The Ukraine War And Energy Crisis

for Bloomberg News. Tell us where you are, generally speaking, what you can disclose and kind of what you're seeing on the ground here. Hi, Yes, So I'm at the station in Cemisal, which is a town in southeast Poland that has received a huge amount of refugees in the last several weeks. Um, I'm at the station here where a lot of refugees they're getting trained directly from Ukraine here, and also a lot of pedestrians that got went over. They came over the border on foot are then taken

in busses from the border itself to this town. When you talk about not only the humanitarian aspect of this, but the economic aspect as well, Aggie, how we're both sides of this feeling the economic sanctions that have been put in place. Given as Paul said, I mean we're now entering week four, Yes, so we're clearly seeing from the European size that there is some sanction fatigue, potentially from countries that are worried about the impact to their

own economies of the sanctions on Russia. The sanctions seem to have significant effect on the Russian economy, but Biden, who is coming to Europe in order to push for a harder hitting sanctions against Russia, is going to have to come up against a European Union that is quite split on how much they can double down on the sanctions in case it also hits parts of the European economy significantly, especially when we're looking at places like Germany,

which is still so heavily dependent on Russian gas. Aggie. You're literally on the ground there, um as you see the refugees come in. How is Europe planning on dealing with what I've seen three to four million refugees and I guess that number is going to continue to grow. Is there a plan who's leading kind of the the way to house these refugees for what might be a fairly long stay. I think you're pointing at a key thing. There is the question of how long this day will be.

Because in the short term the work has been quite efficient to manage to get people into places away from the border. For the most part, people are able to find accommodation, sort of ad hoc accommodation in other places, but that's putting a lot of pressure on cities. A huge amount of the refugees who arrived in Poland, for instance,

are staying in Poland. The U N a c I. Sas is around all the refugees that came in to Poland are probably going to stay there, and that means that there's going to be a lot of pressure on Poland, a country that's already reeling from the coronavirus like many countries, and trying to find the funding in order to secure housing and access to the labor market. And also because so many of these refugees are minors, many are unaccompanied miners, it's also a question of how to get them into

the education system. And so in the short term it seems to have worked but it is a question is that what this means in the long term and how

that's going to look going forward. And you think about Ague, this is a not only a story about Poland, but the rest of Eastern Europe that responds any sort of additional help they can get from more of the Western European countries, how is the rest of Eastern Europe responding acting and the likes a huge amount of Eastern Europe it feels the pressure that Russia is putting on Ukraine also themselves, and so first and foremost there has been a lot of solidarity on the ground to help the refugee,

but they are expecting more support, especially fiscal support from the European Union, and that is something that a lot of these countries have been pushing for. And so going forward, this is going to be a concern as to how the resource allocation works um for for instance, unlocking the Coronavirus Recovery Fund in order to support these countries that are dealing with these influxes of refugees. So, from your position on the on the ground there in Poland, is

there a consensus as to how this might play out? Aggie? It's quite difficult to say, But the thing I hear, especially from a lot of the people coming over the border, is that they are really hopeful for this to be a temporary issue. Pretty Much everyone I speak to here has an intention to return to Ukraine at some point, and they do not want to settle completely in another country.

They want to be able to return to their families. Also, because it is notable that so many of the people who left women and children, and they've often been split up from the men in their family who have remained in Ukraine. So there is a concern for a lot of them that they hope that this is short lived. But as the war goes into its second month, there are a lot of people now looking at what those next steps will all. Right, control, We appreciate getting your

thoughts in perspective. A contral she's a TV producer for

Bloomberg News. She has been she's based in Berlin, She's but she's been on that southeastern border of Poland and Ukraine, and she's getting us first hand reporting about the refugee situation and um as a continuous day by day and as she mentioned, going into the second month here, and I'm not sure anybody on either side thought that it would continue on here into its second month, but we will certainly continue our reporting, and we really thank Aggie

for taking time out to share some of her first hand views of what's happening on the ground in that border of Poland and Ukraine. We've got a federal Reserve which has pivoted noticeably to a more hawkish view. We're talking about potentially seven eight rate hikes over the next year, uh, perhaps fifty basis point rate hikes. What are assets to do here? What are risk assets to do in that

type of environment? Let's check them with Randy Swimmer, co head of Senior Lending and a senior managing director Churchill Asset Management. Randy, it's been a while since these financial markets have had to deal with a significantly um an environment that has significant rate increases in the offing. How do you think about that? Yeah, And in fact, it's the kind of thing that expectations for the kind of moves that have happened and that actually embarked on last

week have been growing. And now that in fact that has been behind us. And in fact, if anything, UH FED j R. Powell has uh doubled down a little bit and said, hey, don't worry if things, if inflation doesn't get tamed, we're prepared to go even at fifty basis points. Uh per hike I think has given investors some kind of path to uh you know, less volatility

in the sense that they know where this is headed. Now, what's into into the conversation has been ge do these federate hike because they potentially lead to a slowdown, and we're starting to see more observers coming out and starting

to worry about that. UM Now, I still think that the signs, the economic signs that are around us, you know, with housing starts and commercial and manufacturing production still being up solidly, expectations for this year for GDP still you know, in that kind of high to the low threes range in a positive way, still is sending I think a very good growth message overall to UH two investors. So I don't think there's a chance of a recession and time soon, but it is at least giving certainly credit

investors something to look at. But I do think that overall people are feeling now that if that's on a path removed some uncertainty regarding the direction certainly great and how many are going to be happening over the next year too, and then we'll see how this unfolds, you know, Randy, it's interesting I've heard a lot of commentary that Powell has been speaking a lot and talking about those big moves and the potential from maybe fifty basis points are

moving faster than to make sure that the equity markets are doing a lot of his job for him when it comes to some of those fight UH tightening financial conditions. How are you thinking about the messaging from this Federal Reserve? Well, and in fact, they've done a very good job I think of removing a lot of a doubt once the pivot began in November when transitory was taken out of the out of their their playbook, and it became obvious that this was a pretty serious issue that was not

going away in terms of inflation. Ever since November, you know, four months ago, we now have seen a pretty consistent,

solid messaging coming out from the Fed. And I do think if you look at public equities as an example, have pretty much fully recovered values um, you know, certainly over the last thirty days as we saw following the Ukraine UH invasion February twenty four, so I think that generally markets have factored in both the worst case scenario at least we hope um for the Ukraine war, and then also to some extent where the ultimate endgame is for the FED, which they've advertised pretty much is going

to end up at a kind of two to three uh FED funds rate, which would then match expected inflation. And I think we're seeing, um, you know, some stability in all markets. We still have not a new issue UH deal flow would turn to the high yield market or the leverage loan market in the great extent, but at least things have calmed down certainly over the last several days. Yeah, Randy, that that's where I wanted to go.

I want, I want to take advantage of your experience in the leverage loan business, you know, with rising interest rates, how do you think you know, theo's private equity folks, which are such big consumers of of leverage debt leverage loans, how do you envision the M and A market over the next say, twelve months, we can see a pullback and activity. Do you think, Well, we came off a huge not just the Churchill but also just you know,

with private equity deployment, private credit deployment. It was in many ways probably an environment that would be hard to replicate for this year. We still think activity UH and the M and A pipeline is going to be solid for this year. Certainly the economy. We believe people will continue to be constructive for credit. It doesn't have to be toward growth in order for credit to be two

to work UM. And I think private equity, which has raised so much money over the last you know, three or four or five, seven years, UM, that dry powder which is going to be deployed, is going to be deployed UM in partnership with direct lenders such as Churchill that have worked with these private equity firms over many different texts of markets and through volatility when the public markets were either sidelinders set down, direct lenders such as

ourselves had plenty of dry powder to help the dry powder of our private equi clients be deployed. So if you go back upstream and look at where the M and A market is, we're seeing evidence of another solid year with a number of EM and A bankers who are working on books to be launched over the next thirty days. Reports we get from them is it's going

to be a very busy second quarter. And as long as the the p that we've just been talking about geopolitical and interest rates and inflation, which we think is going to get under control in most of the conomists believe it will as continue to go up. As long as those things continue on the path, we think the two is going to be poised for a little solid year. From her and then Nani, alright, good stuff, Randy, really appreciate you taking the time. Randy Schrimmer, co head of

Senior Lending and Senior Managing Director Churchill Asset Management. One of the I guess the fallouts of the war in Ukraine is it's really highlighting the energy dependence that much of Europe, particularly Germany, has on Russia. And of course that raises a question I think here on these shores is how is the US position in terms of its

energy independence. Checking with Marian Brown, she's a president of Southern California Gas Company, h Miriam, give us a sense of you know, I guess a lot of people are now probably thinking a little bit more about energy independence given what we're seeing in terms of the uncertain these and disruptions in Europe. How do you think about that? Yeah,

thanks so much for the questions. So, when we think about energy independence, especially these days, we think about meeting the twin goals of energy security and the clean energy transition, and how best to meet that And obviously, I think, and you're hearing it from a lot of your viewers, as it's about investing in diverse domestic resources and that those resources need to increasingly be renewable over time. And I think the important thing there is that gas, like

um like electricity, can be renewable. How do you make it reliable? Now? I mean, we've talked a lot about the importance of the shift to renewables, but when some of those fail or we've done it in such a way where it's so fast that it isn't reliable, how do you make sure that that transition is smooth and

also reliable as well? Yeah, you complement renewable electricity, which can be intermittent, to your point, with renewable gases, which is what gives you that renewable and that reliability and that resiliency. And that's why you're seeing this tremendous momentum globally and also nationally on hydrogen. You know it is an energy dense gas, but it's not a greenhouse gas, and it makes renewables from sun and wind available seven three sixty five days a year. What role does how

you're GM play. We think it's an important, growing part, important part of the mix that's going to help us to meet those twin goals around energy independence, energy security, and clean energy faster UM. We see UM from our end that the costs are coming down really significantly, and what it does is it adds to energy diversity. And any time you create a jump in the access to energy, you're going to have a positive impact on energy prices.

And that's why you know our company has actually leaned in on hydrogen and we announced the Big Project UM

a few weeks ago Angeles Link on it. Can you talk to us about the specific challenges that California faces In full disclosure, I'm from the Central Valley and in the summer we joke we're politely asked to unplug our appliances because it's a hundred and five degrees and there's no energy and no one can afford an eight hundred dollar electric bill when you're running the a C. So can you talk to us about the specific challenges that

you're seen in California and particularly your southern California. Yeah. Absolutely, California is a bit of an island on energy and so UM we deal with a tense dynamic on supply and demand. And to your point, I think that there is an increased focus about needing to bring more supply um to customers and also managed demand with energy efficiency, and California does have a good story to tell on on energy efficiency per capita. But I think you're seeing

a lot of focus in the state on bringing increased supplies. Miriam. About nuclear energy, how does that fit into the equation I'm hearing from certain folks within that space that you know, there's a lot of advances being made where you don't you don't need to build these huge nuclear facilities that pose a significant risk. Maybe you can do it on a much smaller, more nimble scale. How do you think

about nuclear? Yeah, nuclear, that's a complicated issue here in California, But I think it's a complicated issue federally because we have a waste management issue. So I think it's whether it's a solution today maybe not, but can is it going to be a part of the solution eventually maybe, And so I think that we're in a place to accomplish the goals that we have. We need all technologies

on the table, and I would include that one. How are you thinking about the impacts from Russia's invasion of Ukraine. We've talked a lot about the gas market in Europe. Your taking look at European gas prices already up thirty or four percent on the day is Putin had been looking to seek payment in rubles. Europe though, feels distant right from the US and from your southern California. But what do you see as the impacts if any UM already here on this market. I think the lesson of

the last several weeks really is urgency. There was already a trend and you heard about it at SERO Week two weeks ago, on the drive for energy security and

clean energy transition. And I think that the experience from from what's going on in Europe and Ukraine UM really has put in urgency because I think, you know, this won't be the last cold winter, and it won't be the last hot summer that we just had, and it won't be the last geo political event that we have history may not repeat itself, but it sure does rhyme. So we need to learn from this and UM accelerate our investments UM towards towards energy security and the clean

energy transition. And Mariam just quickly here climate change. Boy, you just see coming out of the great state of California. If it's not wildfire, it's a mud slide, it's an earthquake. How does climate change factor into how you kind of think about your forecasting going forward? Climate policy is UM really needs to be a factor in investment decisions and managing climate risk is definitely part of our investment decisions.

And part of that is future proofing our existing infrastructure and we've got a significant amount of it were the largest gas utility in the country UM. And another part of it is new infrastructure, so UM the announcement of the UM large green hydrogen project that we announced Angeles Link, that's part of it. And it's also as we modernize our infrastructure UM that we look to make it resilient to be able to adapt to changing climate and externalities.

All Right, Marian Brown, thank you so much for joining us. Marian Brown, President of Southern California Gas Company. Let's switch ears a little bit and talk about recession hedges. We've been hearing a lot more. I think over the last couple of weeks, if people talking about recession as a result of this feder reserve action, then that might be a risk. And a lot of folks are saying, where do I go for some hedges? Is there any place in the commodity complex that I can go for some

hedges on recession. Let's bringing Mike mcglogan's senior Commodity Strategies for Bloomberg Intelligence. Mike, if if I'm looking for a recession hedge, is there anything in your world of commodities that I should be looking at? Yes, But I think the first target should be gold because I think gold right now is almost entirely dependent on if the stock market goes down and if the Fed job owning works and if yields them bond y'll start declining from these levels.

To me, that that would be the impetus for gold to just break out because it's so ready. It's really technically looks strong, fundamentally looks strong, but it has a major headman right now. It's tightening, stock markets going up, you know, higher rates, higher yields, if the stock market finally rolls over, gold should be the best place to be, in place that, you know, to really for a recession. I think gol would be the best heage. Because we

get a normal recession, almost all commodity should collapse. And that's the problem. Crude oil right now is almost on the screen. It is almost triple that the US cost of production, which is part of that boom that we think we're going to have in commodity production in North America. Talked to us more about that. I mean taking a look at crude at a hundred and fifteen dollars of barrel, and it was two weeks ago when we were looking at one thirty five on some of the futures over

on that big Sunday night movement. I remember that we saw and then there was a little bit of a relief as we briefly did below a hundred. But wow, I mean looking again back at one, what is that telling you? Yeah, it's tell me that we're more likely to have demand destruction now, because that's if history is a guy in the significance of this rally is it's the first one that's ever happened in crude oil futures with North America net energy, crudeil, liquid fuel exporter massive exporters.

The most similar recent example was two thousand and eight crudel got to the all time high and then collap stated percent. The most recent example before that was from forty and then back to twenty that high put and then took fourteen years to take out. To me, we're at similar risk now because this demand destruction significant and virtually all that supply that people are saying is going to leave the market from Russia is going to China

in virtually and China's demand has actually been declining. So to me, that's the key thing. And then one thing I'll leave you with. If you look on the forward curve one year from now, crude oil's training around ninety dollars a barrel. That's been a significant resistance and the curve for about fourteen years, and the high and the

forward curve is still around one forty. So market price for the short term pain right now, and longer term supply comes back on and and the demand and goes backwards. To talk to me though about the differences in demand destruction, because I hear that if it's from a demand shock then that number is lower. But if it's a supply shock to where we are now, demand destruction may not

be until we get up to one fifty barrel. Is there a difference in how you look at demand destruction based on what the shock is and where that shock is coming from. Yeah, well there's a fogg of a war here. So this is the most significant event of our lifetimes. And I've been around from the six decades. This is this compared to the Gulf War. This is nothing what Russia is doing and the destruction. I think the key thing to remember is the psychological impact of

everybody in the world reading this on the tape. It's not going to increase consumer spending. It's going to do the opposite, and then there's a price factor. But the key thing to remember is short term. We just got the most stretched above you know, five year or four year mean and crudel. Ever, yet the market didn't make a new high. And why is that? Because it's a different world now, so it's really hard to quantify it exactly here. But I have to use my tools and say, sure,

from these levels, who can make a new high? But if you look at the history of lessons, maybe we get the one fifty. The enduring result is we go back to fifteen stay there for ten years, which is where we have been. Fifty has been basically the average since the collapse in two thousand fourteen, and still it's well above the US cost of production. But here's a

big difference. It's that dichotomy in North America really doing well as a net commodity exporter and Europe and the rest of the world getting heart hurt really bad with recession and being net commodity importers. Mike, here's the dumb question of the day. Can the world exist without Russian oil? And most notably can Europe exist without Russian oil? Well,

that's the cool significant thing about this, Paul. We look back this from from the future, we're going to see they're fighting the twenties century war with fossil fuels, and the world's focusing on the twenty one century war economic and moving forward. And wait, so let's look at this. Peak energy consumption or liquid fuel consumption US occurred about four or five years ago and it's been in decline. And that's even before e v S. It's just embracing

advancing technology. So once we get past this horrible period of destruction the markets. The world's gonna say, Okay, there's a better way we're gonna sell this. This process of renewables, and it's already started before, so I own an EV

for a reason. But that's also going to ramp up when the most significant key tool retiions of the entire we've ever scene is that the whole manufacturing process in automobiles switching to e vs. That's gonna just six Sorry, but in the meantime we're probably gonna have to recession. And yes, Russia we can do without their energy. The problem is a fertilizer. That's what's gonna really hurt yields,

and that's going to be a really boom for the Cornbill. Alright, Mike mcglogan giving us the lowdown on commodities, as he always does. Mike mclogan's senior Commodity Strategies for Bloomberg Intelligence. He is based in Miami Beach of Florida, which is a scam in and of itself, and I will get to the bottom of it at some point. 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 bal Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio