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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. Here's the view on
Wall Street this morning. Stops looking for some direction as big Tech plans another massive AI spend in the face of what could be Tainan's central banks worldwide. Joining US Shaman Massa var ROCKMANI the wealth management CIO and head of the Investment Strategy group at Goldman Sachs Charmin. It's good to see you, hello, Thank you for being here. Our central banks avants become a headwind to the Secretary market rally.
We actually had a very exhibit on one of our client calls. If you look at the twenty one past strikes that the US has had on the middle Eastern North Africa. Up to eight months, eight weeks after the initial strike, the equity markets have been up on average four percent, and that's exactly where we are. So everybody saying, oh, the equity market is going ahead, how can they ignore the price of oil, whether it's wto or brent, what
is exactly going on. Growth is still robust. Obviously we're going to get Q one numbers, but I think nobody's thinking that we're in recession is imminent. And if you look at the earnings we've gotten, they've been incredible, substantially greater than consensus, and this is a pretty significant in terms of exceeding expectations. It's a pretty significant number. It's not like, oh, we exceeded earnings by two percent, three percent,
five percent. It's double digit. And if you look at the number of quarters where we've exceeded expectations and the number of consecutive quarts, it's just incredible. And so when people talk about the impact of the war, we have said the US economy is unbelievably resilient, and people continue to underestimate that. So as we look at this, I don't think anybody knows exactly how long this will last.
If it lasts a lot longer and oil prices stay at these levels, then the economy will be weaker, and so the idea that people can raise rates in the face of weakening economy, especially in the US when you have a dual mandate, I think we need to factor in a lot of uncertainty.
Do you think that there is a lack of logic when people say, well, oil prices are at this level and you see still that robust growth in the economy, So that means that the inflationary impacts can get passed through much more directly and easily because of the CAPEC spend, because of how all these companies are doing. Do you see that as a logical connection or do you think it just hasn't been long enough with oil prices at this level.
They're actually two points. You're right, it hasn't been long enough. Number one, because if this war were to last and we see all prices here, eventually we will get to negative numbers in the equity market. But for now, the idea that we're up four to five percent is actually totally in line with history, and from our perspective, one of the pillars of our investment philosophy is history is a useful guide. So first we have that as the
backdrop that we need to follow. The other thing that people need to think about is the energy intensity in terms of usage of oil is a lot different than the early eighties. So when we had the Arab oil embargo, then we had the Iran Iraq War, we had the Iranian Revolution, prices skyrocketed, but at that time the energy consumption in the US in terms of barrels per capita per year were substantially higher. In fact, it was around that's say, thirty barrels a year. That number is down
around twenty three twenty four now. So there's also a view that energy crude oil will not impact as much. Obviously it will fertilizer. As we hear about all of these things to last a while.
It does affect the cost of components, and we saw this with some of the hyper scalers reporting earnings last night. Meta for example, increase their expected capex in part because of higher component costs, maybe also because of some of
the transportation issues that people are experiencing. At what point does that become a sticking point, Maybe not for the biggest tech companies, but for some of the tech companies out there that are facing an existential threat but are having to pay that much more to even play ball.
I think there is a big question mark about the returns to the kapex for AI companies. The hyper scalers obviously have so much cash flow from other factors that they can do quite well. And if you look at their earnings, whether it was the latest reports or last years, they're just being phenomenal. But the rest of the economy is actually doing quite well, and people underestimate again the resilience.
If you think about oil production in the US, US produces double the levels of Saudi Arabia, right, It's just incredible. You think about natural gas, US has become the largest exporter of natural gas in ten years, far exceeding Qatar. So as we think about these factors, people need to think that the shock is not as great. And at the end of the day, both sides want to end this war. The question is what is a respectable off ramp for both sides, And I think the market is
saying we will get there. Well, there'll be fits and start the escalation, the escalation, and we're going to have to go through that and That's why we recommend our clients stay invested, don't try to time this market. Nobody can do that consistently very well.
But in the beginning, conventional thinking was four to six weeks. We're now eight to nine weeks into this war. How much longer with these kind of elevated prices do you think the economy could withstand? Julian Emmanuel says July and then things might start to break down. Do you have a date where you're looking at Not.
Really, because nobody really knows, right if you look at the probabilities, it's not as if it's so obvious how long this will last. I think we know both sides don't want it to last. July and oil not the conflict.
How long the economy could withstand tripled crude?
Well, in the US, we're just sort of just around triple digit, right, and we've been here before, and prices last under these levels for a while. I don't think the economy is going to break. We had initially expected GDP to be around two point three when we started, then momentum two point four percent. Now because of the war and oil prices, we've lowered it to two point one percent, But we have a very low probability of recession even at these levels if prices were to stay here,
I think to say, exactly, is it July? Again? If you believe the resilience of the economy and adjustments, and we're talking about the US that is ample crude and natural gas, right, it's really the rest of the world. And if the US is a big importer and less of an exporter, then not in terms of hydrocarbons and things like that, but in aggregate, the damage to the economy is going to be much less than it is, for example, to Europe or to China.
Do you think we're moving into a phase where the offset to equity were is increasingly gold and commodities and not develop market bonds, which increasingly are subject to potentially spending issues, deficit issues as well as just the national inflation in the system.
That's a very good question, because all our clients are asking us how can they hedge against the risk of war, And we tell clients that at the end of the day, the best hedge against inflation has been historically US equities in aggregate. So in fact, that's why again we say stay invested. Gold is not a good inflation hedge and not a good inflation hedge. So the idea that gold is something you need to have in your portfolio is
something we totally disagree with. We don't think you're truly be part of a client's strategic acid allocation, and tactically we've actually said that when you see these kinds of price increases driven by central banks, especially initially by China and then countries like Turkey, Poland, clients shouldn't be caught up in the euphoria and the momentum of gold. And obviously we've seen a pretty significant decline from peak levels.
Stay with us. More Bloomberg surveillance coming up after this. Let's talk about this economy. US economic growth accelerating at the start of the year, fueled by solid business and consumer demand, insulating this economy from heightened geopolitical risk as the FED remains very much on the sidelines. Joining us now to discuss as the National Economic Council Director Kevin said, Kevin, welcome back to the programs. Always good to catch up.
We'll talk about this economy in just a moment. I think we need to follow on from the Federal Reserve and the news conference with Chairman Poll just yesterday stepping aside as the FED chair but staying gone as a governor, Kevin. Was anyone in the administration giving a heads up ahead of time before you heard that announcement?
You know, communications with the Federal Reserve and the administration are still open when they're policy concerns. But I can't really discuss that. I could say that I'm disappointed in what Jay said, but I'm going to sort of stay out of it as we await just a couple of weeks Kevin Worsh's confirmation. I think when Kevin gets in there, it's going to really be a sea change at the FED that we're all looking forward to Kevin.
In the meantime, the President has articulated his disappointment like you just have previously. The President suggested that if the Chairman stayed down beyond his time, not sure what he meant specifically beyond his time, that he would fire him. Is the President intervening certain options to intervene.
You know, I think that in the end, our hope is that Chairman Powell understands that the Justice Department has stood down. They've just asked the Inspector General at the FED to look into this, which is something the Inspector General is probably doing anyway, and so that I think that it's time to de escalate and move on.
Kevin, do you think the President has sufficiently de escalated to allow him to move on?
Well, you know, he doesn't think so, and I think that in the end he'll study the matter and we hope he comes around.
The Treasury Secretary says it's an insult to the other Republican nominees on the board, the likes of Governor Waller, Mickey Bowman, people that you and I know fairly. Wow, do you believe it's also an insult and does it complicate the way this particular institution will operate in the months of meetings to count.
Again, I don't want to start getting too much into having the White House argue with the Fed right now while we're waiting Kevin Worsh's confirmation, which looks like it's a lock to me. The bottom line is that Kevin Worsh is going to go in there. He's going to be new leadership. He's going to be fresh leadership, and we fully expect that that's going to help everybody see how important the independence of the FED is now as a logical matter, if you just sort of say, hey,
we like the IG to look into something. The IG is the Federal Reserves Inspector General, and so it's completely respectful of the independence of the FED. We do respect the independence of the FED, and I think that the best way to show that it's not a artists and organization is to move on.
There has been a pretty aggressive push to reduce interest rates. At the same time, this Federal Reserve is shifting towards articulating a more symmetrical reaction function. Not there yet, but getting closer to it. Kevin supporting that is the economic data from earlier on this morning. Do you think there is space just to wait to see to work out how things turn out before thinking about reducing interest rates?
Right, well, well, first of all, let's talk about the economic data for a second, because it was just kind of a whole bunch of blockbuster numbers. A two percent number actually, you know, for me being capital spending guy, used to be the capital spending guy at the FED
when I was a young economist. That the thing that was amazing, as you know, and you highlighted the capital spending boom and one of the things that sort of drag it down from a really high number was the quality of the imports has skyrocketed, and so almost half of the imports were capital goods, which were coming in to build factories in the US. Typically in the past, you know, our imports are things like consumer goods that are perishable. So the bottom line is that it's really
strong data. We got initial claims the lowest they've been since the nineteen sixties. We've got government employment the lowest has been since the Second World War. We've got all these positive movements in terms of fiscal responsibility and economic growth moving forward, and so then, but we do have this temporary disruption with energy markets, which is very serious. As you mentioned, the energy prices are high, gasoline prices
are high. But you know, my read of the academic literature on what you do when you have an oil shock like this is not that you raise rates into it, especially given how I think we're highly confident that this
is going to be a temporary disruption. Futures markets agree with that as well, and so I think it would be a policy error for this EASB or the FED to hike rates into a temporary spike in energy prices, and their own economic studies sort of suggest this is true, because if you look at it, what they want to do is make sure that future inflation goes back towards the target. The best forecast of future inflation is not top line inflation, but core inflation at core inflation, and
the last CPI number was fine. The PC's kind of crept up a little bit, but it doesn't tell the story of the top light, and the top light is the kind of thing that I think someone could overreact to.
It might not be appropriate, Kevin, to have a rate hike at this point, but do you agree with your colleague treasure Secretary Scott Beston, who came out and said it might be appropriate to stay on hold for a while as this does progress and works itself out again.
I am highly confident that the productivity boom is going to keep core prices under control. And my old friend Alan's green Span and the ninety saw that because of the computer revolution that we could have high growth and that wasn't a flips curve kind of thing that you needed to respond to, as he let us have four or five of the best economic gears that we've seen in my lifetime. And I think that we have that opportunity again and it would be a shame if we squandered it.
So you think that it is appropriate to currently cut rates de fite the increasing concern by some of the FED members that we are entering a potentially inflationary moment. Do you think it's inappropriate to go to something more of a symmetric type of approach.
Well, they've been sort of saying we're leaning towards cutting, and then there was some dispute about what's going to happen at the next meeting. But I think that getting interest rates down could really supercharge the economy from where we are, but not be super inflationary. So you saw that the weak spot the weak spot in the GDP
report was residential investment, which was down eight percent. Residential investment is kind of the most intrasensitive thing there is, and I think that FED policy has a chance of moving the yield curve in a way that could really help home buyers. And one of the things that I remember from the nineties is that when we want to have sort of low inflation, high growth, then one of the things that happens is you get a lot of
construction residential construction. And when you have residential construction, it has a big positive effect on GDP because you have like an empty house that has to get filled with a w dryer and a TV and carpet and furniture and everything else. And that's much different than if you have like an old house where you're moving from what old house to another. And so new construction is really the thing that could lift this to four or five percent growth, and it's being held back by hydrostrates.
What's the pathway to get there? Given the fact that longer and the longer term yield curve is seeing some of the highest rates that has this cycle, five percent in the thirty year yesterday for the first time in a while. And frankly, a lot of people in the market think that if the interest rate were cut at the front end, that would only exacerbate the creep higher in yields at the long end. How do you see that?
Yeah, I mean there are times when that's true, but not a time when we're in the middle of a huge positive supply shock. And so I think a little bit of movement and Kevin Wirsh, hopefully soon to be chairman Worsh has described how one can do that and maybe play with the balance sheet a little bit at the same time and move things in a direction that
helps America's homeowners. I think that if we could get that last little bit of the economy going on all cylinders, that we'd really really be back very close to talking about the golden days.
Kevin. We have triple to crued this morning, WTI much higher, and actually what you're seeing across America, especially in a place like California, they've actually breached six dollars a gallon when it comes to gasoline. I know the White House has some measures, they've extended the Jones Act waiver, but what else are you thinking about.
Well, we've already done a whole bunch of things, including you know, basically opening up the drilling that was offshore drilling in California that was shut down by the state and that's actually you know, alive and pumping out barrels. The bottom line is that we're very convinced that this is you know, a suicidal Irradian regime that was set on really big disruptive things in the region that would
be perhaps permanently harmful. And when we had them signal in their negotiations, they were just about ready to have eleven nuclear bombs. Then the President decided to take action to defend the entire earth for good's sake. And so right now, the thing that I look at in terms of the economic effects of the war is how difficult it is for Iranians right now, as if the government doesn't care about them at all, and so they're having a hyperinflation, they're running out of food, they don't have
any distilled products to driver out of their cars. They're shutting down businesses. Even the Persian rug dealers are shutting down. It's time for that government to just see that they shouldn't aspire to have a nuclear weapon, and if they just give that up, then we can go back to having normal relations.
What could hope, right, but what could this government do to shield Americans from higher gasoline prices? Are things like an export ban on the table.
Now, what we've done is, as you know, we've done the Jones Act. We've opened up drilling in California. We've pursued like different changing the ethanol standards so the cored ethanol can be used more in the summer. We've taken every single step that we could, and we understand that, you know, it would have been a lot worse if
we hadn't done that. But the fact is that our expectation is that things are going to get better very very quickly, if we could just get the irradiance to like finish the negotiations and realize that it's in the interest of their own people to stop things that could turn into you know, serious hunger events and so on.
Kevin, Unfortunately, and you and I probably an agreement here. Unfortunately, they've got a track record of doing a lot of things that aren't in the interest of their own people. In the meantime, there seems to be a preference to maintain the blockade and put the squeeze on them. How close are we to them breaching storage capacity, so to speak? What's our understanding of that. Do we have a decent gauge of where things are at inside the country?
You know, like it's a well to well thing. But the basic idea is that if you shut down a well, then the pressure can build and then the you know, oil can kind of squirt everywhere, and then when you open the well up again, you get a lot less oil out of the well. That's the sort of theory of what could happen, and it's certainly possible because they're writting out of storage that they're going to have to
shut in wells. The one thing I can say is that their production went from five million barrels a day to one million barrels a day because of President Trump's you know, policies in the previous term, when he really put in tough sanctions on Iran to try to stop the nuclear program. And after Joe Biden came in, he just stopped the sanctions and the energy production went back up to five billion barrels a day over a couple
of years. And so the Iranians, you know, they had they took them a couple of years to get things fixed, probably with new wells and so on, because it can harm wells. But we have an experience of them being shut almost down to nothing and then getting back up.
Kevin a partner's stepping up to how we're just hearing from the president here out on social media. So I assure this is the first time you're hearing Golf here. I'll read it for you. The Chancellor of Germany should spend more time on ending the war with Russia and Ukraine and fixing his broken country, especially immigration and energy, and less time on interfering with those that are getting rid of the Iranian nuclear threat, there by making the world,
including Germany, a safer place. I believe the German chancellor earlier this week suggested that the president was being humiliated by the Iranians. Just what is the relationship, like Kevin with our European partners at the moment?
Oh, you know, I think that the European partners are feeling stress because they're very unwise energy policies have exposed them much more to energy shocks from the Middle East, and it looks like the German chancers lose it as cool a little bit, and I would suggest that, you know, you take a deep breath and recognize that the best way for Europe to get its economy back on track is to help us resolve this problem and then also examine their own policies, which are so anti free market
that their economies are happy when they get one percent growth. I think Germany is a great country. I lived there for a time, and I think there's a heck of a lot of potential for that country. But they sure earned achieving it right now, and it's not just because of oil.
Stay with us. More Bloomberg surveillance coming up after this. Let's get to Crude offering their four year highs. With President Trump reportedly gearing up for a military briefing on Iran that could open the door for fresh escalations, here's the same for Victoria Coach of the Heritage Foundation right in the following. We're going to have a tipping point in the coming weeks where Iran just can't sustain itself anymore. That's when the president will have the most leverage, Victoria.
John just now for more of Victorry. Welcome to the program. This is a high stakes, blinking contest. With that, there is no doubt which side do you think is better positioned to wait it out?
Well, Jonathan, good to be with you. I think that for all the reasons you've been discussing this morning, the United States is best position to wait this out, if you will. And we have to look at what's actually happening to the Iranian economy. We had some really important reporting yesterday on the first metrics we've gotten out. And bear in mind, I mean they haven't had a stock market for more than two months. It's been shut down. Nobody knows what their equities are worth. If anything. Their
currency is down. If you look at it over the last ten years, it's down ninety eight percent, and so you just have a lack of value in that country that is catastrophic. And Secretary Bessett was talking about this yesterday as well. The economic fury, the economic front of this war is what is sort of causing the devastating consequences to Iran. They can't go on that much longer. We're not happy about our oil prices. I know. I
think Julian was absolutely correct. This is putting a lot of pressure on what should be a very successful time for the economy. But at the same time, it's just it's apples and oranges. What's happening in the United States and Iran. And they're going to have to blink Victoria.
No doubt that the Iranian economy is in straits right now. But how long can this administration deal with one hundred and seven dollars and going north when it comes to WTI No.
I mean, this obviously is something they're going to have to bring down. And I think that's why the President's getting that briefing today, and there are a range of options on the table. There always are. General Kine, the Chairman of the Joint Chiefs, is someone in whom the President has enormous confidence. He's performed extraordinarily well over the course of really the last year and months, but very
much over the course of the last two months. So they can look at the kind of military action that would force an opening of the strait. I might favor that personally, I'd want to see the details. We do have options in terms of our special operators, who are especially trained to deal with nuclear material. So you're getting a person who's both a special operator and a nuclear scientist. That's quite a combination. I think we're the only ones who have that. They could go in and go after
the highly enriched geranium. And you also have the infrastructure targets that the President's been talking about for the last week or so that would have that kind of final crippling effect on the Iranian economy.
Well, when it comes to opening up the trader for most In this Axios report, it says that such an operation could include ground forces. One source said, what would that look like?
Well, I mean that you would have to see how as I said, I want to see the options here, and there are a lot of reasons we shouldn't be seeing them. But at the same time, I mean, you can put people on the Iranian side of the strait to prevent them from using ships and missiles against any
maritime traffic coming through the strait. You could put in some demining efforts to get rid of some dozen minds they theoretically put in there, and then you can have the naval escorts that you were talking about, so you can use our navy assets to escort the ships through and prevent the Iranians from attacking them.
Yes, Kenna, Victoria, we got signs that the US Social Command is prepared to plan for a quote short and powerful way of strikes on Iran. Do you have any sense of what this would be focused on.
I think in that case, Stephanie, we're looking at the infrastructure targets that the President was talking about, bridges, power plants, that kind of facilities, and this is going to be what would really shut around down and dread people from moving around. We're already seeing these reports of their big
industries starting to close. They've lost as many of as a million jobs, and that what would be crushing about this is there may be ten to twelve million more jobs that would be at risk if the president took this kind of action. That's fifty percent of their workforce. So essentially fifty percent unemployment happens overnight to Iran, and you just wonder how the country can continue functioning after that.
This is the Bloomberg Survandans podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app. Mm hmm