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Peace talks underway in the Middle East between Israel and international mediators, Axios reporting some progress was made on the first day of discussion, citing US officials, This coming as Israel braces for a possible attack from Ran. Joining US now is Ambassador John Bolton, former US National Security Advisor and former Ambassador to the UN. Ambassador Borlton, thank you
so much for being with us. To start with what you think of the recent talks underway and why you think Iran has not retaliated yet.
Well, with respect to the talks, the administration saying making progress. You know they've been saying making progress on these talks for about four or five months now. They never seem to get to the finish line. I think there's still enormous gaps between the Israeli position and the Hamas position. I'm not saying a miracle couldn't happen. It happens in the Middle East from time to time, but I wouldn't
look forward. I do think Iran has hesitated to retaliate for the killing of Ismail Hania, the Hamas leader in Tehran. They need to strike back. I think very strongly. They've been humiliated by what Israel did, killing this terrorist leader in their capital in a secure compound with a bomb planted two months before. It shows nobody in Iran is safe from Israel, including the Supreme Leader. On the other hand, the Iranian leaders are also intimidated by bb Net and
Yahoo and Israel. I think this time they are worried that the US will not be able to pressure Israel into a limited response as Israel did after the three hundred and twenty drone and missile assault on Israel from Iran's territory some months ago. Really, Iran is more intimidated by Israel than it is by the Biden administration. So they've got a difficult decision how strong a response to make to restore their own very damaged credibility versus their fear of what Israel would then do to them.
Well, in April, when those three hundred missiles were flying over, it was because of the US defense that Israel's able to fend them off. Ambassador, given your level of intel regarding Iran, how can they retaliate but also try to not strike this cycle of endless retaliations back and forth.
Well, let's come back to the attack. Wall Street Journal and CBS reported that of the one hundred and twenty ballistic missiles that Iran fired at Israel, sixty never made it within range to be shot down. They either blew up on the launch pad or crashed before they got close enough, which speaks to the quality of Iran's ballistic missile force.
But if there had been one hundred and twenty rather than sixty ballistic missiles in the skies over Israel, I don't think it would have been such a good performance. The cycle that's at work here is caused by Iran. Look, this is not a war between Palestinians or Gosans in Israel. This is a war by Iran against Israel, what they
themselves call the ring of Fire strategy. And as long as the current regime in Tehran is in power, seeking nuclear weapons, arming, equipping, training, financing, giving intelligence to multiple terrorist groups in the region, threatening not only Israel but the Gulf Arab states too, there's going to be conflict. And what's driving Israel and the Golf Arabs closer together is that they all see Iran as the main strategic threat and they think the United States is feckless.
As these ceasefire talks continued, do you agree with the idea that Iran could potentially use those if they were to incadeal use that as an off ramp to not retaliate.
Well, they may want to use it as an off ramp, but I think it would be a big blow to Iran's prestige. You know, they're not exactly stepping up here to take responsibility for what happened to Hamas after the October seven attack, and they've also not been able yet to persuade Hezballah to use its unbelievably large arsenal of missiles against Israel. So, as I say, I think it's the fear of further Israeli retaliation that has the Iranians intimidated with.
That retaliation coming from Israel if Ron does do some sort of large attack. Ambassador Bolton, what is the ability of the US and its allies to reign in Netanyahu's response?
Well, I'm sure that the Biden administration will want to rein them in. They've been afraid of this issue and the war in Ukraine dominating the news in the United States because it shows a world and chaos due to three and a half years of American weakness. Really, what they would like to see is this go away until after election day, even though Biden's no longer running himself.
You know, Frankly, I think the lesson to be learned is that the prospect of a really forceful Israeli response if Israel comes back at them, shows that a strong posture toward these rogue states is the way to go. And Iran has a lot to fear from Israel. It should have a lot to fear from the United States, but at the moment it doesn't.
And Ambassador, a lot of times when we're talking about this retali even if Iran would like to do that without provoking a response. The question always comes into the fore, what is the likelihood that mistakes are made, mistakes are made that escalate things further and that there's been this conversation that it won't just be around this time. But Hesbala as well. Are the ows for mistakes higher by involving proxy forces in the retaliation to the retaliation to the retaliation.
Well, look, I think you have to look at what the strategic picture is. There is a regional war in the Middle East now of Iran against Israel on five fronts Hesbala from Lebanon, Hamas and the Gaza Strip. The Hoodies that have closed the Souez Canal Red Sea passage, one of the most important commercial shipping channels in the world,
closed effectively since October. The Shia militia in Iraq and Syria that have been attacking American positions and Iran itself, and the question is how do they dial up one
or the other. Israel does Hesbelah's Arsenal, which in public estimates this is an extraordinary number, but public estimates are that Hezbola has between one hundred and twenty and one hundred and fifty thousand missiles, which would obviously be enough to overwhelm Israel's air defenses, and leads to the question, if they really think it's about to happen, might not Israel strike first. It's complicated. It's not mistakes. It's the fact that the leadership in Tehran is determined to destroy
the Little Satan. That's what's at work.
Here, Ambassador Bolton.
Yesterday we heard from Foreign President Donald Trump, who.
You worked for.
He said, I'm not looking to be bad to Iran. We're going to be friendly. I hope with Iran, maybe but maybe not. But we're going to be friendly. I hope we're going to be friendly. Do you know what trump two point zeros policy towards Iran potentially will look like.
Look, he has no idea what it will look like. People who look at what happened in the first term and believe that it'll be the same in the second term, I think are mistaken. It's always possible. But remember he Trump almost met with Iran's then foreign minister job At Zarief at the ba ritz G seventh Summit in August of twenty nineteen. Emmanuel mccrown, the President of France, had Zerief in a villa in bea ritz almost persuaded Trump to do it. The attraction to Donald Trump of making
a deal with anybody is hard to quantify. It really goes off the charts, and it could be the same way in a second term. And that's why I think there's a certain amount of pressure on the Israelis if they're going to do something, to do it now rather than to wait for the uncertainty of the American election.
Ambassador job Bolton, thank you so much for taking the time with us. To begin with the top story, The Goldilock scenario is back on the table and fully embraced, stocks rallying on strong US retail and labor data indicating continued economic strength. Daryl Krok of Wells Frago remaining cautious, saying this the US economy is slowing and the Fed should be cutting interest rates.
They probably should have already cut in July.
The burden of proof has now switched over in the market's eyes and is on the soft landing to prove itself. Daryl joins us, Now, Darryl, did you write this before last this past.
Week's I did not actually wrote it yesterday morning. Look, I think outside of market's kind of vicious reaction last week and this if you kind of double click below the surface, there is disconnects here, right, they'll curve is disconnected. I think some of the consumer data is disconnected. We read retail sales yesterday up one percent. That was almost extensive. It was autos, right. The rest of it was food beverage, which is stuff we all have to consume every day.
So it wasn't like discretionaries, right, It wasn't some big, you know, element that showed that the consumers out there spending crazily right on this, And I think there's disconnect in the manufacturing data and the housing data. We got the National Association of home Builders yesterday. Think about it this way. That came in a thirty nine right. Anything below fifties, you know, means that their outlook is poor for homebuilders. Yet homebuilder stocks are going crazy, right, I
mean they're upsetting new basically all time highs. So you've got all these disconnects that I think markets have to reconcile themselves with.
Let's talk about one particular disconnect in the bond market, where you have parts of the bond market talking about an economy that is in need of a lot of FED support, and then you have other parts of the bond market that are suggesting that this is an economy that's quite robust. How do you understand and reconcile some of these discrepancies.
Well, I think you put it well earlier, right, think about it this way. I wake up in the morning, and the first thing I look at is the two year treasury right quickly generally now last couple weeks, followed by the Japanese yen.
Right, those are the two.
Eyes on em The two year treasury at four to four and a quarter does not sync with nine interest rate cuts between now and next year.
Right.
The math just doesn't work. I mean, the FED funds is a five and a quarter. You bring it down to let's say four, that's one hundred and twenty five basis points cuts. We have one hundred priced in for this year alone, much less what we're going to do in twenty twenty five according to FED. So we're right back into this camp of who's right.
Who's wrong?
Is the YO curve right and the two year treasury right at four to four and a quarter and maybe grinding higher or you know, are we going to get nine big interest rate cuts. You know, we've seen this movie before. We didn't believe it at the beginning of this year on the six interest rate cuts, right, we said that would get walked back. We didn't believe it at the beginning of twenty twenty three. When the FED funds future is priced in three interest rate cuts for
the back half of twenty twenty three. You know, third times a charm, But there's no doubt the Fed will go in September. I just don't believe the seven to nine. And if you get seven to nine, it's a problem for the economy. That's the reason we're cutting that aggressively, right. It's not because we're soft landing this thing and we need nine interest rate cuts to get back to our start.
I wonder what you make of duration and the level of the tenure right now. We were having this discussion earlier with Stay Street, this idea that you're living in a time where the soft landing seems probable, at least for now, we're not pulling off a cliff at the very this week.
This week. We'll talk again next week.
Yes.
And in the meantime, you have these policy proposals coming from candidates that seem to indicate a lot of spending, and you have fears about auctions and auctions that have tailed. Yet it is a tenure that is still below four percent.
Does not make sense.
I don't think it makes sense.
I do think the long term kind of neutral rate of the tenure is around three seventy five to three eighty not very different from today. But just last week on the volatility, we had been like most people, kind of crowded on the short side of the curve in our exposure and positioning. We basically took that positioning and we bulleted it right not Barbell, So in other words, we took money out alongside, took money on the short side, and went right to the belly of the curve.
Think we think you're getting good value there.
You do have to start biting in duration and take some some uh exposure there. If the FED is gonna cut interest rates, which we believe they will, we just maybe fade this idea that they're gonna be able to cut as aggressively as what everybody else does. So you do have to go after some duration here. You can't just live on the short side of the curve or you're gonna get you're gonna get killed with reinvestment risk over the next twelve to eighteen months.
Back to the fiscal policy outlook, though, is the bond market just ignoring all these policy proposals.
For the time, Yes, I mean I if you win. So so if you take my neutral rate on the ten ure, it's three eighty, and then you regardless of the candidate. Right, the two things that I think are certainties post November are you know, bigger federal budgets and fiscal spending and more uh tariffs.
Right, those are the two things you.
Can bank on regardless of whether you get you know, Harris or Trump, and both of those put an upward bias into interest rates, all else equal, Right, So I think you're gonna see this continued, you know, fight these kind of two sigma moves and yields on a daily basis that we haven't seen in maybe careers of a lot of bond traders and people.
Who manage money. But it may be the new norm.
The volatility may now exist fully in the fixed income markets and not as much in the equity markets as we just keep you know, keep the carry trade in the short ball, and we just drive the vix down into from sixty five to fifteen, and we push the end back weaker again. Right, It's just we're carrying on right now.
It sure feels like we're seeing a lot of once in a career events just in the past two weeks, one of them being the yen.
Which you said you wake up in the morning in check.
What does it tell you when you wake up on a day like yesterday after the US data and you see dollar yen up one in a third percent after just again two weeks ago, a week ago rather about a week and a half, we saw this huge appreciation in the end that we can get that firepower back with dollar yen.
Yeah, I think it's you know, last week was all about kind of vicious unwines of the gen Carrie and the short ball level bridge to trade.
Right.
They're putting it right back on this week, right, I mean, and putting it on with a vengeance. And it's coming from the buyers. You know, they're shorting the end and they're shorting the ball or vix using that capital to go out and buy risk on assets, right. And it's coming from all sources. It's coming from the hedge fund community, it's coming from institutions, it's coming from retail, it's coming
from buyback programs. Then now that we're getting to the end of Q two, companies are using any weakness to aggressively step in with their buyback programs.
So it's coming from all corners.
And until you change that and you couple it with kind of August seasonal low liquidity, and it creates these outsized moves.
Let's just take a step back for a second.
You say, the volatility now exist fully in the bond market, almost more so than in the stock market.
Has it affected the.
Way that you position, where suddenly stocks become more of the have in trade and bonds become more of a trading game, sort of the sort of daily grind that you think of with day trading of stocks, not traditionally bonds.
Yeah.
Look, I mean, you know, some of the worst performing returns at the asset class level, we're on the fixed income markets this year, right maybe up until about the last week. But the Barclays Egg, you know, which is your common domestic indicy, is one of the few indices that still hasn't set a new all time high. Everything else is pushing, you know, all time highs across the board and the Barclays egg has not given you much
return over the last few years. People get they get enamored with the idea of I can now get four or five six percent, you know, on the short side of curve. But when you actually get to a total return, it's pretty anemic and it's pretty bad. So it's pushed people to equities as kind of the there is no other alternative, right the Tina trade, and they just keep going back to that as a way to get exposure until you can't or don't right until volatility spikes.
Is that how you're arranging things?
Are you buying it to the tina and staying away from big.
Risk in bonds.
No, I would say we're a little more balanced.
So we used last week's weakness that we bought into small caps right when the Rustle two came all the way down to two thousand and had a ten percent full correction. We bought into high yield because we thought, you know, at three eighty three eighty five on highyield spreads, that was the highest or widest spreads of the year, right, we finally got a chance to take a bite at some high yield in that environment and then we moved
out duration on the fixed income market. But overall, I think from equities to fixed income were slightly overweight equities, but nothing where you've pushed risk budgets or positioning out to extremes at this point, and I think that'd be a mistake to be honest at this point.
Well, we can get into why in a bit. Daryl Kronk always wonderful to speak with you. Thank you so much for being with us. Daryl Kronk of Wills for a Global.
Here's the latest.
Kamala Harris set to pitch her economic agenda in North Carolina this afternoon.
Ahead of the DNC next week.
Harris and Donald Trump both looking to put the economy front and center. Noel Dixon of State Street Global Markets warning quote, this could turn out to be a race to the bottom as it relates to fiscal irresponsibility. I think it's difficult to see how there is not a floor under the long end of the US curve, regardless of who wins. Make bond auctions great again, Noel joins us again. Now, Noel, thank you so much for being with us.
I want to start there.
Yeah, it seems like people have forgotten about this storyline, and it seems like it only gets reprised where there is a lot of other.
Types of drama in the market. Why is it not just.
A convenient boogeyman to pull out when people don't seem to have that many worries.
Yeah, I just I feel like, you know, you know, right now the market is certainly focused on different elements that it's a lot coming at once, and I think right now the main focus is, or the concern is, you know, both candidates seem to be wanting to embrace or add to the fiscal spending tab and that is what I think most people are going to be focused on and keeping an eye out on, and it gives them trepidation about going fully in into the bond market,
especially into the long end. So from what we experience, it seems people are more focused on more the belly of the curve, staying on the short end of things because there's just a lot of uncertainty and we're certainly going to get I think a risk premium baked in as we get into or approach the election.
NOLL when it comes to some of this rhetoric that's being thrown around Kamala Harris today is going to talk about twenty five thousand dollars. If you're a new home buyer, of course you need Congress. So it feels like rhetoric. But Trump tart tax cuts are back in play. He's talking about a lower his words, lower class, middle class, upper class tax cut across the board. Is anyone in these parties serious about ratcheting back fiscal spending?
I don't think so. I think right now, you know, you know, we've been able to sustain these high levels of debt, and they think, you know, the music will continue to play. But I think, you know, we're at a very different starting point. And this is what I think markets and investors are starting to get concerned about.
We see it with some of the activity, and like I mentioned before, I think a lot of this risk is going to start to get baked in post Labor Day, and I think we could expect some volatility.
To borrow a phrase from Lisa, are you expecting potentially a Liz Trust moment? Is that what it would take the market to push back on the US federal government.
I think I would say that's what it would take. I don't think we'll get to that extense just to be fair. I think, you know, we are still the reserve currency of the world. I think we still have very deep capital markets. However, you know, I do think we have to expect that we're going to get some volatility leading into November.
I mean, it is pretty remarkable that we have everything you're saying.
We've seen some bond options tail. The deficit's going to get worse.
The economy isn't falling off a cliff, but ten year yields are still below four percent.
That's right.
What is fair value to incorporate the fear of rising deficits in the US?
Yeah, I think to me, I think fear value is definitely higher than four percent right now. I think you have to juxtapose the fiscal concerns with with what's going on with central banks. And there was up until I would say yesterday, until we got retail sales, there was this concern that, you know, the US economy was starting to roll over. But as we see, you know, the labor market is still tight, the US economy is still
relatively strong. So you have that environment. You augment that with some fiscal spending, and I think that's where you get above four percent and stay there.
Well, people have.
Pointed to this idea that there's going to be less fiscal support than there was in the era of the Chips Act, the Inflation Reduction Act. Bank of America puts it at about a five percent drop in US government spending year over year. How are you thinking about the US fiscal impulse at this moment.
So the fiscal impulse, I think you have to keep in mind the CBO projections right now factor in the lapse of the Trump tax cuts. So both parties are going to keep you know, Trump obviously wants to keep it full stop, but you know the Democrats, you know, they're saying, you know, four hundred thousand or or below, are going to keep the tax cuts. You add on to that, you know, they both seem to be on consensus in terms of no taxes on tips. That's another tab.
So you can start to see it start to add up. Like she mentioned before, Kamala Harris is talking about twenty five thousand dollars tax credit. I know she wants to probably extend some of the tax credits that they had during the you know, the Biden's tenure. So all of that's adding up, and I think it's going to definitely, like I said, cost some volatility.
Just to sort of underscore this whole point, are you basically recommending to State Street clients not to go into long bonds?
I think I think I would be definitely skeptical to go into the longside right now.
Of the curve.
I think it's I think it's more secure to probably stay on the short end. And you know, if you have the FED may cut rates. However, you know, given how the like I mentioned before, the economy is pretty strong, I think you know, the Feds, they only could go so far.
Well, how far.
Would long end yields have to back up for you to recommend them against clients.
I think they would have to get to five percent for me to feel comfortable recommended long end at the stage.
And that's the tenure.
And this is entirely because of political concerns, not because of what you're seeing with respect to potentially preemptive FED cuts and just where inflation might be long term. This is having to do specifically with the deficit.
Correct it does.
Yeah, I think it's completely the fiscal situation that we find ourselves in, and I think it's just going to get exacerbated regardless of who wins.
How much futback are you getting from clients?
I would say it's kind of mixed. I would say it's maxed. Some clients are you know, all in because you know their perspective is, you know, you know, global central banks of cutting rates, good environment to go into into bonds. But some are starting to get concerned about some of the proposals that are getting floated around. I think they were caught off guard a little bit when Carmala embraced this, you know, no tax taxes on tips, because that was something new. Now now the thinking is, okay,
what else could come to the fore? What else can be reintroduced here? So I think that'll you know, what she lays out later on today, what she kind of emphasizes during the DNC will be critical.
Nor Dickson, thank you so much for being with us.
Really interesting, Nold Dickson that on State Street.
This is the Bloomberg Sevenants 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.