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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 appar with our top story fedshare,
Jpowell signals another delay in cards. B and wi's Alia Levine, saying this, the market is more aligned with the FED than three months ago. That move from six to three hikes happened with barely a hiccup in the equity market. We think the FED will cut less and later. It could be two. As long as the economy is strong and the labor market is resilient, the equity market can handle less and later.
Alisa joins us now for more. Alisa, good to see you in the morning.
Been too long. Let's talk about how you framed the EE. We're talking about a year or two halfs. I think the second half was going to be a little bit better maybe than the first half. How's that shapen up now?
So it looks like the first half was very very strong, obviously coming into the first quarter up ten percent on the S and p up eleven percent including dividends. Look, we're clearly walking into a counter story here in the last few weeks. So it's not just that the rate cuts are lesson later, but it's also is inflation higher? And then the Powell yesterday age is sort of said the part that we were all thinking, which is are
there no cuts at all this year? But to your conversation earlier, I think the issue is the pivot already happened. The pivot happened in December. To pivot from the pivot is going to be a very difficult thing for the institution. So we're in a place where you know, the Fed can hold this high for longer, but I don't think we go higher, right, So we're not pivoting from the pivot.
And ultimately, the data really are hanging in there. I mean, the job market data has actually been extraordinary, and if you just look at a rolling three month average you know, six months ago that rolling three month average of job creation was two hundred and twenty thousand jobs per month. We're now at two hundred and seventy five thousand jobs per month.
So we've ticked right back.
Up in what is supposed to be a slowdown this year, and we've done it with wages quietly ticking lower. So there's a supply story going on in the labor market that I think the FED is hanging their hat on here to kind of quietly bring inflation down on the labor side, on the wage side, even as we see some higher numbers in the services.
I remember you called twenty twenty one the COVID xcess years, twenty two to twenty three with the transition years, and you were setting up twenty twenty four to be the.
New normal, the new normal, the new normal. Do you think we're still in the transition years or is this really the new normal?
So this feels like the new normal, which is we seem to have better labor supply, We have an economy that can grow at two and a half percent, and we have inflation that's probably not going down to two percent anytime soon because we have some deglobalization, we have restoring, and of course we've got hot conflicts in two parts of the world where commodities matter, food and energy.
So we're in a place of.
Let's call it two and a half to three percent inflation as a steady state. That feels about right. We're also in a place where growth is likely to be higher than that two percent which we had in the post global financial crisis world. So I think this is the new normal. This seemed like it would be the new normal. We've had hiccups along the way, but this doesn't feel problematic.
Right.
We've lived in this world of two and a half percent growth and two and a half to three percent inflation quite well with five percent yields.
It's not problematic for Google, it's not problematic for Microsoft. It's really problematic for a lot of smaller companies that they're struggling with highly leveraged balance sheets. At what point does that become a problem for the broader market, given that that's sort of the steady drum that hasn't go.
Away in the backdrop, right, So that's true, there has been a bifurcation here, and this like the slow ringing out of excesses and leverage in all these challenged balance sheets. So you see it in the Russell for instance, they Russell's down three percent this year. There was a lot of hope last year with the pivot that this asset class would finally rally sell twenty five percent below the highs of.
Twenty twenty one.
It is happening across the economy to smaller businesses, but the larger cap companies and the larger companies in the US termed out their debt, meaning just like households which termed out their debt at three percent, mortgages fixed rates. Large companies you know, sole bonds in twenty twenty and twenty twenty one at three and four percent interest rates, and those are not due.
The bulk of the S ANDP that debt is not.
Due until twenty thirty or later. So you have stronger companies, larger companies actually paying out debt at three and four percent and getting five and a half percent on their cash, similar to what households are doing as well. Just keeping that part of the market really solid. So the structure of the US markets are going to protect the S and P from what we're seeing in some of those smaller companies, and yes, if the re FED keeps high for longer, then we will see that slowly wind its
way through the economy. It's just really slow, and it's very unequal in how the higher rates and the contraction of credit is hitting the economy.
So what I'm hearing from you is own US big tech companies and chill, is there some room for say, Tebells or you know, international or gold or do.
You just basically.
Say you can have your general allocation overweight US stocks just keep their particular the tech name.
So we allocate to all asset classes on the On the equity side, we have favored US and large for several years now because it seems very clear that potential growth in the US is just higher than elsewhere, and even though we get better than expected numbers from Europe or even China, it's just not enough to really go where the US can go in terms of sustaining growth, looking at policies that have to, you know, boost growth there. So we've been US large cap overweight for a while now.
We're very comfortable with that, but we do allocate everywhere. In terms of the bonds, we've always said you've got to you know, actively manage your bonds.
We never said go long duration.
We said please get out of cash because we think it's a year where cash can under perform. We think as rates move higher, it is a great time. As you said, why does everybody want to go into bonds when you know when rates come down fifty basis points like, maybe this is the time to start, you know, walking out a little bit, but you have to actively manage it.
And we still like.
Alternatives here for that world where there is just our distressed assets to invest in, and private equity valuations are seadily coming down, and this is the time you want to start getting into those vintages.
And what about gold?
So I heard your gold conversation earlier. Look, gold can be a risk off asset or a risk on asset.
It is not in our allocations.
It has no yield, it has no dividend, just very hard to track here. But I think he your gold is as acting as a inflation an expression of discomfort with possible inflation.
Bumps.
Okay, well there's a lot of discomfort. We're at all time high. So Elisha, Levina, bn y Man and Alicia, don't leave it so long.
Next time. It's good to see you.
I will promise to be back.
Thank you very much, appreciate it.
Security Advisor Jake Sullivan saying the President is coordinating with allies on quote comprehensive response, adding we anticipate that our allies and partners will soon be following with their own sanctions. Admiral James Travenis, the former NATO Supreme Allied Commander and co author of twenty fifty four, a novel, joins US now. Admiral wonderful to get your expertise on this program once more.
It's fantastically catch up with you, sir. I want to start with this question, and it's what did we learn over the weekend?
And by we I mean Iran.
What do you think Iran learned about the missile defense system in Israel?
They learned that it is formidable, that it is comprehensive geographically, and I think above all Tehran would have been surprised at the extraordinary coalition operation. You know, I've spent a lifetime in the military, a lot of it doing air defense, guided missile destroyer command, for example. The hardest thing in the world is to knit together the Israeli air defense the American Air Defense is alongside Jordan, UK, France and
put them all together. I think Iran was unpleasantly surprised at the coalition level, the comprehensiveness, and most obviously John at the result ninety nine percent patting rate knocking down incoming missiles.
Do you think the success of that defense admirable, shape or influence Israel's response?
No, I don't.
As follows, the Israelis are clearly looking at it, and I think they should as a massive attempt to bombard their homeland, something they have not done to Iran heretofore, it's been between proxies of fighting more or less. Now you've got the Iranian military, specifically Revolutionary Guards and elements of the conventional Iranian military launching a massive wave of
missiles at Israel. So they will respond. I think they'll respond in a measured way, but clearly they are going to take on this challenge from Iran.
Is there a way Israel could respond to make sure that there's deterrence when it comes to rom but not make sure that they're sparking off some revenge cycle in the Gulf.
Yeah, this is exactly the right question. It's the one clearly under discussion in the war cabinet, and I'd think of it as an ascending ladder of violence, meaning option one, do nothing militarily but imposed sanctions, more diplomatic aggressiveness, try and get all your allies on board, perhaps some cyber response. I think option two is you go after kinetically, perhaps maritime assets, Iranian warships. You up the cyber game a bit.
You certainly throughout this are going to go after the proxies.
Option three is a strike.
On the Iranian homeland that could be a fairly tightly packaged, perhaps going after the industrial facility where the drones are built. Option four, and let's hope the Israelis don't pick Option four, would be a massive counter attack. Hundreds of missiles, both ballistic and crews, aircraft, all of that thrown at major military targets across Iran.
I don't see that latter option.
I think you'll find a mix of option two and three as I just described them.
One of those options had to do with the Red Sea, and this morning we have a new reporting that there's a naval mission underway with you, the Iranian Navy escorting some of their commercial vessels from the Gulf of Aiden to the sus Canal. Do you think Iran is preparing potentially for some sort of retaliation in these waters?
Clearly they are.
And let's recall, immediately before, perhaps a day before the strike against Israel, over the weekend, the Iranian navy, in what can only.
Be described as an act of.
Piracy, seized a large merchant ship that is ultimately owned by Israel by an Israeli business concern. So Iran kicked off that cycle as well. I think the Israelis have to be contemplating something in retaliation for that, hence the escort by the Iranian warship Adamiral.
I've been trying to understand why are has felt so emboldened to take these new steps to directly attack Israel on its own land, to move.
Out of the shadows. How much is.
Iran being inboldened by its relationships with Russia and with China.
Oh, you've put your finger on it. That's what's different.
Over the last three four years, particularly Russia, Iran is beginning to feel very comfortable in this partnership they have developed, which at its heart is transactions for weapons, with Iran providing very significant, fairly sophisticated drones to the Russians.
In their attack on Ukraine.
This in turn feeds the Iranian sense of having, if you will, a larger coalition partner behind them. And then finally with China, Iran is fully engaged in the Belton Road initiative, has received billions from the Chinese and investments, more of an economic relationship there. But both of those have emboldened Iran and well given the.
Fact that they have their own coalition or the appearance of one. How much do sanctions really work to They said that they've worked at all to this point.
I think sanctions are always an imperfect imperfect tool. And we can go back to the global sanctions imposed on South Africa during the apartheid era.
It took decades, decades.
For them to really create a sense of economic disadvantage, which caused a part of why South Africa changed course. So this is any time you impose sanctions, it's going.
To be take time.
And here you're absolutely correct. These are pretty leaky sanctions with at least a third of the world's GDP, maybe a bit more simply not participating. Not only China and Russia here, but for example, India not participating in the sanctions against Russia that we're correctly imposed in the Ukraine War.
So it will take time.
It's better than nothing, but we should not believe that it will be the path to changing the course of Iranian bad behavior.
Admiral, you mentioned China. Can we finish on China? You're out with another book, the follow up to twenty thirty four, again with a brilliant elliot Akiman, a good friend of his program as well, like you, Admiral. The twenty thirty four book was a novel of the next World War. And I just want to talk about the situation between
China and the United States. I don't know about you, Admiral, but waking up this morning and hearing the President talk about the prospect of umping tariffs on Chinese steel and referring directly to building ships in America, what do you think we're drifting towards here?
I think, unfortunately, we are drifting toward the possibility of more tension in the relationship. But I'll close my reappearance on surveillance on a mildly optimistic note. I think a good deal of what you're going to hear in that regard over the next coming months is in fact tied to the election cycle in the United States. Once we get through that, I think that there will be a possibility of the two sides finding their way to a
better modus vivendi. They are clearly going to be no go zones in the relationship over everything from Taiwan to South China Sea to military competition itself. But I think the possibility of continuing to have coupled economies and not stagger into a decoupling of these two massive economies, I think I'm cautiously optimistic we can work through that.
After the election, I say.
We can all agree. We hope you're great novels. Remind just that novels fictions. Admill, thank you, Sir adamal jangster Fat. It's the former NASO Supreme Allied Commander Cities and Costo. She writes in this we protect three hours and announced over the next six to eighteen months. The recent gold rally has been aided by geopolitical heat and is coinciding with record equity index levels, So a steeper risk of
environment should further boost prices. Cash's with us now for more acash Camoroni to you want to talk about the drivers here we can start with that. Can you help me understand because typically we'd associate a gold move with a wiki dollar and lower yields.
This is happening the other way around. Why is that?
That's absolutely right, John.
If you look at the gold rally over the last couple of months, it's coincided with a stronger greenback as well as a real backup in nominal yields as well as treasury yields.
Real interest rate adjust the treasury yields.
So I think a big part of it is financial flows are finally catching up to what's been strong physical demand. Right. If you look at what's driving gold over the last couple of years, If I was sitting in the studio, FED was at the zero lower bound, they were going to increase rates to five point two five percent. No one would have thought gold would have averaged eighteen to nineteen hundred dollars an ounce, and then here at records at twenty four.
Hundred an ounce.
And I think driver is the official sector demand. It's been barren coin demand from retail, very strong Chinese non monetary imports, and I think that physical demand for alternative fiat for reserve diversification in the official sector case, I think that's driving this gold demand on the physical side, and financial flows are only catching up.
That's interesting given the character of demand. Then do you think there is no limit to the divergence we're seeing between say treasuries.
And gold at the moment, I mean, the relationship is still there, But what we wrote in that note, and what I wrote is that the duration has just shortened. So we think getting to three thousand dollars announce over the next twelve months is plausible.
If the FED proceeds with.
For example, insurance cuts and nominal rates can still stay high, but then real yields would rally.
If you have a turn in the dollar cycle, that would just be a kicker for.
Gold getting even higher as financial investment flows come back into play. Also, given equities are at all time records or war in the.
Past week or two, you also have.
Potentially gold serving as a macro overlay hedge. So if you do get an equity correction or unwind, if the market is mispricing US recession risk, then I definitely think gold is a good portfolio diversifier there.
Recently, in the past couple of weeks, we've seen a repricing in the bond market about the idea of higher for longer and what we hear from institutional investors and even some executives is that it's a pet rock and that it doesn't give you anything, and that there's no runoff, there's no yields, and if you go into t bails you could get five percent and you actually earn something. How much are you think institutions pull back as everybody else gets in.
Well, I think the inflows are coming not only just from retail, but it is coming from institution. And if you think about gold, yes, it is a non intersparing asset, so the move in rates is not a positive tail wind. But what we're seeing is it's not a negative headwind right now either, and I think it's for other reasons. For example, the central banks are buying gold not for a yielding, but because it's a bearer asset, so you
don't have credit risks. It's an alternative fiat. So some of the moves that you've seen in crypto this year part of it on etf launches. Some of that over capacity is clearly shifting over to gold and silver markets. I think also from the point of view is can you monetize gold? You actually can in the options market. You can hold gold and sell and overwrite volatility on that.
And in fact, a lot of private bank, ultra high net worth individuals that own physical gold, they sell options in the market and they monetize the volatility skew well.
So this is actually exactly what I was going to ask, And forgive me for getting very basic, but I do wonder about central bank buying of gold. Do they just sort of store it there? Are they looking to monetize it through options? Do they have a gold carrier who they have they can call one hundred monetize my gold and they can go and deal with it. I mean, what's the functionality of gold in a central bank portfolio?
Central banks are buying gold, which is physical, physical gold that's typically stored underneath the New York Federal Reserve in London volts, some might be stored onshore, and some might be stored in France Switzerland as well.
It is physical demand.
It's used as a reserve device afire, it's used to as part of a broader de dollarization theme, and it's dollar recycling, right, So as treasury holdings might go down incrementally, gold holdings go up, but gets what's a smaller market, fiat market or the gold market.
The gold market is much smaller.
So even incremental demand pull from the official sector, which is now twenty five to twenty seven percent of annual gold mine production, that is a big boost for prices in our view, and we think that's set a higher
price floor. So as one thousand dollars became kind of the new price floor post financial crisis, I'm arguing that nineteen hundred even two thousand could become the new base floor for gold going forward, and that we're in a higher for longer regime, kind of resetting price expectations over a structural period.
How much do you think US sanctions are driving that appeal to gold.
I think US sanctions policy has been a big driver. If I look at central bank demand trends, they started increasing post financial crisis after being net sellers for four decades. Twenty fourteen, with the Russian annexation of Crimea, central bank holdings started to increase further than In twenty eighteen with the US Sino Trades SPAD they started increasing further again, and then most recently over the last three years. You've had record central bank purchases since the Russia Ukraine War.
But these purchases you say, are stored in places like downtown at the New York fed or London. Is there a point where if they're owned by that central bank, the US could still maintain control of them.
Some of that has been onshore more by emerging market countries. Very difficult to track, but we do expect that trend to continue from many central bank players. And keep in mind it's not just the PBOC and Russia that have been buying gold over the last decade.
It's Poland, it's India.
Even within developed market Asia, Japan and Singapore have been two of the largest gold buyers in the official sector sense since January twenty one.
You use the phrase that I think a lot of guests still shy away from. You said, date dollarization. Why people serve fright in that phrase? What does that mean to you?
I don't think everyone is afraid of that phrase, but it is a concern for US policy makers as people look for alternatives outside of the dollar. And if you look at Russian sanctions regime since twenty twenty two, you know gold is a bearer asset was the one instrument that they.
Could hold, which they held onshore that really couldn't be touched.
Yes, you can push Russia out of the LBMA market and give them less liquidity to the Swiss refining centers, but they still have that asset, right So, I think from that point of view, challenging the US dollar and the hegemony of the US is probably a goal of some emerging markets, and we see that as a long term, long term trend.
Is there a limit to the amount of gold that central banks can hold on a relative basis to their reserves?
You know, you'd have to ask central bank reserve managers. I think from that perspective right now that has the incremental gold holdings have grown. Right now, they're representing somewhere around a twenty five percent of annual gold mine production. As that number incrementally increases, that is price supportive.
We think it does two things.
It lifts the price floor of gold and it damps downside price volatility. And that's why I think we're in a new regime shift and dare I say it could be a multi year, multi decade.
This conversation fills incomplete without introducing bitcoin, where does bitcoin fit into this? Is it a competitor to some of the forces that you're talking about that underpendent support gold.
On the retail side, we see crypto as part of the alternative fiat story, particularly with retail investors. From a central bank or official sector standpoint, we don't view crypto and bitcoin at city.
As digital gold.
We view that as an alternative or a separate asset class. I think gold holdings increasing from sovereign wealth funds and central banks. What it does is it proves the validity of gold in the monetary system. And gold is old and traditional money, so we think crypto is a little bit newer. That's happening more on the fiat side. For retail, I think the official sector demand story is still driven by gold.
It's retail catching up to the gold story. Yet am I about to say tons of gold commercialorge? You know, we'll buy your jewelry. We'll buy your jewelry. How far away is that?
Well, it happens a lot on certain networks that you might not be watching late at night already. Certainly maybe not Bloomberg, but within that context, yeah, I think so you've seen the headlines about Costco selling out of gold bar and coins during specials about young millennials doing stacks of gold bars as opposed to SAT stacks on bitcoin. So sure, I think it is becoming something that retail could get more interested in. Interestingly enough, John, ETFs have still posted outflows.
Interesting since four.
Q twenty the all time peak, you've seen twenty tons a month of ETF outflows on average. Imagine if that just flatlines or starts to increase, that tightens up gold physical and I think that helps accelerate the move to three thousand dollars an ounce over.
This was fun months. I enjoyed this. We should do it again.
A reference that to low Brown financial news networks as well. This is the Berg Surveillance podcast, bringing you the best in markets, economics, angio politics. 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