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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business app. So here's the laces this morning, A round threatening to retaliate if the US blogs the stratiform most the ships that stop at its ports one quote, no port in the Persian Gulf and the Sea of Verman will be safe. Normal rule of csis writing it's the sharpest escalation since the ceasefire. This may not mark the formal end of the ceasefire, but it could represent the beginning of its unraveling. Norman joins
us now for more. Norman, Welcome back to the program, Sir Norman. In your mind what happens several lasts from now at ten am Eastern.
Sign at ten am. In essence, you will have the United States stop all shipping into Iranian ports, and for the Iranians, they will need to test US fortitude. They will likely try to do several things. They may try to run several tankers through the Iranian side of the Straight of Horror moves into Iranian waters to see what will we do if the tankers are instruct tanker captors are instructed to continue no matter what the US says,
The Iranians will just see what happens. At the same time, the Iranians will look to see what ships go in outside under the US control and then perhaps threaten to target those ships or the ports where these ships attempt to dock. And last, of course, if the Iranian position is that their economy will suffer because of an inability to produce an export oil, they could in an extremes position attack golf oil producers.
Normal is the blockade the appetizer potentially for full US naval escorts to the Strait.
It is, but it may not. But it just may be a broader step for US policy to test run short of hostilities. We saw the two destroyers go through over the weekend, and that was interesting for several reasons. First, they faced no mines. Secondly, they faced no Iranian missiles, speedboats, or any other Iranian hostile activity which could have happened. Next, you had the US demonstrate freedom of navigation, which is a long standing US practice in the straight upoor moves
and the Persian Gulf. So you've got a precedent beginning where the US is beginning to test a process that could lead to convoy operations. But it could be the convoy operations are not necessary. The straits naturally opens on its own at some point. But again we're in early days and hostilities could well break out again.
Well in these early days, will golf partners help the United States in this blockade?
I don't see that as being necessary, and the best way they could help out would be to produce oil and energy through other roots that don't rely upon these straight or for moves, and I think you're seeing Saudi Arabia and the Emirates do this. Also, you're seeing rhetoric by the Gulf of leadership such as doctor sultanal job Or and others where they state that no Iranian control
of the straighter for moves can be tolerated. And I think you're going to continue to see that quite clearly, what left.
Is there to negotiate if Iron doesn't want to give up control of the straight off moves and they're not willing to give up the nuclear ambitions.
Constraints upon their missile program to ensure that they don't develop an intercontinental ballistic missile, and continued enhancements on their medium range ballistic missile that make it impossible or difficult for regional countries to stop them. But also the activities of the Goods Force. I mean recall that the Goods Force was proliferating missiles to the Houthis which did shut down the Red Sea for a period of time missiles
and drugs. And there's no question that the Goods Force will continue to provide technology to the Houthis and other proxies in the region that will enable them to do similar things in the future. So for the United States, nuclear issues, missiles, and regional adventurism have always been the three issues of importance, and those issues have been shared by Europe and Golf partners, but how they're handled has been the difference in terms of an approach.
How concerned are you that in response to the full blockade by the United States iron will get some of the Houthy militants involved in the Red Sea, and we could see more a broader blockage of all transport in the region.
It's possible, however, the United States has will likely treat the Houthis very harshly militarily, and I think you're probably seeing a lot of diplomatic efforts by the Saudis to constrain Khuti action. The Huthis have on the ground issues dealing with Yemeny internal matters that have also focused their attention, and traditionally the Huthis have focused on Israel issues regarding Palestine,
and their role has been limited thus far. So it's a possibility, but thus far a limited one, but it remains a possibility.
No, just a final question, because it's on people's minds. How do you think the US would respond if a Chinese flag vessel attempted to go through this treniforms now.
Intense diplomatic engagement with the Chinese to ask them why they are attempting to turn a regional conflict into an international conflict, and if someone in Beijing had actually lost their minds.
Stay with US. Mul Bloomberg surveillance coming up after this. Just to break this down very quickly, start training comes in much firmer than anticipated. Another record. Danny went through the numbers. Just think about this. The record in the previous quarter was four point three to one billion. The record now is five point three to three billion. So that's the good news for Goldman. The miss is on thick and we can talk about that extensively throughout this morning.
Whether it's also some strength and Danny talked about it too. That eighty nine percent and let's call it search in dealmaking advisory fees speaks to a theme that a lot of people were jumping on board for coming into this year and why this part of the market was a consensus overweight. Chris Marina could bring capital Well joined us now for more Chris, welcome to the program. How difficult is it to anchor the outlook in a moment like this, Well.
John, I think that you may have trading losses in fig and that might be part of the problem. So I think as you move forward, this may not be as big of an issue. I think the pipeline being very strong on the banking side is very important, So I do think that is a win in the quarter. I still think that season the second quarter is also very strong, So I think the market can look past this disappointment initially.
Do you have a sense of what David Solomon could be talking about when you said that he had seen some concerns he's worried about geopolitics. What are you looking for and how he speaks about that to get some guide on when it could hamper some of this capital markets activity, Well.
I think it's things that are not announced that are in the works, and I think that there tends to be an attitude to go on hold when you have this geopolitical uncertainty, and that's the part that you can't account for. So I think as May and June come into greater focus, I think there is a high uncertainty, and I think he is trying to give a signal that that indeed may be the case.
High uncertainty is part of what he might be pointing to. And you take a look at the ten percent build in provisions for credit loan losses, which is something that we heard Danny talking about. Now it's three hundred and fifteen million dollars. Is that number significant to you or does that signify still a pretty benign credit backdrop.
Well, I think the credit has its own uncertainties, particularly in the private credit world. I think you have to build reserves now just to be safe. So I think the attitude about having higher provision is smart to some extent. I think the market would be disappointed if you had not built reserves at this juncture.
At this point, though, is that a significant build, right? I mean, I guess I'm trying to get some perspective on this. Does that indicate that they're really concerned about stress because right now you're not seeing it and any of the preliminary comments. But this is a fear aside from private credit, it's the broader sense of rerating and specific wholesale industries in the credit area, particularly tied to
software disruption, trade, et cetera. I mean, how much would you expect loan losses to have to increase to truly offset some of that potential risk?
So I think it's a moderate build your first question, Lisa, and I think going forward, I think you have to have a significant change in credit losses to really warrant much greater concern. I think right now it's a preliminary move to be conservative to Playcate. I think investor concerns that perhaps the companies are doing enough. So I've expected to see some provision increases quarter, so I'm not that surprised by it, Chris.
This year we were meant to see a boom in economic activity, particularly the kind of boom that some of these names would take advantage of. We still might see two or three of the biggest IPOs we have ever seen in the history of capital markets, Chris. Which banks were in a position to take advantage of that?
Well, clearly the national leaders from the JP, Morgan and b of A and Goldman should have that. I think those big IPOs are still out there. I agree with you, John, It's a long year, so I would not give up hope at all. I think this uncertainty can pass, just like it did last year. So I still think there's a very good road ahead.
Are you willing to look through some of the gloom that might take place on some of these calls, Chris, No executive wants to be dismissive of risk that might be brewing. Not a single executive on Wall Street wants to be the person that does that. On these earnings calls, do you think they might really understate the potential for gains in the year ahead. And I'm not just thinking of Solomon, so I'm thinking of maybe Diamond tomorrow.
Oh sure.
I think they're going to be very careful and cautious, No different than they were in April twenty twenty five. You know, we had Liberation Day and then markets were very uneasy for several days, as you remember, and most calls were very sort of quasied, negative and cautious. In April twenty five. It turned out to be a much better year as the second quarter played out, So I think this could be a repeat, just totally different circumstances.
Chris, is it basically a quarter where numbers could be pretty solid, but the rhetoric is concerning given what's going on in the world, so that shares ultimately just are depressed.
Well, I think investors always hit the sidelines when you have uncertainty, and I think we have that moment. They acted better last Thursday Friday than I would have fought. Quite honestly, I do think the rhetoric could keep the incremental buyer helding back in the short run.
So the stock right now in trading in pre market on this thick miss, and I'd love to get your sense of why you saw such a big miss. When it comes to fix sales and trading, A real concern here is that interest rates are going to be higher and then potentially incredibly volatile, making it really difficult for big banks. How much of a headwind is that, I mean, are we skipping over that too quickly?
Well, I think people had thought that the FED would be easing once or twice as we got in the second quarter, that obviously is off the table, So that is part of the headwind. I think to some extent, the uncertainty about whether the war is going to go away or still be lingering from the next four to six weeks also as a concern. I think to some extent there is a lot of optimism built into this quarter from.
A trading perspective.
So now that you have a slight miss that pushes everybody now to be negative, I think that's a short run thing. I think we still have a lot of positivity happening in the business. You know, on their ordinary bank side, the deposits are growing really well, and that's ultimately going to have many players buying securities as this next two quarters play out.
You know, volatility is a funny thing. On one hand, volatility can be really good for the banks, and they'll say, well, we benefited from the volatility, see this in equity trading. On the other hand, it can be bad when it is just an unpredictable macro environment. Are we entering bad volatility or good volatility? Then what do you expect the commentary to be from the big banks.
Well, most of the volatility, I think is positive. I think the companies understand how to make a dollar when you have these top suturnity markets. They've been here before. We've seen many examples of volatility the past several years, So I think it's just a different circumstance, but the
same volatility to some extent. I think volatility is your friend, but you may have had a loss of the Goldman quarter, and I think as we see the other players come out the next couple of days and may look and feel a lot different.
Stay with us Multilinpeck Savana's coming up off to this to begin this sound with stocks adding to losses as Golment Sacks fails to lift markets. Jason Drajo ubs Global Wealth Management right sing the start off quarter rounding season should support our forecast for eleven percent EPs growth in the S and P five hundred this year, with a price target of seventy five hundred. In December, Jason joins us Now for more Jason good Mornic won in how shakey is that outlook for earnings now?
Well, the guidance going into q on earning season has been good. We've actually seen you know, kind of in terms of revisions outwards or downwards, it's actually been realpily optimistic versus other quarters. We've seen some good results from tech companies, some semiconductory companies, So the setup going in is good. Similar we talked about, you know, the high bar perhaps for the market performance, the bars highbrid in
terms of actually achieving that eleven percent. Nothing so far we've seen going into the season will suggest that's a real sort of jeopardy. Again, we're making the caveat in terms of the whole Middle East situation, but you know, attracting that the earning story still looks very much on track.
This is anchored pretty much everyone on Wall Street, so farther small and I say pretty much loosely forgive me, but the likes of Morgan Stanley, JP, Morgan, HSBC, black Rock all saying something similar. It's an opportunity to buy this from Morgan Stanley. We'll find ways to solve a problem that is intolerable for the global economy, much like they did in twenty twenty two. Is this so bad it's got to get better? And then you should look
through it. Is it that simple, because it feels much more complicated.
Well in terms of like kind of solving the problems, you know, I think some lesson we learned from the pandemic error is that the supply chains, you know, create problems, but they also create opportunities, say companies, the ability the economy, especially the US economy, to kind of solve the problems. Have the price systems sort of equiliberate again, you know, I think it does it very well. And so the lesson from my takeaway from that experience is out, don't
underestimate to the economy's resiliency. Now, the economic conditions today are in the strong. The finetic you know, the healthy consumers is not kind of strong, but fiscal support it's not there. So a lot of reasons to obviously be more concerned at the same time, you know, I don't want to sort of doubt the ability of the US economy to be somewhat resilient, you know, to this whole situation,
resilient enough that you know our forecast. Do you think we still feel pretty comfortable about ultimately by the end of the year equities being up you know, about ten percent.
One of the reasons that people seem somewhat optimistic when I speak to a number of investors, they say, ultimately, all of these supply shocks will create the greater need to invest in artificial intelligence, the greater need to get bigger, to engage in deals to create a critical mass and
economies of scale. How much do you see the uncertainty and the ongoing supply shocks as only accelerating some of the capecks that we've seen that have really driven some of the gains that we see not only in equities, but more broadly in the overall economy.
Well, the cappecs for AI, that's we're seeing strong numbers there. If you abstract from that, if you look at residential non residential other investment, it's actually well to three weeks. So we're not seeing companies saying we need to invest more necessarily and AI specifically, so from a near term growth perspective, that's sort of not driving it in terms of ultimately of creating supply chain resiliency. I mean, this is now a story almost kind of going back a
decade with you first with tariffs, with the pandemics. I think you're going to see companies move in that direction. But it's hard to invest when there's a lot of uncertainly at this point in time. So I wouldn't view that as a key driver for the next say quarter or two to really lift us growth.
One of the difficulties is people look to a potential upside, significantupside of a hundred other people completely agree with you, is that there isn't an obvious hedge. We used to talk about bonds, we used to talk about gold. Nothing's really performed consistently. I mean, how do you think about a possible hedge to optimism that seems to be pervasive right now?
Well, it ultimately depends, like what are you trying to hedge against. You know, if it's ultimate oil prices going to higher commodity prices, that's an inflation shock. It's really difficult to hedge that. So you can look at things like oil or having exposure to commodities that worked earlier this year, like in March we go back to twenty two that would have worked in that time period. You can also need sort of de risk and have sort of less exposure overall. You can have less risk exposure
in interest rates markets. You know, we're saying stay in the front of the curve. We've like, you know, no more than about the five year point. You don't want that interest exposure, so you can make changes of the margin. But ultimate inflation shock is really really hard to hedge. I mean, other than sort of de risking.
Significantly, are there any parts of the market that are prepared for serious escalation?
I mean, I think it depends if you think of serious escalation. I think the front of the curve pricing in like now to go a couple weeks ago, actually hikes seemed optimistic to me in terms of the optimistic in the sense of the markets that are pricing the Fed to hike, because ultimately, if you really get significant escalation, I think the markets transition from we treat this as an inflation shock and therefore the Fed has to hike to we treat as a shock.
You know, what's an escalation? From my standpoint, the status quo is bad enough. Really need an escalation from here? Physical markets really tight shortages are beginning to merge across Asia. Europe is bracing for them to confront the same thing in the next month or so. I'm not sure do we need an escalation? What kind of escalation? Do we need just the status quote to persist? Where things are
right now? For that to persist, we come week on wee, come week on week, You're going to see more damage to the global economy every single week. That's logical.
Yes, that's correct, Although Max keett Over at HSBC is saying that actually it's the pace of bad news getting worse and so if it's not getting worse as quickly as it was before, that's enough to keep people optimistic in the markets. I mean, you're just giving you a sense of what the register is right now on Wall Street.
Le's bad is good enough? Good enough? The line from mass Count of HSBC your conclusion too well.
In terms of escalation, really the key is do we get you know, oil flowing through the strait of Homove. So status quo means whether military escalation or not. If you don't get that improvement, that's a problem because I think, well, the markets are assuming, and what we're assuming is ultimately, as we go forward the next month or two, you get improvements. If that doesn't happen, yes, prices go higher. Economic growth has to be sort of marked down. The markets are not pricing for that.
But then they're not pricing and what's going to happen less than two hours today? There is an escalation. There's a blockade of the blockade, so even a little bit of oil that was getting out will be stopped.
Well, if you're talking about an oil tanker two versus the thirty that we normally go through, I'm not sure that marginally makes a change. Like this is a question, you know, have to believe will the administration do a blockade?
There's also reports over the weekend that they're going to prepare to try and do sort of like sweeping of minds, you know, could there be also, goodness, you know, a week or so from now that all right, we'll do this, But we're trying to actually improve the flow of oil. I mean, so that's not something the market is talking about. But what is the ultimate plan for the administration. Ultimately, I don't think you want to have oil not flowing through.
What the calls for is we want to flow through, and so you talk about a block K. But ultimate, if you're working to prepare to increase military securities so oil can flow through, that to me is a positive for the markets, which is not being discussed this morning. For what I can see.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app