The War’s Impact On Global Markets And Oil

geopolitical risk to add into the um. The whole panoply of issues for this market to navigate. Let's check in on the economic outlook underpinning all of this. We can do that with Pete Earle. He's the economist at the American Institute of Economic Research. Pete, has your economic outlook changed at all given what we've seen coming out of Ukraine over the last week or so. Good morning, Gentlemen's good to talk to you. It's great to be back. Um, yeah,

it certainly has. Um. When we last folk in October November, we had oil Brant and West excess between say fifty five and seventy dollars a barrel maybe consumer demand was high, but it was being blunted a bit we think by supply chain pressures, and inflation was running about five And I seem to recall that I mentioned that the ugliest word in economics, which is siflation, was back, but I

didn't think it was where. I didn't think it was really reasonable concern because there we had inflation, but there was no real stagnation happening. And I think at this point, uh, we we've pivoted, and the last two weeks and perhaps the last few days, things have changed quite a bit. We see commodities across the board rising pretty precipitously, even with COVID slipping to the back burner. Now we have

consumer sentiment falling. Consumer it fell in January, consumer competence fell a bit in February, and there's a host of other signs that we may we may actually see rising inflation, rising general price level with slowing growth. There's a few other issues embedded in there. But the answer is yes, I do think we are turning a corner here. Do we need um the Fed though too? Well? Is the market going to rethink whether the Fed hikes six seven

eight times this year? Even if we're looking at rising prices, UM, they're not rising for any reason the FED can put a stop to other than demand. So the only way the FED can really slow UM inflation is by slowing economic growth. Yeah, so I think that they are. I think all the talk about a hundred seventy basis point

moves are completely off the table, certainly for March. UM. I don't think the FED will move any greater than SAPs this year, but I will go out on a limb and say that when James Bullard of the St. Louis FED said he would like to see rates on hundred basis points higher by July, I don't think that will happen. But I do think he was sort of paving the way for unconventional not unconventional, but unusual monetary

policy measures. So what I see are maybe not seven or eight UH hikes of basis points this year, but I see the heightened possibility of intermeding hikes, for example between the FO and C meeting, such as we haven't seen since UH two thousand eight or so, and before that since long term capital collapsed supply chain. That's another economic issue that has been with us as a result of this pandemic um. You know, initially we thought it would be relatively short term, but here we are beginning

year three. Here, how do you think about the global supply chain? And maybe the events in Ukraine may exacerbate some of those issues, but how do you think about that as you think about your economic outlook. It's it's it's complicated, because I see some signs that the supply chain morass is actually easy. UM world container rates have

leveled off. The Baltic Exchange dry index is half of what it was in October, although it's up a little bit on the Ukraine conflict, and the cast freight index is at levels we haven't seen since the start of the pandemic um. Even at the port of Los Angeles, which has sort of been the focal point um the number of containers ship and and by the way, the counting convention was changed, we have to bear that in mind.

But even so, the number of container ships is down to the seventies from well over one hundred six or eight weeks ago. So the components in the rise of prices that I think we impute to um UH supply chain issues, I think is starting to to to to um to sort of dissipate. However, kicking a number of

Russian institution institutions off of swift UM introduces entirely new issues. Uh. We could very easily see new supply chain issues or I should say new price pressure zoning to scarcity arise as a result of kicking a bunch of those institutions that deal in say oil, natural gas and grains off of swift So uh, it could be exit frying pan, enter fire. I wonder what I wonder what happens now in Europe as a result of mean, do they need to stop buying gas, oil, aluminum from Vladimir Putin? Are

they going to have to do that? And then what happens to their economy for for some amount of time they may have to, But I think we are at a point right now where um, we will see um a real gut check of ideology where many nations are buying from from certain resources, especially UM carbon based uh uh you know, energies and and petroleum and things like that from nations because they don't want to do it

at home because of the green wave we've seen. But I think, UM, this this incident, especially if it drives prices sizeably higher, but we're still really looking at you know, ninety five dollar oil. If we get prices one for barrel, that sort of thing in the next few months, um, we may see a real reconsideration of the ideologies which led many nations to pursue more costly, in some cases, less tested green energy at the cost of ignoring. Okay, Hey, Pete,

thanks so much for joining us, taking the time. We appreciate it. Pete Earle economists at the American Institute of Economic Research, giving us his outlook. Take a look a Bitcoin up ten percent trading today forty two hundred up ten point one per cent, So a huge move there for bitcoin. I'll call that out for for Tom Keene. All right, let's talk commodities, guys. I have my g l c O screen up Global Commodity screen on the Bloomberg terminal. All of energy higher, metals higher, most of

the big aggs higher, wheat, soybeans, cotton higher. So commodities definitely moving higher. We want to get a sense of kind of what's moving this market, so we turned to Everett Millman, chief market analyst at Gainesville Coins. Everett, what's your call across commodities here at a time when we have rising geopolitical tensions in Eastern Europe. Right well, appears that gold has certainly held up its bona fides as

a faith haven asset UM. It has certainly rallied amid all this conflict, but also the economic sanctions that the West is imposing on Russia UM will almost certainly drive up the prices for many of these other major commodities UM. Even though the Russian economy makes up less than two percent of global GDP, they are one of the largest exporters of a lot of these really important commodities like nickel, aluminum, cobalts UM. As you mentioned obviously the key energy commodities

like oil and natural gas. The fact that energy is rising is just going to make it more expensive to get all of those resources out of the ground, and even agricultural commodities. Russia exports more than ten percent of the world's fertilizer. They're a major exporter of grains like wheat and barley. So everything in the commodity space is really connected to this, and we should expect to see

higher prices going forward. So what's the margin or what are we really waiting for for a reversal of this is this p puarly on geopolitical tensions. Because these prices, these commodities, they were rising before the Russian invasion, before the onset of the geopoliticals What are we watching for for reversal of some of the action. Do we have to wait for demand destruction? I think so. I mean, that's an excellent point that prices were already rising, we

were already dealing with elevated inflation. I think the real reversal possibility would be a de escalation of this proposal to band Russia from the Swift system. I think that is a very potent um sanction. And really the direction of how long this goes on, all the disruptions and markets I think will be based mainly on that if the West is continue to be that aggressive with sanctions.

All right, let's given this environment, given this backdrop here, ever, what are the two or three most common calls you're having with your clients? What are you telling them? Where are you telling them to be exposed here? Well, obviously gold it's always a safe place during on certain times like this, especially given at the Russian ruble has been tumbling, so that may force the Russian Central Bank to liquidate some of its gold. It's large stockpile of gold in

order to support its foreign exchange value. UM. I'm also looking at platinum and palladium UM. Russia is far and away the world's number one exporter of palladium and an annual basis that's somewhere between and of the global supply.

So if there is more difficulty in getting palladium out of Russia and it being one of the only sources UM, that is certainly an area that investors are going to want to be exposed to, because really the only the path of least resistances for palladium prices to continue to climb U due to that supply shortfall. We could see you mentioned gold in particular. This is interesting to me. I've been saying this all morning, the fact that gold and the dollar are up higher together that it's usually

a sign a very very acute stress. Talk to us a little bit about what turns gold around. In particular, if you continue to see it, I mean gold, after the end of the day, it's priceton dollars. So does the currency mean nothing right now for the metal or is this purely a matter of haven demand? I think it really is haven demand, and only in these extremely high stress times do we see that both the dollar and gold and the Japanese end would all be rallying

at the same time. UM. I think that the major kind of pivot point here between gold and the dollar is whether or not we're going to get any kind of quick relief for de escalation or for diplomacy to prevail here, because until then there really is no reason for investors to to sell their safe havens to get out of those assets that they really are the only

game in town in terms of weathering the uncertainty. UM. Gold is always good across borders, so there is even as I mentioned before, with Russia possibly selling its gold, there is some evidence that gold bars minted in Russia have been ending up in vaults in London. So there's already some indication that perhaps we will be gold used in international trade or um to bolster the Russian central banks form reserves. Everett Milman, thank you so much for

joining us. We always appreciate getting your take on the commodities market. Everett Milman, chief market analyst at Gainesville Coins. Right now, let's switch over to the markets. The market outlook, Lots of bricks in that wall of worry. Now we have to include geopolitical risk. Uh, and the markets are trying to digest that we have. Markets are mixed today off the bottoms, but again investors are trying to get a sense of how they price this Outlet's checking with

Brett Ewing, chief market strategists for First Franklin Financial Services. Brett, thanks so much for joining us here. Kind of what are you telling your clients here over the last five days. Well, first,

thanks for having me on today. Um, Yes, there's been a lot of turmoil, a lot of concern out there in the recent weeks with the volatility in the markets, and certainly our clients are talking to us and wanting some insight, and what we're trying to convey to them is we are still put the FED as one of the biggest risk into the markets for two and we're also guiding them to look a little out past these

geopolitical risks. And you can go back over the last eighty years and really look at every geo political event and it's really a short run phenomenal in the market, meaning that the average raw down is around about four point five with the recovery rate around forty two days, So an event like that, we're trying to look past that and look out over the next eighteen months really,

and so what we're doing here is positioning. We're taking advantage of this volatility and specifically looking at the small and MidCap sectors. So talk us a little bit about I mean, you said that you want to look past the geopolitical tensions, but isn't there a commodity read through that then kind of hits essentially the American recovery story. Is that perhaps worth making a bigger deal of over

the FED. Well, I think the commodity spikes that we're seeing right here are most likely going to be short lived. I think that when we look at the oil markets right here, of course it's all it's reaching multi year highs UM. Again, we think it's closer to the peak than it than it um than most people realize UM.

As a matter of fact, last week we actually sold a lot of our oil stocks into the strength and we just feel there's on a relative basis, there's a lot better asset classes that have just been decimated, whether it's growth, tech or other all MidCap stocks out there, so we feel there's better places to park that capital

going forward. All Right, let's talk about tech, because a lot of folks have, you know, the last twelve months as the as the rotation trade as works so well, they've been kind of rotating out of some of those big tech names. Now you get some folks saying, hey, I like tech, just I need the tech that actually makes money um as opposed to some of the more high flying revenue growth stories. How do you think about tech and allocating capital there? Yeah? Absolutely, I mean, look

is going to be a stock pickers year. There's a lot of great technology companies that have you know, it's the baby with the bathwater syndrome here just been thrown out and decimated here in the short run. But we're taking advantage of that. I think there's a lot of great opportunities within tech. There's a lot of tech companies out there that have wonderful moats around their business model, and those are the areas that I would be um advising people to take advantage of. We'll talk to us

a little bit about perhaps the value rotation. I think a lot of people started off two thinking was going to be kind of a continuation of what we started off in one, and yet it doesn't seem like that strong kind of conviction essentially for the value at the start of the year has really persisted in the last six weeks or so. Do you think it can really revive itself. I think there's there's certainly a few areas

within value that I would we would continue to look at. UM. I do think that the areas that I feel have a lot of upside is more of an asset class story within the small mid cap stocks. The valuation on those asset classes is the spread between large cap and small MidCap right here is those is the widest dating back twenty years. You have to go back to two

thousand one. UM. Typically the small MidCap areas of the market are are you know, their four ps well above the large cap and right now it's quite the opposite. All right, Brett, thanks so much for joining us. We appreciate your time. You in chief. Market strategy is for First Franklin Financial Services. Let's get the latest here on some of these sanctions. I'll probably focus on what we're seeing from the global banking system and the impact that

may have on Russia. Shinalie Bassik Wall Street Border for Bloomberg News drains us here in our Bloomberg Interactive Broker studio and she like, can you help me here, Just tell me what's SWIFT is and why it's important. Yeah. Well, it is a cooperative that serves as a global messaging system to the global financial system. So that's more than eleven thousand entities across more than two hundred countries, and it's governed by the G ten banks and incorporated in Belgium.

So when the globe comes together and say they want to ban Russia from SWIFT, what you really saw at the end of the day is the US announced moves and other countries announced moves to really cut off a number of Russian banks and entities from that payment system. Here's the thing, Paul, there's a lot of questions around what the ultimate impact of this will be. The reason

that a lot of countries did we're opposing this. Germany in particular, was uncertain of doing this for at the beginning is because if you cut off payments, then all of a sudden, do you start to make it very difficult to make transfers among energy companies and counterparts? For example? Will it have an impact that has a backlash on the energy trade between Russia and Russia and Germany, and really what is an ultimate economic impact on the countries

that are pushing the band themselves. So let me just dumb this down for me, um, because I really needed. My understanding of this system is kind of like, I guess the only way I can describe it as back in high school, when I worked for the high school newspaper, we had a rule that when you send an email, you have to send a goded email back the idea that you have confirmation, right, And that's the way I

think of about the system, right. It's a payment confirmation system that essentially, if you don't get that confirmation, that payment isn't necessarily being delivered in a kind of trustworthy way. Am I getting that right? Here's the thing. Ultimately, it doesn't control the payments, You're right. It only oversees the messaging. And by the way, it's not really led to go

into the messaging. But any bank and any entity that's involved in the system being able to store those messages and track those messages helps those banks comply with sanctions rules, which is why swift is important even in an era of sanctions. One of the things that people worry about and remember since two thousand fourteen, Russia and China did try to create alternatives. It didn't really take off to such a massive degree. But can Russia and China create

bigger alternatives to swift That was one concern. But the reality is this is the central This is a central way to communicate across banks across the world. So even if they left this and an alternate system is being made, then how do you transact with the normal global financial system as you know? It's it is a little bit meta alright, So yeah, I guess the way I'm thinking about, it's just gonna make it much more difficult for Russia to do business and putting increasing to pressure on them.

Um another thing, another angle. I wanted to get your sense from its like the JP Morgan's of the world, the Bank of Americas, these big global the cities, these big global institutions, what are they saying about their business in Russia with Russia? All that kind of thing. So remember again, since when there were more restrictions kind of imposed, over time, a lot of banks have really stepped back.

So most US banks don't have a meaningful explosion Russia, which is why those sanctions on those Russian banks themselves is so important. Suburb Bank and the v TB are fifty of the country's global assets. And then you know, all of the five banks combined are like sevent So if you take City Group, it's like a couple of billion dollars of exposure of assets in Russia, not meaningful to the bank itself. But with that said, remember how

entwined the global financial system is. City Group and JP Morgan are big global transaction banks, which means they're effectively the banker to other banks that help these payments from one country to another happens. So what we're hearing right now is a lot of bankers in talks with the Treasury Department to figure out what the actual rules are because that has not been made clear to the bankers

themselves yet. And so now all these banks basically have to figure out how to entangle entangle themselves from any transactions that may involve any of these sanctions entities, and

remember there are many. Now, well, let's talk about the energy piece of this, right because I believe, and correct me if I'm wrong, but I believe there was discussion among the White House about how you actually kind of separate the energy payments from the entire metric, And one of them was simply you can have them denoted or have some sort of marker um, which is having me give me horrible biology DNA flashbacks, um. But the other piece was if they're all kind of going through one bank,

can you just target that one bank? Any update on how they're going to target the energy piece of it, Well, that's the big question here, right If they wanted to target the energy sector, why don't they just target the energy sector? Why is this all being done through financial mechanisms? Interestingly, and just as important, and I'm sure you guys have been talking about it as the band with the central bank,

the Russian Central Bank. So if you're going to target Russians economy right now, the way they are doing it is absolutely by targeting Russia's financial infrastructure, and they're doing almost every means to do that and do it effectively. But if you're going to target the energy system, then why don't you just do that by means of the companies and the people that own them. I think that's the next leg of this story that has a lot

of big question marks that are rolling rolling into it. Yeah. Interesting, it's far and wide. It's been a weekend. We're just sanctions and you know, pull business out of Russians. Just

it's just incredible news flow and continues today. And I'll point out there's a Bluebird editorial written by the Editorial board on the terminal entitled Wielding Swift against Russian banks is a big risk um and it's a great explainer for how swift works in the real world and how there could be some negative repercussions um by the nying Swift to the entire Russian economy. So I recommend that Snelle Basset, Wall Street reporter Bloomberg News joining us here

on our Bloomberg inter active Brooker studio. She does every Monday giving us the latest from Wall Street, which is her beat. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller and on Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio