Federal Reserve to increase interest rates, and that of course is not going to help the economy. My senses, we are sleepwalking towards global economic crisis unless this Ukraine situation get resolved. I want to jump in and say, first of all, that was Paul. Uh, that that was Paul.

This is Matt. I'm just saying, OK, we we we look a lot like on the radio. UM. First of all, hello and thanks so much for joining us. Great talking to you. UM, I want to know what you think about, UM, you know the U s economy in this context? Are we are we headed towards a recession with ten percent inflation?

That sounds like a horrible situation. I think if the war in Ukraine is not resolved relatively quickly, you will have the trifecta of a pandemic of a global logistics Chaine supply crisis and war that has pushed energy prices, commodity prices, food prices way way up, and that yes, will probably lead to a recession. UM. I give you. One simple example, we passed one point two trillion infrastructure bill.

The cost of construction has gone up by more than that means that that infrastructure bill, at one point to trillion, has already lost so it's lost two billion dollars of its purchasing power. So that's a problem. So are we going to get any more fiscal help? You think, um, because we've fallen off this fiscal cliff. It's kind of a cliche now, but it's true. And you know, on one hand, a lot of that fiscal spending is to um is getting the blame for inflation. On the other hand, Um,

can we really go cold Turkey without any more? No, you can't. So so you have to continue to invest, but invest productively in areas where that has a positive effect on American productivity. That has to continue to happen, and that is in fact what the Biden administration is doing. They're trying to ensure that the infrastructure bill, which is the biggest bill we've ever had, is allocated properly across

productive projects across the US. So that is certainly going to be a huge plus, and that has to continue. I think the other element is to be able to have a synchronized effort globally to try and stop the war in Ukraine, because that is going to be the biggest positive impact it can have on the global economy. In terms of US infrastructure, select, where do you think the priorities be. I'll take your minds minus the Gateway project, getting some new tunnels connecting New Jersey and New York

and Amtrak. I've been lobbying that forever. Where do you think the money should be spent? So the most efficient way today is to spend the money on things that needs immediate repair. Why because you don't have to wait another three or four years of planning to be able to do that. So things that have broken bridges that are almost falling are the easiest target. Whether is the most impact, the biggest bank for your buck, And that

is what is in fact the administration currently doing. The next will be to really focus on energy supply and adopt on all of the above strategy. Right, so, we realize that we need to ensure independence but also the independence of allies in Europe, and so that means accelerating energy projects and ensuring that that will allow gas to flow into Western Europe, which I think indirectly should help

accelerate the end of the war. As an investor, sodic, are there infrastructure projects that you think have decent returns right now? What's the what's the what's the environment look like? Look, the environment is generally positive. Of course, everything is expensive, even though there's been a market adjustment, but real assets haven't yet adjusted the way that probably should. But you have investments in digital infrastructure, which continues to be very important.

You have investments in renewables in solar and wind, which is going to be critical. And I think investment in basic infrastructure associated with the transport of gas across the US to ensure that you can unblock the supply of gas for export purposes, that's going to be an important element. So so that at the beginning of this pandemic, you know, when supply chain issues became so apparent to so many people, there's certainly talk about on shoring more of our supply chain.

Is that something you think this U s economy has an appetite force, that's something that should occur. It. Look, the strategy is from a just in time to just in case. Uh, that just in case, of course comes at an expense. Right The fact is Europe was buying gas from Russia and not from other Reasians. It's because it's cheaper. So the moment we start on shoring as opposed to offshoring, we will by definition increase the cost

to the consumers and that will also fuel inflation. And so from that perspective, it's a choice that consumers have to make. I think in times of crisis that's what happens. But I think once that stabilizes, I would not be surprised that we returned to a more balanced offshore on shore type of strategy. Alright, sedek Wabba, thank you so much for joining us. Todek Wabba, Founder, chairman and managing

partner of I Squared Capital. Matt, you ever think we're gonna build a silicon chip factory here in the US, Yeah, for sure, I'm They're they're building chip factories here in the US right now. I believe one in the great state of Ohio, at least one. UM And I think Sodic makes a great point. You know it's going to be more expensive obviously, UM, you can't treat workers here the way you do in low costs labor nations. And UM.

On the other hand, though, maybe we're willing to spend enough so that the workers who do build our chips live a better life. Yep. Interesting to see how this plays app That was certainly the on shoring of certain manufacturing issues, supply chain issues, certainly the talk in the beginning of this pandemic. See how this plays out. There's a film called Trading Places. Highly recommend if you haven't seen it. If you're working on Wall Street, watching Trading

Places is like reading Liars Poker. It's something that you have to have done. So. Jennifer Lee, Senior Conmers Managing Director, Femoil Capital Markets. Have you seen Trading Places, Jennifer. I think my favorite line is when he his legs. We're discovered that they worked, and he was like, it's a miracle. It's a miracle. I can walk. Eddie Murphy, Jennifer's see. Jennifer's seen, and she can stay and play with us.

All right, Jennifer talked to us about this economy. It's bad enough I have to deal with inflation at the gas pump in the supermarket. Now you've got some economists talking about recession next year. How do you think about this Federal Reserve and is a recession risk reel in your mind. They are. Remember when we spoke about this last month, I was saying, it's not our base case scenario, and it's still that's still the point the case that

is not again our base case scenario. But you know, the longer that you know, the the war last for for Examp Bowl, you know, um, the FED communication has been very clear that they are going to go faster and higher um than everyone was anyone was expecting, you know, like half a year ago or so. So I think the risk of a hard landing is is rising. But again it's not our base case scenario. But you know, probably the next couple of years, you know, we're probably

gone some kind of pulled back. So what do you expect in terms of you know, we were just talking about some people forecasting four fifty basis point hikes. Um, I don't think that's the consensus, but we are looking for If you take a look at the w I RP function on the Bloomberg terminal, you can see that the market has priced in essentially nine twenty five basis

point hikes between now and the beginning of February. What do you think, all right, so this is a very humbling job, by the way, and I remember pooing people who are saying, you know, four or five, and I'm like, oh, come on, you know, let's be reasonable. We can account anymore. We have rate hikes um going for every single meeting this year and I think two next year. UM. And we're looking for fifty basis points in May and in June twenty five and whatever after that. UM. Again, the

risk is higher. And it's not just the FED, it's you know, as everyone knows, it's like almost all center banks around the world. You know, this week we had to make a Canada going fifty. We had New Zealand going fifty. We had a governor governor less big of Korea going twenty five, you know. So it's, uh, this is like the story for for everyone, and it's almost like what's that movie about them? Anyways, It's like fifty is like the new That's sort of how I've been

thinking about it. What we had Christine Legarde, president of the e c B, this morning speaking what was your takeaway there? It seems like it's less clear for the ECB their path relative to the FED reserve. Right, so Europe has you know, it's it's a very different story over there, um, you know, especially with with the war

and energy prices especially. UM. It was interesting because I think that the press release it self was pretty cut and dry, you know, saying that if that we are basically seen enough and the A p P will end

in Q three. But during the press conference, President regard Um, who was working from home, sounded a lot more wishy washy, a lot more vague and in sort of like typical of the UCB, where you know, she was emphasizing UM flexibility and optionality, and she didn't She was like, you know, we see it's going to end in QC Q three, but we didn't say when, you know, is it gonna be early or later? Um, So I think July is

still a possibility. But I've sort of tossed that one up the window now and I think we're going to go for a September ray hike, just given how uncertain the the e c B was sounding UM today, it's amazing to me that we have seen such little movement UM in the euro For a while, I thought I was going to go to parody as it was going up to you know, one twelve, one thirteen. Then I thought up is the path and now it's come back down to to one oh eight. Where do you see

euro dollar? Um, we're a little bit more on the bare side of things, UM. And I guess I was just sort of anticipating that, you know, the the CP will probably get cold feet, um, and they will probably keep communicating and they they're already pulling back on that accommodation. But when they're actually going to be more aggressive on the right hike front, I don't know when that's going to happen. But we've got the euro ending at around

one oh six by the end of this year. Um. You know, hopefully I'm wrong on this one, but you know, maybe around lower than where we are now. Are they all on the phone, Jennifer? Are are Christine Leguarde and Jerome Powell? And you know, um the Bank of England and the Bank of Canada? Are they all talked? Because they're fighting the same inflation right with different rate hikes? Right?

I think they were, you know, um chatting and probably they have a WhatsApp group going on, you know, back in But UM, now I think you know, things are heading in different directions, you know, especially uh inflation and then with the economies in North America a little bit stronger. You know, the US was certainly starting on the starting off on our stronger footing, so they have more um, more comfort I think, in raising rates very quickly and

very aggressively. And it's that your poll and said, you know, the labor market is strong and the economy can raise rates, but um in here in Canada as well, but in Europe, like I said, it's a very different story and they're more concerned about the impact of the war. All right, Jennifer, thanks so much for joining us again. Jennifer LEAs and your economist managing director Demo Capital Markets, thanks for listening

to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller V three on false Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.