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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. Let's get to the view on Wall Street this morning, Nate's Earth of Manual Life, writing, we could see economic growth diminish if policy uncertainty increases, Corporate profit margins get prim due to higher energy inputcasts and higher gas prices will act as a consumer tax. Nate joins us now for more. Nate, good morning, Thank you for having me. What is the price for all this volatility?
I mean, I think the reality is we have a bigger pogost going on, right. We have a lot of up and down, we don't have a lot of forward traction, and the uncertainty is very, very high. I think the prices, that we live in a world where volatility continues to be the theme, at least in the near future. To your point earlier, the signal is there is and everyone wants us to conclude quickly and the duration of it
to be limited. But the reality is the on the ground activity and the idea that multiple players are involved could lead this to le lasts a lot longer than many people think.
If you've had the comparisons to twenty twenty two in this moment, right, hey, what do you think the MIGHTIA difference is off?
I think the comparison is that you have energy prices going up. What we don't know yet is the duration of that, or the infrastructure and how wide that is, let alone the escalation. Right, there's three big things there that we don't have the answer to. Twenty twenty two, we saw this dynamic war oil went up for a period of time. We saw interest rates go up for
a period of time, and then eventually things pass. I think this time around, you're probably in a similar scenario where you do see some damage in the equity markets for a period of time, but ultimately we flow through it and we have to focus again on the underlying fundamentals which are going to be much more positive.
Well, people are treating this as though it's an inflationary shock the way that twenty twenty two was, why don't you see it exactly that way?
Well, this time I think, one, we've experienced it before, and the markets, as they've seen one thing before, they start to accept the fact that that's a possibility and are less concerned about it. The other thing I think when you think about it is when we look at the dynamics here oil, while very important to economies globally, there is solutions to this, and we do think there will be a de escalation at some stage, just a
question of timing right. And the longer we stay at high oal prices let's say one hundred or above, the more impactful it is to growth rates and inflation. We believe that from a developed markets perspective, if you stay above one hundred dollars a barrel for let's say a handful of months, you're arguably going to decrease growth rates by about a half a percent a year, and you're going to increase inflation rates about a one percent per year.
For most major economies, that's very detrimental to the markets, both from an interest rate policy perspective, but also from an equity perspective.
It's been treated like a stagflationary shock, which includes people selling long term bonds. It seems like what you're talking about is somewhat of a different prescription.
Why well, I think why it's a bit different is I think this is short term. I don't think this is a secular theme that we are going into a stagflation period that's going to last multi years. I do think ultimately you're going to have central bank policy members look through this and say, hey, we care more about jobs, we care more about growth, and we're willing to look through a temporary shock attached to higher oil prices if necessary. That's not their preference, but they were willing to if
it's necessary. And ultimately we get to a point where we have energy prices get back to a level that one more stable and not at this ninety plus or one hundred plus level. And I think that's where the market is hoping for, and I think that's what's most policy as well as political members out there think will still be in an environment where we will get to a solution here where we don't have to see the worst case scenario.
What do you think that means for the stock bond cord lintion. I think that's the problem.
I think the stock bond correlation has been a problem, will continue to be a problem, and this is why we continue to look for ways to improve portfolio construction beyond just relying on interest rates or lower interest rates being your insurance.
But where do you go again?
While you go to areas like commodities as an example that has been a good hedge in these types of environments, you go to things like gold, which maybe not working as well in the short term here, but has been working very well over the last couple of years, and you look at other types of alternatives.
Once you think going to open working well.
I think gold hasn't been working well partly because it had been working well, right, It had worked very well for the last two years. You had a lot of players in there. Some of those players decided to exit, either for liquidity reasons or for reasons that they made a lot of money and they want to protect their profits, right.
And then you also have what appeared to be the two plastic things that did work, which was the US dollar, and you had the overall dynamics of the market, such as oil, because that's centerpiece of the geopolitical concern work, and so got us.
This trade moved into that. I got asked this question twelve months ago, you would have thought I was insane. It is five kan't good entry points? If I got I think it is.
Yeah.
Twelve months ago that would have sounded nuts. But now this is a good opportunity.
We still believe that secularly we will see higher gold prices over the next several years going forward.
I'm just wondering if you ratcheting back your returns profile more generally overall, whether you think that investors have to expect that in a reindustrialized world with a higher rate of potentially inflation, but also lower growth, this means that you're just not going to get the same kind of returns.
You absolutely have to dial back your expectations.
The reality is we are now in a world where equity evaluations are high. We have uncertainty round yield and they may not go down a lot. And so I think your expectations for total return from your portfolio, whether it's from the fixed income side or the equity side, have to be lower than what we've seen over the last twenty years.
Is the US still the safe haven market?
I think for the time being it is.
But I do think once we get through some of this more geopolitical dynamic right now, I think we are going to go back to a trade where you do see diversification outside the US dollar dynamics start to be more on a backfoot, as in dollars starts to depreciate again. So we think ultimately over the next several years you are better served having a more diversified portfolio. But in the short term US dollar is a safe haven trade that does provide some level.
Of hedge stay with US multiple implexsavandans coming up off to this, the signal from the president is important, so is the reality on the ground. Just as we speaking, these headlines crossing the UAA says it's currently responding to a missile threat, KATSA saying they intercepted a miss targeting the state of Catta. And we've seen headgund after headline like that and more still to count.
Yeah, and the IRSTG coming out and saying this war isn't over until we say it's over. Even though the President is saying I can stop this at any point.
Joining us now to discuss is Mark Shaw, the former chief of Staff to the form of Vice President Mike Pence. Mark, good to see you, great to be here. That this is not in the president's traditional playbook. This feels so so different. Typically he has something targeted, it's limited, it leads to a period of the escalation. This feels so open ended. How would you characterize what's evolving in the Middle East?
Well, I think there's some true to that that. Obviously, you know Venezuela, he wasn't looking for regime change. He left Mondu's number two in place. But at the same time, I think the president always likes optionality, which I think you've witnessed over the last ten days. Is that explanations as to how long this is going to be continued to vary a lot, and so I think you'll continue to see him want to keep that optionality to whether he continues to prosecute this warpoo back.
How different is this time in terms of the support from other republiclkens in Congress for the effort. I mean it was sort of pretty unified around Venezuela. Is it the same here?
Well, I think that there's obviously been a growing thread of isolation inside their Publican party. I think it's been notable that Jade Vance has been pretty quiet and not as visible as far as advocating for these policies, and I don't think there was as much of an effort ahead of time to explain to the American people the priority and why we're doing this, which is why I
think you see the pulling down. Having said that, Lisa, if the present's successful here and in many cases this milit operation has been successful, but if he also be able to transform the Middle East for generations to come, I think we'll see a lot of Republicans be on board with this. I think the greater political concern in the short term is that affordability remains number one issue
for Americans. And you know, I think that even if best case scenario prices you now are an eighty to ninety dollars range of barrel, that's still a thirty three percent premium for what they were. That's not going to help with the affordability issue heading into the midterms of November.
So what do you think is the most feasible counteraction to that by the president heading into the midterms.
I think the most feasible is to get to you to explain why this is a necessary action. Why for forty seven years I Ran has been at war with the West. Why they've you know, going back to funding the Hamas and the Hesbalah and the Houthis, why they've killed Americans in Western Song. Why we did this. I think that's what he can do best. As far as your triggers, I think that one thing that would be
helpful is if you relieve the Jones Act. But I think there's a lot of tension inside the administration because you have the protectionist and the Peter Navars. For him, that is that is sacricyanc They don't want to see that, you know. I think it's disappointed see actually leave providing relief for Russian oil. At this point, I think that Russia has been partying with Iran for quite some time. Iran has been funding, been providing them with drones, and
they're warn in Ukraine. And our recourse of this is to actually reacts. The oil sanks on Russia. I think shows the sensitivity they have politically to rise in oil price.
So there's something very backwards about the whole think we now mus Can have from the Ukrainians to help US intercept drones. At the same time, we're offering sanctions relief to the Russians who they're fighting with at the moment. Makes sense of vote off.
No, thank you, that's basically I mean, ultimately, you're sort of putting your thumb on the scale on both sides. Anyone who's saying this is going to create a sooner resolution to the Ukraine Russian war, please explain to me exactly how.
I could just make the question how perparent they were for this? Why the Chinese were able to stump pile energy over the last twelve months and America didn't refill the ESPN.
Well, look, I mean, I think that there was a lot of depletion of this of the strategical patrolum reserved during the buy it and mass depletion, and I think there were opportunities to continue to replenish it. I do think that there's obviously more oil production out of the United States today, and I think that the present deserves credit for having lowered energy prices as significant as he did.
But as we've talked about on your show, I think that the reduction energy prices in many cases was masking the trade agenda and the extra costs. If all of a sudden you've taken that relief off the table, I think you're going to see the trade agenda inflation come to the voters even more sensitively.
How much can do you think he has over the fate of what's developing before our eyes.
I think he has more control than anybody else, But as you said, I don't think he has a total control over this. And you're saying I mean, I mean cutters still say one hundred and fifty dollars before this is all said and done. They have facilities, they are still offline. Bahrain has facilities offline, and so it seems to me there's a heck of a lot more volatility here, and it's just because the presence signaled maybe this will be a shorter term conflict, doesn't mean that that's guaranteed.
Stay with us. More Bloomberg surveillance coming up after this, Abigo, what a ups rights in this? This morning, energy prices posed a near term headwind to real consumer spending. The old price shock is a more two sided risk for monetary policy rather than is perhaps appreciated. Abigaut joined us now for more good to see you, and good morning, Good morning. What did you mean by that last line?
So, I think if we think about the repricing we saw off the back of the increasing oil prices in bond markets and expectations around easing from the FED this year, I think you saw obviously a clear focus on the inflationary impact of the oil price increase, and I think perhaps what's underappreciated is that this is coming alongside a point where the labor market looks a little vulnerable at this juncture still, and you're also it's also coming alongside
potential growth hits, right, Like, this is something that could hit real spending, which is two thirds of the US economy. So I think perhaps the point around risk to rates being more two sided is this idea that it could come at a juncture where the labor market's already looking relatively vulnerable and the inflation shock, you know, it will depend on the persistence of the increase in price.
So this is something we've been exploring all morning. We talked to Kathy Jones about it. At some point it's a tipping point, this starts to become bullish for bonds because of the potential output hit that we could see from higher energy prices. How close do you think we are to that point?
I think this is one element of the consumer story, right. I think one of the things you've got to think about is the kind of other drivers that we had for the kind of strength that we were expecting from the consumer this year. Right, We're expecting that you see a strong tax refund season. Tax refunds are up ten percent in the latest IRS data on an average basis. That's a little bit behind I think kind of some expectations of the fiscal stimulus. But that's another thing that
should prove potentially supportive for household balance sheets. And if we think about kind of how this feeds through to household balance sheets as well, I think it's the kind of everyone outside the top twenty percent of the kind of income distribution potentially that's going to wear this kind of more. So, I think you've got a way potential kind of positive headwinds, positive tailwinds for the consumer versus some of the kind of negative impacts potentially from higher
oil prices. So I think it will depend on how those kind of play out in the next couple of weeks and months. And I think the key thing here with all of the kind of potential impact for the economy from the oil price increase is really the extent and the persistence of that increase in oil prices, and that's I think that's what's going to be key in terms of how this feeds into kind of growth and also into inflation.
One of the tailwinds has also been the idea of rate cuts. How much is there momentum in the consumer, particularly at the lower end should the FED remain on hold?
Yeah, So, I mean in our expectations, we've got fifty basse points of cuts from the FMC this year, and in terms of the timing of that, we think it's potentially kind of second half, so July October. I think at the margin that easing and interest rates is something that is supportive and helpful for the consumer, but that would in theory bring you interest rates background to around neutral. It doesn't necessarily outright stimulate the economy at this point.
I think for us, when we're thinking about the kind of resilience and the potential strength of the consumer, I think our fiscal story is actually potentially the more important part of the kind of outlook this year for the consumer, rather than necessarily the kind of tailwind from monitored policy.
We've been talking about how that fiscal tailwind could potentially be absorbed by higher oil prices. How do you sort of weigh where oil prices are versus that fiscal boost that people were expecting.
Yeah, so I think it's I think it's probably one of the key things to be thinking about at this juncture. I think, as I said, I think the kind of persistence and the increase in in kind of oil prices.
Will be important. We've obviously already.
Seen gasoline prices rising, and the consumer in the US is incredibly sensitive to higher gasoline prices. So I do think, you know, there is a potential that some of the positive kind of tailwinds we were expecting from fiscal policy could be offset, in particular for those lower income consumers where you know, you are seeing the fact that savings
are running kind of below average. You know they've they've kind of spent down any excess savings that had been built up, and I think, you know, that's the area where I would think that you would feel that kind of gas price increase most acutely in the consumer.
My McKey was talking about where FED fund futures. We're trending right now, what's your FED bet for you?
So we're expecting that the FED deliver fifty based prints cuts this year rate I think the risk if we're thinking about the distribution around that, I think, you know, potentially, if you see kind of more of a growth it, if you see this kind of labor market vulnerability persisting, I think that you could potentially see the risk that rate cuts come come sooner than we're expecting. And then I think, you know, if we think about the kind of risks on the opposite side, you know, the potential
risk for rates coming later and then holding longer. I think that's really going to depend on what we see in the inflation data. Obviously, we'll get the February CPI this week. We're expecting that you see a slowing in terms of the monthly prints there. But we do think that will be the low point for the CPI this year. So you know, we're expecting that that push is higher and we see inflation peaking.
As independent of what happens in the Middle East, that that's the low for this year.
Yeah, So that was our profile previous thing as well, because I mean we're still seeing that tara of pass through coming through. I mean you are seeing kind of elevated core goods price increases, even if you are seeing a little bit better inflation on the services side.
So the call for fifty basis points is that a call based on the economy or the man who's going to be the FED share.
So it's based on the idea that you know, if we think about when we're thinking we see inflation peaking, we do think that the run rates of inflation will begin to peak in the second quarter. And I think at that point as well, we're expecting the labor market still looks vulnerable. We have the unemployment rate pushing higher from here to four and a half ur six by
the summer. So I think with that dynamic, I think that's a point not which in July you should see kind of a nough inflation progress for them to think, okay, we should remove a little bit of that access restricting it.
Got it. This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, enti at 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.