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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. 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. Also tracking the latest
developments between Iran and the United States. The latest from axios This morning, A round gave the US a new proposal for reaching a deal on reopening the streadufor mers and ending the war, with nuclear negotiations postponed for a later stage. This is a view from Normal Rule of csis this morning. Right in the following, the most likely course over the coming week is continuation of the current blockade and indirect diplomacy and narrow maritime arrangement remains possible.
Norm joined us now for more Normal One. Welcome to the program. That last line a narrow maritime arrangement remains possible. Normal what do you mean by that? And what kind of arrangement might we see?
Good morning, And first, it's good to see Anne Marie here and I'm glad that she is safe, and obviously the President and the other attendees. It's possible that some sort of arrangement to allow a limited amount of humanitarian goods could go through, but that itself remains unlikely. And here's why. In essence, the United States and Iran each see the straight up horror moves is normally the focal point for this, but their main pressure point over the other.
We're now on a three o'clock contest. The United States sees the control over the straight of horror moves is its sole opportunity to squeeze the Iranian economy, and that's a real pressure point. Inflation is rising in Iran and it's enduring. Real economic pain is it's oil industry shuts down. But the Iranians know the war power situation is coming to a head this Friday. It's only a political issue in the near term for the president, but it's a
real one. And of course economic pressure in the world is coming forward. So you've got a situation where each side is in this viewpoint that the straight uphoor moves is the central pressure point for each other. But there's just a narrow, narrow deal that is out there. But we're in essence negotiating on whether we should be negotiating, and the Iranians see the straight uphom moves as their chance to get out of jail economically.
No, I'm nice to see you too this morning. Could this maritime arrangement mean or is accepted by the United States? If Iran continues to have a toll and continue to control it, even if ships can pass through.
That's unlikely. And let me explain why the United States sees that the only way that it's been able to bring Iran to the table is for meaningful talks has been through economic pressure and military pressure. If the straight up removes is open, well, the first thing that's going to happen is what is the purpose of the entire US military presence in the region. Are we going to maintain three aircraft carriers in the region if there was
no blockade? That's unlikely. So if the military pressure is removed, if the economic pressure is removed, what do you think the chances are that the Iranians are going to come to the table with any serious negotiating position. Now, they'll come to the table, and they have done this for years with multiple administrations. But its history is shown with the Iranians. They come to the table to talk. That doesn't mean they come to the table to talk about
anything seriously. And the Trump administration, in fairness, knows this history quite well.
Mohammagolibov on Twitter was talking about supply cars that the regime could still use. The bab al Mundeb straight, he says, is unplayed as well as pipelines. Is this just a threat or do you think that we could see real escalation.
Well, it's probably more accurate to say someone typing on Twitter and the name of or Colliboth is stating this. The Iranians do have the capability of resuming hostilities, but bellicost rhetoric has long been a mainstay of Iran's public diplomacy. It's a possibility, but at the same time, we have three aircraft carrier task forces in the region, which have an enormous military capacity to produce quite a significant amount of destruction against Iran's and civilian infrastructure.
Normal I'm curious about the economic blockade that the US is engaging with, and how much leverage is giving the United States versus Iran given the fact that it is starving them of much needed dollars and there's discussion about descent among the ranks who aren't getting paid. Do you have a sense of how long Iran has to hold out versus the US and its allies.
No, and that information is not going to be known outside of probably Iran and intelligence services. Now, Iran is going to hold that data very close. It doesn't want the world to see that the pain of that being imposed by the economic blockade, nor the military damage is how serious that is going is to actually being felt because it's going to want to appear to be robust, defiant.
Not much is happening, but the pain is genuine, and it's likely that the administration has a good idea of this and for this reason is willing to hold off on negotiations. So you've got each side understanding the pain of the other. It's just that the Iranians can see the US political pain because our system is open for the United States, it's going to have to assess this through other means.
Stay with US. Mul Bloomberg surveillance coming up after this. So here's the LAist this morning, Kevin Walsh clearing a major hurdle to become the next FED chair after the d O j drompt It's probe into the Central Bank the Senate Banking Committee Center on Wednesday, Sona Designed Franklin Templeton joins us now for more. So, good morning, good morning. We can get into the future of a Federal Reserve
under Kevin Walsh in just the moment. I just want to get through the Federal Reserve current chair Chairman Powell and what's going to happen to him. So some key dates. So May twenty fifth is when his term finishes as FED chair. Twenty twenty eight you can stay on the board as a FED governor. Which date do you think is going to choose here?
You know, number one, I don't know. It really depends on what he wants to do. But number two, I'm not sure it matters. It really doesn't matter. This notion that somehow the current Feed chair is the only thing standing behind complete loss of credibility of the FED and whatever else lies ahead, I think that's misguided. I think that the institution is relatively strong and enormously dubvish. So I don't think that it's just J Powell.
Who stands between enormously duvish. Does that change with the change of one man then no?
I actually, you know so again, this entire focus on loss of credibility for the FED seems to really focus on the idea that this is what is going to cause the FED to lose credibility. And I would argue the FED actually did it to itself, and it monetized fiscal deficits of close to twenty five percent of GDP over a two year period. I'll just repeat twenty twenty one, twenty twenty two. So everything since then is the FED
trying to regain credibility. And I don't happen to think that Kevin Walsh is going to change that dynamic.
Well, there is this question about whether he is going to be dubbish, whether he's going to cut rates even in the face of inflation that potentially is stickier for longer as a result of what's going on with oil prices.
Do you agree with that?
I mean, do you think that this is ultimately someone who, even though he has been hawkished for most of his career will skew dubbish in the face of political pressure.
So I would say if he does q dubvish, I would be surprised because the biggest thing he's talked about is the idea of taking monetary policy back to its orthodox roots, which mean you don't buy long end treasury
the US FEDS. If the Fed's overall balance sheet had expanded at the average base of nominal GDP, we would be looking at a balance sheet of around one and a half to one point six trillion today as opposed to close it to what is it, eight trillion, So we're looking at somebody who's taking the FED back to its roots, and I think that's on balance.
What is more important?
Will he cut rates? I think if the situation demands it. Right now, I'm not calling for more FED rate cuts this year based on fundamentals.
So where does this leave you in terms of your market expectation, Because listening to that, I could make two ideas. One, if he really is going to be hawkish potentially based on what he's said in the past, or at least trying to reframe the FED around its old framework, well, then two percent inflation remains two percent inflation. I would buy long bonds because ultimately that would be very different scenario than.
Say a Duvish FED. If this is someone who's not going to.
Be buying long term bonds, on the other hand, that's potentially a pressure where do you line up on that?
So right now I'm not buying long bonds here because I don't think long bonds are yet fully pricing what I think is going to happen, and you've got to look into a multi.
Year period here, and I hear that.
Where I disagree with Kevin Walsh is his idea that productivity stronger productivity growth is necessarily going to lead to a lower, call it a neutral nominal FED funds rate.
I don't actually agree.
Because that Fed funds rate is a combination of inflation and long term productivity. So the idea that the disinflation from productivity is going to be enough to make up for the increase in productivity, I'm not sure that works. I'm not sure that the round of productivity increases we are going to get this time will necessarily be disinflationary. So what I mean by this is two percent productivity growth,
two percent inflation, four percent FED funds neutral rate. I'm not sure we're at two percent inflation, and I actually think we're going to get higher than two percent productivity growth. So if anything, I think neutral FED funds is higher.
Right But this FED has shown it's willing to cut interest rates even without two percent. And Foy, oh, absolutely, And wouldn't he be able to make a case to the the FMCA.
He could, but not when? Not right now?
And I don't think not this year. Essentially, I don't see oil prices, and this is a headline issue. I totally get that headline issue. I don't see oil prices coming down. We estimate around twenty five thirty five basis points of inflation for each ten percent increase, and oil prices you easily comfortably get closer to four.
Now.
I get it.
They're supposed to see through it.
But after the period we just came through in twenty twenty two, twenty twenty one, I doubt.
That this FED is going to be cutting into that.
You said something that actually you could argue that the neutral or it's higher than where it is currently. Is this a federal reserve under Kevin A. Walsh that you could see hiking as its next move?
Only if we thought inflation was significantly higher. I see this FED frozen next year, could we see our FED funds higher?
It's possible.
It's not my baseline right now, but I'm certainly not anticipating additional cuts from TE.
So what would make your baseline? What is significantly higher inflation? What is that going from three to four, four to five?
What is that? So to me, it's more four to five, three to four, I believe they probably look through you start going to four to five, you're looking at second round.
Do you think this labor market is strong enough, tight enough to generate that kind of inflation?
You know, the labor market is pretty balanced, and I think it's improving. It's not deteriorating. Here. The data which has come out is all hawkish. It's a very difficult situation for anybody to come in and start cutting.
Stay with us more Bloomberg surveillance coming up after this. Let's talk about the ongoing closure of the stratoform most sending fuel prices higher and highlighting the need for reliable energy. Olivia Wassonov, Global head of the Apollo Infrastructure Group, writing, we see rising need for investment across midstream energy and power infrastructure areas where private capital is increasingly playing an important role. Olivia joins is now for more.
Ol good to see you, good morning. Thanks for having me back.
Is it fair to say, and I think it's important touch base with you on this issue that this shock in the Middle East is not upending investment, it's accelerateing geit it is.
I mean, I think we're all looking at a few things. We're looking at redundancy, right, We're looking at the you know, the current infrastructure in the Middle East and maybe we're there gaps. Right, You're looking at things around existing pipelines. How do we max at existing pipelines. How do we think about where there's potential for new pipelines? Can you restart old pipelines? People are being need to talk about things like a rail again. So I do think in
the Middle East there's this real focus on redundancy. In the rest of the world, we're looking at where can we commensate. We announced the deal last week for a large Canadian gas infrastructure platform. We believe Canada is a really attractive market right now, especially if you look at what's going on with Canada l G and access to Europe, access to Asia really sort of a big part of
the broader sort of value chain there. So we are very actively investing in other parts of the energy infrastructure globally.
Well, let's go through the Global bank drop on the deals right now. You mentioned Canada, we had ADF over in the UK. Are there we in Germany? Offshore wind or stead? I believe as well. I don't want you to pick a favorite baby, but right now it's there a theme that really gets your interest out of all of those right now, off those deals that you think are the ones to watch.
We've really been investing heavily in Europe.
We do see this theme around making sure we're giving again real redundancy and growth in European power infrastructure. So we started RWE around the grid, we looked at EDF around nuclear, and now we're really focused on offshore wind with the RSTED deal. I mean, this is a tremendous project. If you look at the number of homes it's going
to power across the UK, it's really tremendous. And we're also thinking a little bit about you how do you give really reliable long term power to supply to areas that have previously been really dependent on oil from an oil and gas from places like Russia and.
The Middle East.
You have a great lens because in having these discussions and these investments you have to work with policymakers pretty closely to understand exactly what their appetite is and getting clearance, et cetera and permitting. Have you noticed it changed when it comes to Europe in particular as they try to accelerate some of their reliability given the supply shocks that have come to them from all angles over the past couple of years.
Absolutely.
I mean we saw sort of the first start of this in twenty twenty two around the Ukraine crisis, right, and that was the first time you saw sort of a pan European focus on, Okay, how do we make sure we're really more prepared longer term.
Now with what's going on in Middle East.
You had a big announcement out of Europe last week saying we've got to focus on two things, one short term around how do we really help the consumers, and then long term around how do we look at better permitting, faster permitting, how do we speed up electrification, how do we speed up things like batteries which are going to help smooth out intermittency.
Right, So there's really such a big foot within.
Europe on how do we make sure that we're taking this reliance away from other areas.
Of the world.
The fact that everybody wants to build at the same time makes things a bit complicated. How much are you experiencing shortages of things like turbines.
And engines and the actual pipes.
And things of that nature, given the fact that everyone is trying to do this at the same time at a time of potential supply chain constraints because of the straight removes being blocked.
Absolutely, I mean, it's a real issue and it's something that we're all grappling with in the US. For example, if you do not have your sort of components around a new gas plant supplied, you're.
Looking at five years, right.
That's a long period of time to get to really get the new components in place.
So this supply chain is just compounding.
And when we look at what we're going to see around the rebuild in the Middle East whenever this conflict is over, that is only going to add to the need for some of these components.
Every single Middle East country is coming out now basically saying we won't the Saudi's have. We want an East West pie, we want to be able to bypass the strait of Formos. Can you get the appetite for that kind of investment when Iran and the Iergy still remain a threat.
I do think you're going to need to see some stability.
But you saw it out of the eating last week saying hey, how can we help with investment in the region to really again help this redundancy piece. When you look at pipelines, that's helpful for crude, but when you look at things like refined products like jet fuel for example, and energy, these are things that are not going through pipelines, so we need to think of other ways to be able to transport these and really ensure that security.
To get that confidence though it's not even just for oil and gas. There's all this money put to data centers and people now talking about them having.
To go underground.
Do you still see the optimism for people wanting to be invested heavily in this region.
I do, And the offer on the data center side was very clear for a while, right. I mean, if you look at it, there was cheap power in the Middle East, there was abundancy of land, there was lots of local capital and for many years of real perceived political stability.
You've sort of taken the last point of that off.
I do think you still see the other components there, but there is going to be a little bit of confidence coming back to the region before you see people really wanting to reinvest in this AI phenomenon.
You don't have to worry too much about the political cycle in certain parts in the Middle East. And that's a different conversation with Europe maybe you do and with the US as well. How relevant is the political cycle to some of these decisions.
You see a lot around, for example, renewal energy, right, and we've certainly seen I mean I've been investing in renewal energy for twenty five years.
You've seen real sort of booms and.
Bus Over time, what I will say is it begins to be tied more into security than it ever has before. I mean, again, as we look at Europe, right, this sort of dependency, whether it's on Russia or on the Middle East, and all of a sudden looking in saying what can we do internally?
What resources do we have?
We have sun, we have wind, right, these are things that we continue to build up internally, we can look at electrification, so worre again less reliant on these commodities coming from other parts of the world.
Do you think there is a bigger focus now on abundance. I just wondered to what extent the conversation really has changed. Lisa mentioned that it seems to me that everything's become very polarized. That for certain political groups, particularly in Europe, they believe everything that is fossil fuels or touches fossil fuels is bad and everything that's renewable is fantastic under any situation, in any circumstance, and for whatever reason, the
other side sees it completely differently. Do you think we have got some kind of moment here where we can just accept we need something from both worlds, We need abundance.
I think that's absolutely spot on.
Right now, you're looking at a crisis, right, and everyone's trying to figure out how do we fix this?
Right?
If you look at Europe, Europe has spent about twenty five billion over the last few months since the war started, do you get the same amount of energy supply they had before? So they're looking at it saying, gosh, you know rather than making this highly politicized, Let's figure out again how we can have homegrown energy supplies so that we're not dealing with these massive pray shocks going forward.
This is The Bloombergs, a Bayans podcast bringing you the best in markets, economics, angient 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.