Markets, Ukraine, And Crypto (Podcast)

president Private wealth adviser at Morgan Stanley, joins us. Katarina, on a day like today, give me an example of one of the incoming phone calls you've received from your clients today. Well, thank you for having me on the show.

You know, it certainly has been, you know, a difficult year for investors, and you know specifically this day, and you know, the type of phone calls we would receive on the day like today would be focused on the fact that investors are getting uncomfortable um with the stocks and bonds that they own, and they might understand that the quality of their portfolio is really high and there really welcal asitions, but we are all human beings and it's very hard to manage through the sphere, and we

tell our our clients all the time, over and over and over again to focus on the long term. But you see returns on the day like today and you know what we're so during the previous week and in combination, is getting progressively difficult for them to focus on that long term, to have that big picture you know, in

mind and in our review. The only thing that we can do at the moment is go back to basis, go back to all the work that was done through the portfolio construction on making sure that the portfolio quality is really high on the income generation, to in quality of the portfolio only asset allocation between stocks and bonds, and also internationally because surprisingly many when we look at the returns and the European markets in general, um, you know they're not you know, quite quite as bad as

good which seemed here in the US, making our case for at allocation, but investors are concerned in the scary time. Sorry, I feel like we haven't seen Katerina true capitulation. And I don't know if that's necessary, but it seems to be something that a lot of people want. Right now. The VIX is at thirty three, but it's taken so long for to get there. This sell off seems fairly orderly.

What what what do you think we need to see? Well, bottoms are hard to printict to begin with, and the market is getting to the the the range that we quite frankly have expected. You know, we thought that on the lower side we could see anywhere from uh thirty four hundred to thirty eight hundred. We're at thirty seven seventy nine at the moment. And it's not used to anyone that we are in the bare market and you know,

the rallies that we have been seeing. The one of the big things to keep in mind is that, you know, the bear market rallies, which is totally normal during the bear markets, and we have to um analyze the data that is coming in and you know see really the the path out of this bear market, which we quite

frankly think is not going to last too long. We think that with all of the earnings revisions to the negative, eventually as we get through the force and force and a third and forced quarter of earning reports, we're going to get some positive news and maybe get get this catalyst that we need to get for the third and fourth quarter. You think we need to get through the second half of the year. That's what we think. Yes,

we think that that we're here. But but but at the same time, you know, here's a little bit of a positivity means as difficult asitors to you know, focus on it. Right now, our up range for the year is forty two hundred to three hundred because as the inflation, you know, get get somewhat out of control and as tu more confidence in pools a little bit and we start seeing the end of this earnings revision cycles and companies get into in position where the earnings are normal.

We're looking for that general market normalization. You know that that is you know, difficult to achieve. We just have been through this COVID environment. There's UM, a war in um, you know in Ukraine. That as the geo political risk. But the biggest thing is that consumer confidence is at the all time low. I mean, we have not seen the numbers at the quite frankly at the levels that they are today. And the big part of it is the price of blowing gases. Inflation is you know, just

just the day to day. But at the same time, in our view, market cycles are getting hotter but shorter, and we even though the but we totally appreciate the possibility of the recession, thinks that it's not you deal that you know, it might be on the horizon, but it also is not something that is a sure thing, all right in terms of kind of getting a sense of are we seeing capitulation. I have an SMP that's

off three point three percent this morning. I look at the w e I function on the Bloomberg terminal and I see the volume so far this morning is thirty three above the thirty day average so far today. So that's a little bit of something to pay attention to. Katerina, when when you talk to clients and they say, I think this is the bomb. I want to buy some stuff, you want to put some money to work. Are there

any sectors today that you feel comfortable with? Absolutely? They are all these sectors that would do better than others, you know, in this type of environment. In all of you the data point the re focus on is inflation and that it might be peaking. Actually so so the sectors that dwell in this environment are utilities, healthcare, real estate,

UH and consumer stables. And consumer stables is the you know, it's a little tricky because there is a price pressure there you know, but but we think that this is the after that that those Hubert defensive sectors, you know, that are positions well in this environment. But you know, speaking about inflation, even though we think that inflation might be declining, um, we think it's seemed to be higher than just stored at a level. So we always view

portfolio through the prism of income. All right, Katerina, great, great stuff. As always, always appreciate getting your perspective. Katerina Semonetti, Senior vice president, a private wealth advisor at Morgan Stanley talking to her clients today, holding some hands today snp off three point. Let's get to our next guest, Matt, because I don't know what this guy does. Chris Campbell.

He's a chief strategist for Kroll. I know Kroll as like the security people, right, yes, okay, but before joining Kroll, he actually had a real job. He was a former assistant secretary from the U. S. Department of Treasury. Chris, what does a assistant secretary for the U S? N correct? Like, what did you do for like day to day? What did you do? Yes, it was it was a very

busy time seventeen and eighteen. We uh, you know, we had reregulation of Dodd frank And and Starman's Oxley and tax performers underway, and so many other things, cyper security and uh, you know, it's a great variety of things. There's no question it was. It was very difficult time, amazing time, but also I you know, as I like to point out, there was good economic time as well. The country was doing pretty well at that time. What I was gonna say, it wasn't that difficult about how

about being the assistant treasure secretary. Now, you know, I have got a lot of respect for my friends at Treasury and I wished them a lot very well. So you also interacted with FED chair J. Pal Um during that time through you know, various type types of meaning what do you expect to hear from our Federal Reserve chairman this week? I mean it is it's ugly out there.

As it relates to inflation, yeah, there's no question. Like I you know, I've been saying for a long time the inflation was unfortunate, not gonna be transitory, and unfortunately I was right. Um. You know, I have great respect for cham pale Um, and I mean you guys basically put him in there right we did was through February. So yeah, he came in and under the Trump administration, uh, you know, and was renominated by President Biden. Um, look at it's and confirmed. You know it's it's a It's

a very difficult job. There's no question about it. Uh. Chairman Powell is a consensus chairman, always has been. I think one thing I always say it's great about him as he's able to talk about the economy in ways that it's really approachable and kind of democratizes the way, you know, otherwise very very unapproachable topics. But he has an incredibly difficult job, and I believe unfortunately he's this

move too slow. Um. So I think that uh, he's now faced with an impossible set of of of challenges and um, he's either gonna have to choose to precimpitly raise rates or and drive the economy in the in the tank, or live with inflation and the and the really difficult things that are going to happen with that. Now. I just wondered, like, how does a failed to reserve board some smart people there, led by j Pal, how do they fall behind the curve? They do their best

on economic forecasting. Um, you know I can Sherman Pal's uh approach to the FED is he's he's most he's really a consensus builder, and he's a consensus guy. He's very even keel um and uh, you know that approach would in almost every other circumstance would work. But this unfortunate. Right now, this is a word a time where I think inflation is just you know, it got away from them.

They forecasted inappropriately, unfortunately, and now there's a real challenge ahead and they're gonna have to find ways of either shocking the system by raising rates precipitously, um, because there's so much outside of their control, supply chains, um, you know, Russia, UM, China, uh, kind of regulation and I mean I was gonna just point out that it's not all about the FED. I

know that. Um. There was there were a few days a couple weeks ago when the administration wanted us to believe that the FED was solely responsible for inflation or deflation, like passing the buck. But obviously there are other things. If you spend five trillion dollars in a year, if you um, you know, try and regulate oil companies out of existence, then you're gonna have some, um, some some some feedback from that. Right. All I can tell is

you're a very smart guy. No, there's like, there's no question. I mean I got you know, from my advantage point, Congress and passed and spent way too much money. Um. You know, there was some of that that's really necessary. That the government came in a shutdown the economy, so there was there was a real challenge there for a while.

But that we Congress certainly overspent um and both on the fiscal and monitary side and quantity of using and it continued for so long, and so there you know, on both sides of the of the equation are to

blame here um, And now we're in significant debt. What one thing is not talked about is that you know that again the impossible challenge of raising a just rates is also going to make the fiscal side almost impossible because now most of us are THEAXX period dollars that they're gonna be collected are going to be spent on servicing our nation's debt. And doesn't seem like people talk about fiscal solution or a policy solution to this. We only talk about what can the Fed do? And I appreciate.

That's fun for us. We talked about the FED all day long. Um. But there the difficulty is in Washington as well. Right, they can't come in and just cut taxes and um, well they can't do anything stimulative, right, Otherwise that risks boosting inflation even further. Yeah, Like, I mean, they're they're gonna I know, I know my friends and Washington, I've worked with them a long time. They're gonna want

to spend more money, There's no question. And as the economy continues to degrade, they're gonna want to provide assistance to families, and so it's gonna be a great pressure on them to spend more money. You know. But fast forward to November, likely is going to be a divided government. Um. And really in those situations, if there is a willingness um, you know, the president being democratic, perhaps the Congress being Republican at that time, there could be a bigger solution

that we we could be we could be seeing. But until then, I see nothing happening in Washington. DC is really broken. Yeah, I guess, Chris, how about a recession? Is that something that you're talking to your clients about is a real risk and if so, when, maybe so, I think it's gonna happen sooner rather than later. Um. You know, even again, I'm talking about before. The FAT

has an impossible set of choices ahead of them. But one of the choices they have, and likely the choices they're gonna take, is a is a participitous increase in in interest rates that is for sure going to lead to us at recession. And I like to say, Um, there's about half of our country who live paycheck to paycheck, and so if we go into recessionary times and if

we can't get inflation under control, we're in stiflation. That means that the majority of our our our fellow Americans, you're not gonna be able to afford food and gas and clothing. That's gonna be a real challenge. It's gonna, you know, put socio economic pressure, economic pressure and everything else absent what the markets are going through. So what do you expect from the FED on Wednesday and the next few meetings. I think they're going to have to

start shocking um. And it's it's uncharacteristic of Cherman Powell and this FED, but I just can't see him doing it right. You can't see him coming out in surprising markets. So now as we ratchet up expectations for seventy five, he's gonna have to do a hundred like I like, I just I think he's gonna have to go beyond fifty um do something. I don't think he's you know that the German pal is not Paul Wolkers. It's not

going to follow that path. But I think he has to do some things that are that are going to be uncharacteristic of him and what the markets don't expect in order to do something that's going to get inflation under control. Chris, good stuff, man, good stuff. You're coming back. By by the way, we just kind of did a little vote. You're gonna come back. You're pretty good, guess. Chris Campbell, chief strategist for Cool. We like to talk

about education. Two NBA from the Thunderbird School of Global Management. I love that, uh, and then a bachelors from the University of California at Santa Barbara. I think students should pay the state of California to go to Santa But that's how beautiful do Santa Barbara is mean, I know, but they should pay more because they're literally on the beach and one of the most beautiful spots in the country.

Good stuff there. Let's switch gears a little bit talk geo politics, and there's absolutely no one better to do that with than Jack Divine. He's a founding partner and president of the ark And Group. Awesome. We're talking a thirty two year veteran of the c I, a former acting CIA Director of Operations, and headed CIA's Afghan Task Force from five to eighty seven. Remember kids, that was when the Soviets were there. Jack. You know you're also the author of a book that I read last year,

Spymaster's Prison to Fight Against Russian Aggression. Good stuff. I highly recommend it. I cannot really fathom how much President Putin has miscalculated, seemingly in Ukraine. What do you make of the whole situation here over the last four months. Well, I don't think you're the only one surprised. I mean, I'm sure he is UH and his intelligence with salty

and there's no question about it. The key question was whether or not the Ukrainians would fight, and I think he grossly underestimated that because of the relatively little resistancy UH faced in fourteen when he went into the Crimea and the thumb buss. So I think he thought he had a cake walk, and I think he's surprised by his own army. I think he thought he had a

drugger army. Is he's invested in high end weaponry but didn't look at the basic blocking and tackling of logistics and those things that made you to seas As Grant win the civil war. Alright, so he's made some mistakes. But how is this likely to play out? How Jack, do you expect this to end? Well, I think everybody thought, you know, let's get Zelisio on a plane before it's

too late. And this is in the first couple of weeks, but it quickly became clear that's what we're talk about a second ago, that the army and its structure this week, So the Russians basically got put pushed back. Now, I think you're at a point where the Russians are using heavier artillery and so on, and they're making slow but steady progress, but it is slow and bloody. I also think there's a catch up here. I think as the artillery has arrived through the uh for the Ukrainians, they're

going to be pushing back again. So you're going to see more counter pushing in somewhere not too far out, I would say, before before the end of the year, if not Thanksgiving. You're going to find somewhat of a stalemate where they can make some gains and then they pushed back. Ukrainians make gains and they get pushed back.

We haven't reached that point and there, but it will arrive, and that because the Russians cannot win over the occupy the Ukraine and Ukrainians unfortunately won't be able to reoccupy all of the suratory without significant cause. So I think we're probably looking very soon to the stalemate where everyone was going to feel that this is going to be a battle as far as it goes. There will may not be a negotiated settlement both sites made. Just lower the firing level and it will go on like it

has Pointing four team. But we're looking now, I think it closely where the standoff will be. All right, Well, that's it's obviously a tragedy in so many ways, but I love to get your your take on that. Jack. Let me also ask you what you think about what we're seeing in this country and the market fallout from that inflation at eight point six percent, the highest since the early eighties, the markets really tanking for the third

day in a row. You're speaking, I believe you're speaking at the S three Air conference at the New York Stock Exchange. It's a company on whose board you serve and has become really noted in the financial industry for it's short data. What are you talking about out there, Well, we already get the experts that are at the Summer that address that. I'm more of a military political analysts, but I would say, frankly, if we're looking in the context of the Ukraine, it's it's there's a cost here,

we're paying that cost. But some are the some are the Russians. But there are overarching issues in the economy that I think many many experts on your show understand. You know, where are we going to go with the interest rates? And I think be enabled to monitor various um UH variables rather as UH as the Street Group does, enable analysts to have a better handle on the speed in which variations are taking place. If you want to

gut reaction. My own gut reaction is the platon is going to be with us a while an interest increased interest rates are coming down down the road, and it's any going to be a difficult year, not only for the United States, not only for Russia Ukraine, but probably probably worldwide, including the Chinese. Hey Jack, you just mentioned the Chinese. I wonder what they're the Chinese. What do you think China is taking away from what's happening in

Ukraine as it relates as Taiwan. So here we're seeing a lot of static and and chest speeding uh and from China right now about they'll they'll go to the last man to preserve there are countries as if we were going to attack. My senses, they looked carefully, very carefully,

what is happening to the Russians? And I think they're asking itself, we don't want to make the mistakes Putin made that looking at Taiwan, attacking an island, by the way, I will tell you a much more difficult thing than the land work, and looking at the cost of the Russians now paying and the cost that they would pay, and it would throw off their economic game immensely. My honest opinion is that I think when they looked at it, whatever they they had in their mind, a lot of

people talked about. But my my view is it's pushed off to an indefinite period. I think they need they're more concerned about solidifying or economic and power in the region. Uh, but a war would totally disrupt their economy, totally disrupt their placed in the world. So I think that's it's further off and a lot can happen between and many of the military and trying to think they need to have a Taiwan part of it. So I think they've they've seen this and this is actually helpful and not

having a confrontation with them. All right, Jack, awesome stuff as always, Jack Divine, founding partner president of the ark And Group. They are obviously obsessed with what's going on in markets today, and that's not just what's happening in stocks and bonds. Crypto has become an increasingly important part of fine financial markets. Nick Carter joins us right now, who um kicked it off? And Nick correct me if

I'm I'm wrong here. As one of the first analysts on the street following crypto before he founded his venture crypto venture company Castle Island and also founded coin Metrics. UM, what is going on? It's not just Bitcoin that's failing as an inflation hedge. I note that gold also hasn't performed terribly well. But the drops that we've seen in crypto UM far outperform or underperform anything else. Why well, UM, then thanks for having me on. Yeah, the crypto markets

going through its own little de leveraging cycle here. UM, there are a bunch of lenders that are blowing up and uh, in fact, some of their positions are visible. Uh, their liquidation thresholds are visible on the blockchain, and so there's an element of stop hunting that's also going on in the market right now with UM, So that would

probably explain some of the reflexivity. But yes, we are having our own little de leveraging cycle, obviously not helped by the fact that financial conditions are getting very, very tight. So it was already tough before Tara us D and Luna that UM catastrophic collapse. Is that starting to UM to spread? Is there any contagion effect from that, because now we see that Celsius is also barred money being

taken out and moved around. Yeah, entirely. Yes, there's a daisy chain of risk care and uh that's precisely correct. Its traces from Tara, which was um its peaked the largest sort of defied lenning protocol, the anchor protocol within Tara. That was really the reason it blew up was was the was the largest UM lender in the DeFi space, and a bunch of sort of centralized lenders that take retail deposits and offer a yield on that they were putting client funds in it. And Celsius, which is this

big crypto lender which is now paused withdrawals. They were probably the biggest user of the anchor protocol of Terra and so now that terror fails, Celsius suffered a ton of withdrawals. Uh, they're clearly distressed. We're not true if it's a liquidity or a solvency crisis, and then the next daisy chain would be other lenders that have exposure or relationships with Celsius um and then other lenders that

also suffer outflows due to the confidence crisis. So there's your precisely right, there's a daisy chain of risk here, and we're seeing it play out really really quickly. Hey, Nick, I know, as as Matt mentioned, you were at Fidelity as the first crypto analysts there. I'd love to get your perspective about as you look at the sell off here, these are the other assets of crypto. What percentage from your perspective do you feel like is institutional ownership of

crypto across the board versus retail today? How institutionalized has it become? It? Well, it's it depends what kind of institution you refer to. Obviously, we have a very small amount of sovereign ownership. Um, we have some corporates UH that own bitcoin. That's probably the largest sort of institutional tranche there. And then of course you do have asset management products created by the likes of Fidelity. Overall, say, the crypto market is still very retail driven, um and UM.

You know, if it were more institutionalized, i'd expect to see the volatility attenuate, and I would expect to see uh softer peaks and less aggressive bottoms through rebalance, and we're not really seeing that. To me, it's still very retail driven. Remember, it's as small as a class as

of right now. It's collectively all the crypto assets are worth less than a trillion dollars, so you know, it doesn't really have the liquidity profile to absorb you know, the largest institutions, But I mean since I've certainly seen a lot more half type for it, I just haven't seen a ton of institutional option in size. Well that could change now obviously, given the crypto winter has gone, UM has turned into like a polar vortex. I want to ask about something maybe a little more esoteric for

many of our listeners. But people in crypto have been waiting for the merge to happen at Ethereum, which would change UM the verification system from proof of work to proof of steak. There have been a couple of hurdles lately. UM. There are concerns that a lot of the steaking is well, it's too UM concentrated, and the difficulty bomb that had been planned to help move this along has been delayed. What do you think about proof of steak in the merge? Yeah,

that's well. Prior to sort of everything falling apart in crypto markets, that was the biggest catalyst that people were looking for, in which it was expected in the fall of this year, and for a serium, it's a big part of the story because they had determined that they were going to make this transition from day one. It just took some five or six years to get there.

Um and it's a key part of the ethereum. Uh, you know, the pr positioning, let's say, in terms of moving away from the energy intensive profork and moving to privo state model. There's definitely some snags there because um, I would say provo stake is just less battle tested

in the wild. Um And, yeah, it does raise centralization risks, um either through these large staking pools that have these economies of scale so you have concentrated liquidity, or through custodians that a mass lots of the coins when they do the staking. So you know there's concerns there. But UM, all right, Nick, that's great stuff. We appreciate. Check back in with you later on all things crypto. Nick Carter

founding partner Castle Island Ventures. He went the University of St Andrew's and University of Edinburgh, so it begs the question how many times did he play the old course? It's St Andrew's will get that next time we talked to him. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller, I'm on Twitter at Matt Miller three. On Fall Sweeney, I'm

on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio