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Terminal and the Bloomberg Business App. Here's the take from Norman Raw, the former senior US Intelligence official and senior advisor a CSIS. He writes the following. If the US executives executes strikes on Iranian power plants, Civilian infrastructure would become a primary battlefield, and oil would reprice sharply for an extended disruption scenario. Norm joins us. Now for more, Norm, welcome to the program. Can you help set the stage? What are we set up for later this evening?
Good morning, So three weeks into the conflict, a new battle space dynamic has been created. Despite the extraordinary campaign results of the United States and Israel, the Iranian government has survived, so the war has evolved from a golf shipping and gas infrastructure crisis into a deadline driven, strategic depth and civilian critical infrastructure contest that openly involves control of the straight upform moves with all energy systems, regional
power infrastructure, desalination systems within a potential escalation envelope. Once these systems become explicit targets or even threat objects, you in essence have a situation where the market will now need to price in not only the crude and liquefied threat to natural gas, but also a reliability of electrical systems, water security repair times, and the higher probability of allied burden sharing of all of the Golf Cooperation Council partners.
When the President puts out a statement and has this ultimatum about opening up the strait of Hormoves or he's going to go after power plants, do you think that statement would come from the President United States if he was unwilling to do so.
No.
I believe the President of the United States has a serious intent of taking a greater action against Iran. I also believe that US forces in the region are more than capable of executing the presidents of wishes, but they would prefer to undertake these actions when the conditions are most appropriate. Now they can do whatever the president requires.
Fully opening the strait would require reduction of the Iran's UAVs, it's dr own threats, and probably undertaking more action against the strait of hormones as Iranian infrastructure, and waiting until we have the full contingent of additional marines and perhaps some additional air assets.
Norm you've been in the room, the president will have a number of options in front of him. There's reporting over the weekend that he molls carg Island, a takeover of that island that's just some miles off the Iranian cost. Can you go through all the options right now you think are being presented to the president?
Well, I prefer to avoid all the options, and that perhaps the Iranians are watching and giving them a school answer may not be the best of ideas, but it's likely that the Iran the president's overall approach is to convey to the Iranian government that they're about to lose control and the revenue from their most strategic asset, and that that idea is going to ripple through the strategic leadership of Iran's government and compel them to push for
negotiations and to make concessions on several points, which is an essence to give up the idea of nuclear weaponization, the enhancement of their ballistic missile program, the could's force activities within the region, and to return these straight up hoo moves to international control vice their control none.
There is some speculation that a ground operation could be imminent. Can we go into the ramd of speculations together and talk about the geography geography that you know, Well, how difficult would a ground operation be in a place like Iran?
Well, I'm not sure the issue is of difficulty. US forces are extremely capable. All ground operations have a lethal component that no one should diminish the threat to US forces. I think you want to ask instead what the ultimate goal might be. What is the purpose? Are we trying to retain territory? Are we trying to send a message to Iran that we can take territory? We're trying to destroy key facilities. The question is what message are you
trying to send to the Iranian leadership. We've already sent the message that we can destroy anything in Iran. We can control any physical space in Iran. We control the skies, which means we control the ground.
Stay with us, mul Bloomberg surveillance coming up after this crude hovering around multi year highs. Michael Haig of Self Gen, writing, with each passing day, the market grows more strained with no resolution in sight, prices could climb towards one fifty a barrel in April. Michael joins us. Now for more. Michael, welcome to the program. Your note was one of the
first notes I read to start the week. Scenario B. We're very close to what you call scenario B. What was scenario A and what do scenario B look like?
Scenario A. First of all, good morning, thanks for having me. Scenario A was our basically scenario at the start of March. The market was pricing in a very quick resolution to this conflict. So our scenario A was that we see the streets opening up by the end of March, but prices getting up to one hundred and twenty five dollars
a barrel. Looks like we're going to have to adjust that move to scenario B, where we have this conflict continuing through April and that brings oil solidly up to one hundred and fifty dollars a how.
Michael, A. You know, pricing for longer. That's not just the short term story. That's a long term problem.
Yeah. Unfortunately that seems to be the case because every day that goes by, oil taken of the production makes it harder to come back. Obviously, infrastructure gets more and more damaged. So yes, higher for longer. I'm afreed, Michael. This was an issue for the equity market.
The issue I think a source of comfort was we had extreme vanquidation in the future's curve, and for people who aren't in your world, that just meant the front month of the future's curve was really elevated. But the market was pricing a short term problem and we had this steep drop off through the rest of the year. You see this plank out this morning. The opposite were starting to lift the back end of the curve, starting
to price in the higher for longer scenario. Michael. This raises the question of demand destruction, so called demand elasticity. What are the realities for the energy market when does that destruction creep in?
So well, there's one thing to not being able to ford oil because the price is too high, and the other thing is not being able to get the oil, and that's the bigger concern. So generally speaking, from a price perspective, and when we talk about demand elasticities, the oil market is fairly inelastic. That means that when prices go up, people really can't change their behavior that much.
So given the fact we've had about a fifty percent increase in oil prices since the end of February, that would ordinarily mean from a price perspective, you would lose about one point two million barrels a day of oil demand as people can't afford it. If we go to the one hundred and fifty dollars scenario, then we'd be talking over three million barrels a day of oil demand destruction because of the price effect. But as I mentioned, it's not really just about the price. It's about that some
countries can't get the oil. So you're already seeing airlines put on surcharges, cutting flights. You see refineries in China cutting their runs. You see ethanol crackers cutting their output because they can't get the feedstock. So there are some countries in Southeast Asia that maybe have fifteen to twenty days of oil and product in inventory. So we're going to get to a situation potentially where we get demand destruction because these countries can't operate as normal.
Michael, to that point, we have sprs around the world. Different countries have their own strategic reserves when it comes to crude. Are you basically talking about the fact that we might have the crude but it's so dislocated in the market right now there's not going to be enough refining capacity to say turn that crew to diesel or jet fuel.
Yeah.
I mean we're talking seventeen million barrels a day that has been displaced. I mean, if you look back historically, we've basically had thirty geopolitical conflicts since the early nineteen seventies, and the next biggest disruption to supply was all the way back in nineteen seventy three when we had seven percent of oil being removed because of the Arab oil embargo. Now we're talking seventeen percent being removed. So it's a
massive difference. So you know, all you need to do is take that seventeen million barrels and say how much can be redirected through pipeline. How much can be we offset through demand destruction, how much can come from the relief from Iranian sanctions on floating oil, et cetera, et cetera. And you add it all up and you still have a massive deficit of around eight nine million barrels a day.
And that means that that can't get to the refined is in Singapore elsewhere they can't create the product, and that creates the issue for gasoline diesel, mainly in Asia.
Michael, the way you talk, I'm thinking this is not going to be months. This sounds like a multi year recovery. Is that accurate?
I don't think it would be as drastic as that, but I'm you know, as each month goes by, we're
talking several more months to recover. The market's very resilient and it will bounce back, and there is plenty of oil out there in terms of spare capacity generally speaking, So you know, if by some miracle this was resolved tomorrow and all the oil came back into the market, we might lose like one or two million barrels a day because of the shut ins, because of infrastrut etc. But generally speaking, going into this, we were in a surplus of let's call it about three million barrels a day.
So fingers crossed this doesn't go on through past April, because I think if we can get through that by the end of the year a year will be back to kind of normal.
Michael, this is starting to creep into base metals. Let's just turn from energy to things like aluminum to comper. We're starting to see some big moves there as well. How far along do you think we are in the process of trying to understand how cyclic or the demand for those metals actually is at a time when a lot of people are getting built up on these secular tail when it's coming out of technology.
Well, I think, I mean, let's let's think about copper here. I mean, we said before this conflict that there was some unusual demand situations going on in those metals markets given the growth of AI, etc. But also because of strategic stomppiling because of military spending. So I see a very bright future for those metals from that perspective, because coming out of this conflict, I still believe there'll be a push to do more strategic stockpiling four things like
copper and aluminium just like we have for oil. We'll see more military spending that's very metal intensive. So you know, despite the fact that they get pulled down because equity get pulled down, I think I think their future is pretty bright.
Can we finish on gold? Michael? Twenty percent move so far this month? Huge, huge move. What do you think is behind that move? Is it just an interest rate move driving people out of gold? Is there something else of ply.
So, I think what's going on there is that we don't have any central bank buying right now. I don't think there's any appetite to do that where countries are squarely focused on getting through this energy crisis. I wouldn't be surprised to hear reports that some central banks have sold gold in order to subsize some of the energy issues that they have in their countries. So it's been a big pause I think in that buying. That's mainly
the reason why we've seen it sell off. ETF flows by themselves couldn't explain the dramatic decline in the gold price that we've seen recently. Of course, some of it is fundamentally bas based on interest rate expectations, et cetera. But again, a bit like the base metal complex. I think once we get through this oil situation, with goal prices where they are right now, I would imagine central banks resuming they're buying.
Stay with us. More Bloomberg surveillance coming up after this. This bond markets some wild moves earlier on this morning, yields three four percent at the front end of the curve, past yield we've seen since last summer three eighty five. Now, because we've pulled back following those headlines, we're down five basis points on the session we priced out the easing. At one point we were talking about price again, rate
hikes at the Federal Reserve. Let's have that conversation right now with the Federal Reserve, Governor Stephen Mara and the lone voice dissenting at last week's FMC meeting, continuing his push for interest rate cuts. Governor Maron joins us now for more. Steve, good to see you, good morning, Thanks for havving me back. Governor, Where do we begin with these headlines right here? As a policy maker, as an official, when things are moving this fast, what do you do?
Well? Look, we've had already handsome whiplash this morning, and I think that underlines that we shouldn't be making policy based on short term headlines, right. We should wait for all the information to come in before really changing our outlook.
And I think it's just still premature to have a clear view about what this is going to look like as you look twelve months out, and because of monetary policy lags, we really need to be looking a year to a year and a half out, and there's just not enough information yet about what that looks like.
Communication in the near term, of course, matters. The chairman in the news conference last week really vowing to anchor inflation expectations. Do you think that's a worthwhile pursuit at this point?
I do. Look, you know, traditional central banking Federal Reserve wisdom is that oil shocks head headline inflation, but they don't really pass that much into core as by as much as they do as they do into headline and the two ways that you would want to respond to, and so therefore you typically look through an oil shock. Now, the two excepts would be if inflation expectations beyond the first year start to move higher. That hasn't happened thus far.
Inflation expectations for the first year out have moved higher, of course, but as I look at the CBI swop market beyond the first year, there hasn't been that much movement. Medium term five year, five year, longer term five year five year forward expectations have actually been coming down lately,
so there's no evidence of that. The other reason why you would want to respond to an oil shock is if you saw a wage price spiral, if you saw wages responding to oil price increases, gas price increases, that could result in the type of reinforcing inflation dynamics that you want to forestall. Now Again, thus far, there's little
evidence of that. In fact, wage pressures have been declining for the last few years on a steady, steady, steady basis, so that's also something that I don't really see right now.
So the market, the labor market is just not strong enough to worry about it.
I think the labor markets still could use additional support from montary policy, and that's why I dissented last meeting, as I have continued to send for all previous meetings.
How lonely were you at that committee meeting just last week voting for a twenty five basis point reduction in the face of an energy shock. How robust was the conversation around the table.
Look, I think a lot of people around the table, like me, were hesitant to draw conclusions from the oil from the oil and news thus far, because as I said before, we have to look twelve to eighteen months out, not what happened to the oil price yesterday. And so looking twelve to eighteen months out, there's still not enough clarity to think that montery policy itself should adjust in response to what's happened.
Well, check out the old futures curve that has changed. I've just had one eye on December over the last three weeks or something that's gone from the sixties and threatening to break out into the nineties at one point earlier on this morning. That's a change. That's a real step up now it has.
And I boosted my you know, in the summery of economic projections, I boosted my inflation dot for the end of the year to two point seven percent, reflecting that in part, right, so there is some expectation of higher headline inflation. However, I said before, I think it's way too early to draw conclusions that it's bleeding beyond headline inflation in a way that matters for monteria policy. Don't
forget higher oil prices also depressed demand. Right, They take money out of the pockets of consumers that we spending on other goods and services and redirects it towards gas and other energy costs, and that depresses demand and causes unemployment to move a little bit higher. That offsets some of the increase in inflation.
Your colleagues. This morning, Gustin goes to be at the Chicago Fed speaking to the press, saying, we could see a circumstance where we'd need to raise interest rates. How high is the bar to raise interest rates? What kind of circumstances would you personally need to see?
Yeah, so I just laid out a couple of them before.
Right.
If it looks like the oil like the oil shock, is bleeding into inflation expectations beyond the first year, then you get really concerned about second rand effects. Or it looks like you're starting to cause a wage price spiral, then you get really concerned about second rend effects. First round effects are not something you traditionally respond to as
a central bank. Now I'll say one thing beyond that, which is that these oil shocks have been things that this FED has looked through for a long time, right, it would be highly unusual for the FED to start looking through them now. And when you think about what happened in twenty twenty one and twenty twenty two, we did have negative supply shocks like the oil shock from
the Russia Ukraine invasion. But in my view, part of the reason why it was able to reverb right through the economy the way it did was because policy settings of the time were very different. Monetary policy and fiscal policy were at all time historical accommodative levels. We were doing one hundred and twenty billion dollars a month of KIWI. We were doing two trillion dollars fiscal packages at a time.
That's not the case right now. We're not hitting the gas on demand that would interact with the higher oil price in a way that we reverberate these prices through the economy. Now, that's not the case at all.
But right now we're just seeing price spike on paper market. But what's happening in the physical market is actually avoid We are seeing not just shut ins, but some of these installations going to take years to rebuild. At what point does that start to potentially de anchor inflation expectations.
Yes, so you'd want to see you'd want to see the oil price shocks start to reverberate through supply chains and pushing up prices.
More broadly, we are there in terms of airlines diesel. That means that it's going to do more expensive in terms of some goods and services that are delivered by truck.
Yeah, there's been a few instances, but you want to see that in a broad based way that starts to bleed in core inflation and boost it and boosted in a way that's sort of not just a one off time, but you start to see really second round effects that are concerning for the longer term. And if that starts to happen, then you start to get concerned about inflation. And I think that that is what you did see happen in twenty one twenty two, and thus far I
don't see it happening on a broad basis. Now it could happen, right, but thus far it hasn't happened on a broad basis. You get some usyncratic stories like airline prices that are more directly tied to jet fuel, but beyond that you haven't really seen it, and I think part of the reason why is because we're not hitting
on the gas. We're not hitting the gas on demand, We're not boosting demand with all time record accommodative policy in a way that would allow pricing to accommodate a supply shock like that.
It's fair to say that I think a lot of FED watchers watching this right now, and I'm getting some reaction from them in real time, agree with you that this isn't the environment to high grate. The opposite, though, is a difficult argument to make. Is it the right time to cut interest rates this quickly, this soon?
Yeah?
So, as I said before, traditionally you would look through an oil price shock like this, which means that my policy outlook from before or is unchanged, and my policy outlook from before would be gradual cuts of interest rates. I had about six cuts for the year at the last step in December. I reduced that to four cuts for the year in response to the inflation data right that we received between the two between the two projection periods. So I'm maintaining my outlook that I had change.
For Give me for jumping in, but the balance of risks around the outlook should change. That should change off the back of energy shock. Isn't that a fair summary of where we should be?
Well, the balance service does change, but I think it's actually changed on both sides equally. The inflation risks have got a little more concerning, but the unemployment risks have gotten more concerning too, because the negative supply shock that is the oil price is also a negative demand shock. You're taking money out of goods and services that are not energy that would have been spent on those goods
and services anyway. And I viewed the labor market as continuing its gradual softening trend in the last three years. That trend has been in place for three years. I've seen nothing that would convince me the trend is stopped.
Right.
That's a very very powerful medium term trend that's been in place for several years now. And taking money out of goods services that's not energy to devote a higher energy process is exactly the type of thing that worries me that trend might accelerate. So the balance of risk changed, but I think it got worse on both sides. I don't think it changed asymmetrically.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. 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.