Oil Markets Say Full-Blown War With Iran Is Unlikely

Mid East. We welcome Dr Ellen Wald. She's president of Transversal Consulting. She's also a nonresident Senior Fellow at the Atlantic Council's Global Energy Sector and a Bloomberg opinion contributor based in Jacksonville. Dr Wall, thanks so much for joining us again. Looking at the oil over the last couple of days since the news broke out, we certainly saw him move up in oil, but perhaps not as much as some traders had been thinking, or some observers had

been thinking. What's the market telling us? Yeah, I think that the market is telling us right now is that war is a very unlikely possibility and we can see that the prices win up after the event happened. We saw rise about really less than four percent for Brent. Brent was up, and that tells us that markets believed that some sort of temporary disruption to oil supplies or oil transportation was likely, but that some kind of big military conflagration, some kind of of all out war situation

is really still a very unlikely possibility. Otherwise the market, the price of oil would have gone out much more and been much more sustained rise. In fact, we've really seen prices come back down today. Brent was up about a little over seventy much earlier this morning, but it since come down quite a bit, as I think people realize that there's a lot of rhetoric going back and forth, but that really the tensions are really in this in

this rhetoric, that there's very little military activity. And in fact, one of the interesting developments is that we've seen is that the Saudis are sending their defense minister, who is the brother of Crown Prince Mohammed bin Salman, to the

United States to try to deescalate uh these tensions. And that's one of the reasons is that Saudi Arabia and and you A particularly, they don't want to get involved in a war because any kind of military action against Iran is going to involve have to involve them, and they don't want to be part of any even a coalition against this, and so really, you know, they like to kind of beat the war drone, but when push

comes to shove, they don't want a war. What about Iraq voting to kick US troops out of the nation, how could that potentially play into some of what's going on. So this is a really interesting development. I think we need to look at exactly what did actually happen in

the Iraqi parliament. One of the important things to remember is that this is a temporary government that that Iraq as their prime minister, and the government resigned UH several weeks ago due to all of the political unrest that have been going on there, particularly the fact that that that particular government was seen as very much in favor of Iran and supporting Iran's influence in the region, and

there have been massive protests against that. So what we what we did see from what I understand, the vote by the Rocki Parliament was basically to ask the Iraqi government to cancel assistance to the US led anti Asis coalition, to expel foreign troops from Iraq, file a complaint about the US, and investigate the US bombings, and that this isn't a binding um a binding legislation in anyway. It's

really kind of a resolution. But apparently they really can't kick the U s out because the security agreement that that the US and Iraq have after the war means that they really need to give I think at least a year's notice to actually leave. So this is really a symbolic way of saying, um, you know, we we don't approve of what you did. But keep in mind also that um Kurdish element Kurdish members of parliament and

also Senday members of parliament. I think we're not even really present or included in this, So it was really a reflection of the elements of parliament who support Iran. Ellen, what is the what do you think will happen in terms of retaliation? I think that's kind of the next up here. People are kind of, you know, sensing when will Iran retaliate, how will it retaliate, and maybe how

this might escalate. What is your best guess at this point. Well, that's that's really the big question on everyone's minds is what's the response going to be. Are we going to see some kind of drone strike like we saw on a Ramco facilities. I mean, that was really kind of a stunning event that we saw in September, because a lot of people didn't believe that Iran had the capability to do that, or they know how, or the knowledge

of the detailed knowledge of a Ramco facility. So it's certainly possible that we might see and attempt at something like that. There could be a cyber attack. We really need to take into consideration what Iran is capable of at this point. U clearly closing the Streets of Horror moves would be a major deal. Most people do consider

that or would consider that an act of war. But keep in mind that also harms Iran because they also rely on the Streets of Horror moves to continue their illicit oil trade, so that would also harm their ability to make any money off of their oil. One of the things I think we need to be really careful about, though, is that there's a lot of traffic in the Persian Gulf right now, even more and the previous attacks we saw on tankers in the region. We're really just confined

to small tankers carrying crude to a products. But if we did see an attack on an actual crude oil tanker, that could cause not just an issue militarily, but it could also cause an environmental disaster, and those are the kinds of things have to be really careful about. Ellen Wald, thank you so much for being with us as always

and sharing your insights. Elean Wald, president of Transversal Consulting and a nonresident Senior Fellow at the Atlantic Council's Global Energy Center, joining us give us some perspective, Well, the rhetoric between the US and Iran is getting increasingly heated, but you wouldn't know it if you took a look

at equities. Actually on the day, the NASDAC has now turned marginally positive, up nine tenths of what one tenth of a percentage point, and you're seeing the SMP just barely negative, which raises a question, how concerning is it that traders seem to be completely complacent the idea of an escalating conflict and what has been described as a

tinder box of the Middle East. Joining US now, as Phil Orlando, Chief Equity markets stragist and head of Client portfolio Management Federated Investors, which oversees more than eighty billion dollars in equities and joins us here in our interactive broker studio. So, Phil, does that concern you? The complacency? So the Dow Jones was down three hundred points or so on Friday, so and I think that was appropriate. And then waking up this morning the futures at five am,

we're down another couple hundred points. And I think what's happened over the course of the last few hours that investors have actually thought through this? What are the Iranians gonna do? Are they going to declare war in the United States? That would be suicidal? Uh? Do they have the ability to have a deleterious impact on the energy market. You've got something like twenty or twenty percent of the world's crude flows through the straits of hormones. So could

uh that turn into a problem from us? Absolutely, But we're in a very different place than they were in the seventies. Uh we were, you know, we we're now generating twelve and a half million barrels a day. We're the largest oil producer in the world. I've heard this argument that basically Iran doesn't have that many tools to

retaliate against the US. That said, if they were retaliated in any form, which seems highly likely given their threats and given their past trajectory, what's the risk on the opposite side, that President Trump has some sort of massive response, uh, to sort of prove a point, and it sort of

leads leads things. Uh from that, well, it's a fair point leads so because he said publicly that that if you do something, we're going to have a disproportionate response, and could that escalate into you know, a military conflict. Absolutely do I think we'll win that sure? But but uh, from from an uncertainty standpoint, and I think that's the point you're trying to get to, does that create a

potential air pocket for the market? Could stocks be down, you know, four or five percent over the space of a couple of weeks? Is this as this you know, sort of plays out in the answer that's absolutely yes. But but at the end of the day, do we think that the United States ends up on top in

in in this scenario? I think the answer to that question is also yes, and I think investors are sort of looking through that in terms of what are the underlying fundamentals of the market, and you know, could we know, you know, could we see a couple of percent down? Look, we're up forty percent since Christmas Eve a year ago. I mean that's phenomenal. And if we give up five percent here, okay, fine, it's probably healthy. It washes out some weekends and then we start to work higher again.

So for you absolutely killed it with your bullish equity call in again, market up significant in the calendar year. What does the market do for an encore in Well, in a word, higher, Uh not, We're not gonna be up or percent again. Well, we're sort of in the eight to ten percent neighborhood. We think we get up to about the thirty five hundred level, which would be on a total return basis, about ten percent from where

we started the year. Uh. We think there will be potentially increased volatility and and certainly developments here in the Middle East would qualify as as a source of of instability. Uh, we've got this election coming up. Uh, that certainly could be a problem. Do we do we consummate the China deal the way we think we will. We've got a positive view on that, but certainly you've got no way of knowing if there are going to be any fits

and starts here. So there's any number of things that, uh, could create roadblocks here that could create a little volatility in the meantime. When you talk about air pockets lower and that things should continue to grind higher despite those air pockets, what would you be buying if there is some sort of significant decline. Sure, so I'll take a look at some of the things we did towards the

end of the year. Uh, we've gotten more aggressive and domestic small cap, We've gotten more domestic aggressive in domestic large cap value versus growth, took some profits in growth. Value is underperformed growth by something like eleven percentage points over the last year. And then emerging markets. Emerging markets have underperformed the SMP by basis points in the last year. Uh. This China US trade deal, that's gonna be good for China.

What's going on in the energy market right now with higher energy prices, that's gonna be good for both Brazil and Russia. Well, I've just mentioned three of the major economies that comprise the emerging markets an index that we just said is underperformed by basis points over the last year.

So so if I've got some fresh money to play with, domestic small cap, domestic large cap, value, and emerging markets are three areas that I've looked at well in filled the as I think back in the performance that we had in equity markets in twenty nineteen is essentially all multiple expansion. We didn't have a whole lot of earnings growth. How critical is it that we get the high single digit, close to ten percent earnings growth that we're seeing and

also are expecting the SMP this year. So what what happened last year in terms of earnings was not unexpected. You think about that, we had about a twenty five or thirty percent earnings increase eighteen over seventeen, largely because of the fiscal policy changes. Last year should have been a year of consolidation. From an earning standpoint, we were roped sort of small, single digit. We'll probably end up

you know, three to five percent something like that. This year, we think we're gonna be up you know, maybe eight percent something like that. It's not gonna be phenomenal, but we're gonna get more multiple expansion. And the reason for that is core PC inflation sitting here at one point six percent, benchmark ten year treasury yields are below one one eight percent. In that kind of an environment, multiple

should comfortably be at eighteen or nineteen times earnings. So so you know, investors did look at and say, well, the average multiple in stocks over the last you know, fifty seventy hundred years fourteen or fifteen times earnings. We're sitting at seventeen times now. Therefore the market's overvalued. That argument is flawed, and the reason it's flawed is that the market does not trade at some multiple based upon

what history suggests. It's a function and inverse mathematical relationship between where interest rates and inflation are on the one hand, and where price earnings ratios are in the other. With so with benign interest rate to an inflation we should get more multiple expansion over the course of the next year. Just real quick, here, what roles the Fed play? How much more more juice does the Fed give us equities if it cuts rates again? Feds done? Feds on hold,

We've seen the last of the Fed last year. We will not see them change interest rates. In our view, for the rest of this year. Upper band of the funds rates days at one spot seven five. Okay, but you don't think that it's gonna Do you think that if they were to cut rates that would help stocks, Well, it would. I don't know what the justification for that would be, because we do expect that there will be a re acceleration of both economic growth and corporate earnings

growth in the back half of the year. The first quarter is going to be a problem, alright, Just just to be clear that the whole Boeing shutdown situation is going to have a derivative impact throughout the economy. Normal first quarter seasonal stuff. We've got some you know, some lagging stuff going with China trade. But as we get through that, as we get to the middle of the year, in our view, we're gonna start to see economic growth

in corporate during this growth start to accelerate. Philorlando, thank you so much for joining us. Really appreciate you being in our Bloomberg Interactive Broker studio. Phil Orlando, chief equity market strategist and head of Client portfolio Management at Federated Investors. You know, after increasing SMP five, investors are looking for some places that might offer some better risk reward opportunity. One of those areas has been emerging markets. We want

to talk emerging markets. We talked to our good friend Eric Fine, portfolio manager for Emerging markets fixed income and Van Eck, a Global based here in New York City. Eric joins us here in our Bloomberg Interactive Broker studio. So before we just get to a broad kind of emerging markets view, as we head into what does the last seven two hours in terms of geopolitical risk coming out of the Mid East, how does that factor into your modeling, your calculus as you just think about, you know,

emerging markets. Sure with Hi, Paul High, Lisa having near thanks so so the UH, I'd say the first thing is there are a lot of emerging market countries and companies in the region that issue, and that's where I'm more comfortable saying that there could be an impact UM. And I would say that the countries that are UH the most subject to this are Iraq Um, which is

now being threatened by sanctions. The bonds are down and maybe another two points today and yields aren't that high there, right, That's the thing for a lot of these UM for a lot of countries that are ultimately dependent on some bottom up development that can change quickly. Um um. You often see the last price before the event as being a generic price for risk in a low yield world.

Oh it's this rating, it's got this yield that yields a little too high and own it not Oh, it's got this bottom up specific fund im And also I think sanctions risking Iraq um uh does is a real issue and uh this really started with Iraq war and and the sort of opening that that creates to Iran. Let me put it that way. The natural um I'd say Saudi is is another country that could be affected by this, and that it's a regular issuer, and it would seem reasonable to me to expect Iran to leverage

Yemen over over Saudi. That was the pea stalks look like to me like they've broken down um and there I think the issue is that Saudi's a regular issue or they've got big fiscal deficits um and the yields are really low. You have three percent yield, so a lot of this isn't priced so regionally. I think there's some very specific implications that are important and that are generally adverse. And I think that the main names names national names would be Iraq and uh uh and Saudi

um um. In terms of anything more broadly, UM, I would say it's uh, it's it's a bit of a stretch. I think you really have to First, I think one should be reluctant to hang an entire portfolio thesis based on developments in the Middle East. You know, it's just really really trick um and uh um. And second, central banks are so activated now UM that it's arguably a positive UM. And Third, I caution that this is what happened.

As dramatic as it is, it is a line cross UM is part of of of broader trends that have already started. The borders that existed are being rethought UM. And this and this didn't just start last week, Okay. Arguably positive because it could potentially ignite the central banks

out there to stimulate further. Is that the idea, UM, it's a reminder that to to the extent that central banks were getting a little emboldened by growth, or we're at risk of it, I think it's a little too early to say that they were getting emboldened by by growth, but to the extent that that was a scenario or a month or two from now, maybe that's put back

a few more months. I don't think it's a complete I don't think you're gonna see statements from central banks on this, but it's we will be reminded of Central bank forbearance. What are the big conundrums is how much further the Federal Reserve than the ECB can can stimulate global risk markets? And I have to wonder, you know, doesn't at a certain point further rate cuts signal that the economy is even worse than people expected, and it doesn't really give that much of a boost to uh

sort of the relative valuations and risk assets. Wow. The third question, and we're into this issue of the reversal rate. I think it's the hugest question, and it's going to be a question we're gonna be asking for years is are we at the end? Are we? Is this experiment over? Um?

I would you know, I call myself a recovering economist, so my and I'm going to give a you know that kind of economics type of answer, which it depends, right, it depends on this which like economists anonymous, there should should be after the financial crisis, the global financials where there should be like it's any bar in midtown, you know, sitting on the end. I think the issue is clearest in Europe, where you've seen a very dramatic increase in

the balance sheet and really no transmission into growth. It's mercier in uh in in the U S where you can see some success, but um, Europe has a uh. Europe is really where I think that that issue is coming to the four One way of putting your question is or one way of answering your question is, yeah, some of the central banks, maybe all of the developed ones, but certainly I think Europe's at the forefront of the problems.

UM uh. They either high rates and uh and bankrupt governments, or they cut rates and bankrupt financial systems, which are contingent liability of governments. So that's a way of describing the condom. If they keep interest rate slow, the financial banking pensions is in the financial system, um UM doesn't earn enough to remain solvent. Arguably right or that's a challenge long term. I'm just a big picture theory theoretical,

so UM and uh UM. But if rates are raised to a level that that the banking system, for example in Europe, is probably lobbying for UM. Then government borrowing costs become a real issue, particularly for the peripheral, higher indebted countries. Now this is very theoretical, not really what we do day to day. Any I think it's a great question, what are you playing in what's your highest conviction idea UM highest conviction ideas. Two groups of ideas.

One is I think it is going to be a bumpy road, part partially because of the reasons Lisa mentioned longer term, so maybe you know second, third quarter. And one of the problems I have is a lot of people think what I'm about to say is it will have a good quarter or so and then then it will be tricky. But one group of ideas is the ones that that we think should last the whole year, and they're similar to what we do what we did

last year. Things where we're waking up in the morning and not thinking about these sorts of questions where we're not thinking about Middle East developments, we're not thinking about oil upper down or rates upper down. So Argentina comes

to mind. We're waking up in the morning and following Argentina, we think there's too much pessimism that government's basically market friendly and as and the biggest determined to remind people, the biggest determined of present value in a dicing in a potential default situation is nonpayment when you're and that's when you should be discounting a zero payment at and so you're losing a lot of money as long as they're staying current, which all indications are they plan on it.

Um Um. I think that's a very very good situation, but again, bottom up, uncorrelated. We're waking up looking doing our day job. That's one Uruguay another really interesting local market, not big part of the index, but we have significant exposure there. You're getting around ten percent yields UM low and declining inflation and a new government elected to deal with their one problem fiscal But again I'm waking up in the morning looking for the next few quarters. Are

they dealing with their fiscal programs? So those are some of the unusual ones that could last for your Ukraine's another one i am F program. The more mainstream ones that could benefit UM but may not last the whole year are Indonesia, Growth reform, South Africa, a lot of bad News priced in and Brazil really can't say enough good things about Brazil. Fine wonderful, wonderful synopsis, Zil, Argentina, Uruguay.

Some of the picks here, Eric Fine, portfolio manager of Emerging Marcus Fixing Come Strategy at Vanneck Global, based in New York. Joining us here in our interactive broker studios. As time continues, we are piecing together the movie that

is Carlos Gones life. Joining us now is Alan Kat's financial investigations team leader for Bloomberg News based in Paris, and Alan Woman put out a piece this morning really detailing everything we know about his arrest, his a hundred days in solitary confinement through to his escape from Japan. Can you give us a sense of sort of the narrative here as it unfolds. So, the way it worked with Carlos Gone was that he was arrested back in November of twenty eighteen, and as you mentioned, he spent

a lot of time and saw their confinement. They kept sort of releasing him and then re arresting him. Uh, And there was a very sort of confusing period. Uh. But things got a lot more pressure packed uh in December of this year so he had already been either in jail or under house arrest for for more than a year, and UH this December he found out that his trial was likely to be delayed, possibly in one sort of leaving him in a legal limbo for at

least another year. Japanese prosecutors had begun interviewing UH some of his family members, including his son Anthony, who they also accused of having been involved in some of the financial shenanigans. They claimed that that Carlos Gone was involved in UH and he didn't there didn't seem to be any way out, and that that appears to be sort of the real motive for him to leave now. But

the other issue was an issue of opportunity. Right, so when in any sort of spy caper, you know, Ocean's eleven type scenario, you need to have sort of that moment when the time is right to jump. And it appears that he had been preparing this for months, dealing with people who have been specialized for decades in you know, ex fil trading, UH executives who are have been kidnapped or re recovering abducted children, or fighting on various sides of militia and during a civil war, UM, and he'd

been dealing with them for months. But one of the things that came up just now was that there was a combination of it was a holiday period in Japan, so government offices were going to be closed for several days at least, and one of the main groups that have been sort of following Going every time he would leave his apartment was where series of private investigators paid for by Nissan Ghones lawyer had protested this was violating his rights, and those investigators appears to have appeared to

have backed off, and so that gave Going this moment the sort of golden chance he that he had to take, or felt he had to take UH if he was ever going to get out of Japan, And so he did UH and amazingly was successful in Hi amazing stories. So, Allen, I think the next big piece of news is Mr Gohen is saying he's gonna have a press conference I guess in Lebanon sometime this week. Give us the details are what we know. Uh. He's going to speak in

Lebanon on Wednesday at three pm local time. UH. And he claims, or through his lawyers mostly he claims that he is going to use this to try to press his case for why UH the allegations against him or untrue, politically motivated part of a vendetta against him, both by people within Nissan also UH from the Japanese government. UH in large part because of his efforts who merge Nissan with Renault. As you may know, Renault, the French carmaker,

ownscent of Nissan, nissancent of Renault. But in this alliance that they've had for the last twenty years, Renault has essentially had the upper hand for most of the time since it essentially saves Nissan from bankruptcy when they when

they first did the deal. Um, So this press conference is going to be going essentially going side of the story now he's had He had one video press conference that he did while he was still under house arrest in Japan, which supposedly was going to unveil all sorts of new information that was going to be terrible for new sounding great for Carlos. Gone didn't really come up

with much new. So it's not clear, at least not clear to me, that that there's necessarily going to be a lot of new information or a lot of really exculpatory information that that going is going to come out with on Wednesday. But it's certainly going to be exciting. It's certainly give me exciting exactly right, Alan Cats, thanks so much for joining us Allen as a financial Investigations team leader for Bloomberg News in our Paris bureau. What's

this fascinating story continuing to unfold? I'm really looking forward to see what Mr Gohan says that this press conference on Wednesday maybe gets more details as well as who plays Carlos Cone in the upcoming roid biopic that we can expect. Thanks for listening to the Bloomberg Piano podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. On Paul Sween, I'm on Twitter at pt Sweeney. I'm Lisa abram Woods. I'm

on Twitter at Lisa abram woits one. Before the podcast, you can always catch us worldwide on'm Bloomberg Radio.