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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. So here's the laces this morning, economic impacts of the Iran war mounting, with average gasoline prices in the US nearing four dollars per gallon globe was central banks weighing potential rate hikes with inflation not expected to fall to target levels. Joining us now to discuss Francis Donald of RBC. Francis, can we just begin with your outlook, your base case before this war and whether it's changed it to all looking out twelve months beast.
Key before this war was something that looked a lot like stagflation, like growth that was slightly below comfort level and inflation that was slightly above comfort level, importantly driven by services inflation. Our outlook now is vibe stagflation medium, so more weighing on growth and more upside to inflation.
Now, these are not massive figures.
We're looking at three plus ish inflation, still high ones on growth, but it's not as comfortable as we would have liked. It certainly negates the tailwind coming from government spending, and inflation is probably going to.
Lap itself again.
I suspect next March we'll be celebrating the six year anniversary of inflation above that two percent target. So same directions and the wrong directions for this economy.
Let's go with your medium grade stagflation, Francis. If we get medium grade stagflation, how does this fed A reserve respond? How much space do they have?
They don't have space.
Monetary policy is not the right tool for what ails.
The US economy. And let's be clear, the US economy is not close to a recession.
The unemployment rate is going to stay very low for supply side reasons lack of workers in the American economy rather than lack of demand going forward, and there's nothing the Federal Reserve can do. They can hiker cut all they want, it's not going to open the straight of horror moves. We are once again in a supply shock that limits the abilities of central banks to deal with what needs help in the US economy or any economy across the world. This is why we are increasingly leaning
on fiscal policy. This is why government spending gets bigger and bigger.
This is why the long end starts to rise.
It's the same type of shock, of a different flavor.
Unfortunately, So we're talking about the fiscal lever and a lot of people are looking at that and wondering are we really going to fit the bill for it. Yesterday we saw a pretty messy two year bond auction. Today we've got five year Tomorrow, we have seven year notes being sold by the US Treasury. How much are you getting concerned about buying government debt at these levels given the concern about how much that fiscal lever will be pulled on.
Well, what I'm concerned about is more long run with US fiscal position, which is we have rising pressures on social security coming through. Interest costs are also rising, Defense costs.
Are high, and again this.
Is not a uniquely US situation. We see this in developed markets across the entire world, So leaving or having to rely on the fiscal lever necessitates big government and big government becoming the new norm going forward.
And again it's not just a US issue, it's a new global macro factor.
We've just switched our minds away from monetary policy being a cyclical driver towards governments and fiscal being the cyclical driver. The problem is that fiscal levers or governments tend to be more politically motivated, so your cycle becomes more attached to the political cycle as opposed.
To the economic one.
How much does your outlook change should this conflict go on in the Middle East for a longer period of time. In other words, you're talking about stagflation, like going to stagflation medium. The rest of the world is talking about runaway growth or recession, and there's nothing in between, depending on whether there's de escalation or not. How do you look at an ongoing prolonged enclosure of the Strait up removes and conflict in Iran as pressuring stiflation media.
It's very uneven, and this is one of the challenges with the shock of this magnitude.
Of course, we have net exporters of energy, so the.
United States Canada where GDP doesn't get impacted on the.
Top line to the same amount. And then you have net importers.
Your net exporters, like the United States or Canada, for example, they're dealing with predominantly a price shock. That's one type of shock. But your net importers, well, they're dealing with a price shock and a supply shock that's a whole different ballgame than just an inflationary element.
That's being on top of what the US and.
Canada are currently facing underneath the surface. We also know it's an incredibly uneven thought uneven shocked for consumers. So on average, Americans, for example, spend less than two percent of all of what they spend on gasoline, but it's more near four percent for the bottom half of Americans. And so what concerns me more is we've talked a lot about things like case shapes, We've talked a lot about the US separating from the rest of the world.
The longer this shock goes on, of course, it's going to change forecast numbers, but there's something a little more nefarious happening under the surface. We should be mindful of what that divergence underneath the forecast is going to do both to households but also to their sentiment, shocks, how they vote, their big implications to these shops that are very that create these divergences.
Stay with US, multile Impex. Savana's coming up off to this.
What we have is this administration potentially looking for this diplomatic off ramp and the Associated press saying that via Pakistani officials, the Iranians have received this plan, but it's really unclear, and you hear that from the President even yesterday saying we're unclear of who is running the country. So it's unclear Jonathan, who exactly in Washington is talking
to who exactly in Tehran. And amidst all of this, we still have the straight of her moves effectively shut, especially for Western allies, as the Iranians continue to control that key waterway. And that is the focus of this morning's conversation with Ryan Peterson of Flexport, of course, the global logistics company. He is here in Washington, DC. He's a friend of the show, and I want to begin with a trip you made to the White House this week.
You have been in discussions with this administration. What are they telling you about what is going on in terms of cargoes and shipping throughout these key waterways.
Yeah, thanks for having me on. Well, so actually a lot of our conversations are about Terriss, but I did get a little bit of insight into what's happening, especially with jet fuel. With the accessibility of fuel on the West Coast and in Alaska, that's been a major concern for the administration to make sure that these areas get fuel.
And as you know, California shut down a lot of our refineries in California where I live, and so there's a real risk there because they don't have enough connectivity to the rest of America's energy infrastructure. So they waved the Jones Act. So the Jones Act is this act
that says that for domestic ocean freight. So if you want to ship oil or refined products from Texas other parts of the United States to California, or especially to Alaska, because Anchorage is such an important air freight airport, you can't do it on a foreign ship. That's what the
Jones Act said. So the President waved the Jones Act to allow for these regions to get jet fuel from other parts of our country on non US made ships, which I think was a vital There was a real fear that Anchorage Airport wouldn't have air freight, and a lot of people don't know this, but Anchorage is probably the most important cargo airport in the United States, as cargo planes flying from Asia to the United States have to stop in Anchorage to refuel.
What are companies your clients telling you right now, do they feel like some of the pressure is easing or things getting even more challenging.
There's something I'm getting more and more challenging. I mean, the price of the price of air freight, especially has gone through the roof. If you're shipping from Asia to the United States, we're seeing prices have doubled since the beginning of the month, since the start of the conflict. Even that's carried over to the Asia to US trade lanes, where air freight prices have gone up a lot around well,
initially it was around sixty percent. It's kind of stabilized a little bit, but more like across all of the lanes, Asia to US is up about twenty five percent. So obviously you're going to hear about that, complaints about that, but Actually the bigger problem is it's just available capacity. Twenty percent of all the capacity an air cargo. It's actually eighteen percent of the air cargo capacity in the world is operated by Middle Eastern airlines.
So that's been caught off.
Yeah, I think Emirates, think Katar Airways at the HOD. That probably includes SAD, the Saudi Airline, So that's a lot of capacity. It's effectively removed from the market. They've been operating limited flights. They've been trying to restore, but every time they come back, there's like another attack at the airport and they drop it again. So that's actually made it very difficult to get air freight moving at all. In some cases, there's just not enough capacity.
I want to briefly end on the point you made about most of your conversation with the White Houses about tariffs, about what exactly.
Yeah, well, we've been seeing a lot of tariff fraud. The United States allows foreign companies to import goods into the US without having any nexus any like a think of an entity or an LLC or anything like that. You can just foreign companies can just import into the
United States. I mean, so we've observed at Flexport a huge percentage of trade has flipped to where the Chinese companies are importing it with Chinese freight forwarders and under declaring the commercial invoice value, effectively cheating on their terrafts.
So we've been calling attention to this and partnering with them on how they might enforce this, and so that was a big agenda point for me, is sharing what we're seeing in the data how this is happening, but also trying to learn what's going to happen with tariff refunds. And as you know, the Supreme Court overturned the AIPA tariffs.
Is one hundred and sixty six billion dollars that companies are owed and CBP has said publicly that only six percent of companies have registered their bank account with the government to receive these refunds. So that's something that flex Sport has been all over trying to help companies get their refunds back when when that process starts.
Stay with US multil index to fan it's coming up off to this.
The Iranians are saying that these talks are illogical, and a man that sits really at the center the intersection of all of this has experienced now in prior experience, whether it's geopolitics, financial markets, are actually a decorated combat veteran. I am joined now by Senator David mccormy from Pennsylvania. Senator, thank you so much for joining me, and good morning to you.
Good morning.
So I'm not sure if you just saw the news, but Iran has saying that these ceasefire talks are non existed and they're calling what the US is calling for as elogical. What is your understanding right now at the White House is putting forward? You sit on the Senate Foreign Relations Committee? Is the President buying time? Is this diplomacy or is this a distraction?
Well, I wouldn't put much stock into what the Iranian spokesman say. Think about this way. If you're the person that's trying to negotiate some sort of endgame and you've got a bunch of radicals as part of the constellation of forces in Iran, you're certainly not going to present yourself as the voice of reason. So a lot of what's happening I think in the public domain shouldn't give us too much insight into what's happening behind the scenes.
I think, stepping back bottom line, if you would have said on the first day of common operations, where will we be twenty twenty one days, twenty two days into this. I think from a military perspective, we've made enormous progress. We still have work to do, but we've eliminated ballistic missiles, drones, manufacturing capability the Navy, and those are the goals that President Trump set out, along with making sure Ron can
never get a nuclear weapon. So question one for America, I think is where are we relative to those goals. I think we've made a lot of progress, but we've got to finish that job. And then second, we've got to make sure we secure the Straits of Hormuz, and I think there's multiple ways to try to lessen the
blow of an oil markets. One, the administration is doing a lot of things to make sure there's adequate supply, but inevitably we're going to have to be able to show the markets and show the world that we can put ships through the straits, and that's going to require some combination of our allies working together with our military
to eliminate that threat. Once those two things happen, I think we have a much more stable, secure situation, and I think well, you know, we're on a path to being able to look back and saying we've achieved the objectives there, but obviously there's more.
Work to do.
We could that happen through this fifteen point plan the administration has given the Iranians via Pakistani officials.
Yeah, I think it could. I mean, you know, the most important goal of the United States, and it was the goal from day one. This was a regime that was underwriting to terrorist organizations around the world. It had more American blood on its hands than any other country. It was building up an enormous ballistic missile capability. To think Iran was formidable today, imagine three years from now.
It had called America the Great Satan that I wanted to destroy, and it was committed to a new groar weapon. That was an unsustainable position. We had to eliminate that threat. If that threat is eliminated and the Iranian regime, whatever form it takes, is committed to not rebuilding nuclear weapons and not restarting its ballistic missile that's the basis for a negotiation. You know. The straits of hormous This is I laugh when when I hear people saying, maybe they
didn't think of that. I mean, this has been the strategic question for decades. When I deployed to the golf in nineteen ninety, this was a primary consideration. Oil prices were over one hundred dollars in today's dollars, and in the financial crisis when I was the undersect for the Treasury,
oil prices hit two hundred dollars in today's prices. So creating stability in the Straits and making sure it's secure is a critical geopolitical objectives, and we're going to have to We can't leave this situation until we're sure the Straits are going to be secure, and certainly Iran is a military threat is going to be dramatically diminished, which was the goal.
I want to pick up on your pass your old division. The eighty second Airborne is being deployed two thousand troops. Is it your understanding that those SERVE members, along with the two Marine Expeditionary units will be used to secure the straight.
I think the President's doing exactly what he should do, which is he's creating maximum optionality. Those forces in the region relatively small numbers five or six thousand in total. Once the eighty second gets there, they just give him lots of optionality. There's all sorts of potential ways that you might use the combination of air power, naval power,
and ground troops to secure the Straits. So I think the president's smart to create options, and he's made the objectives clear, which is, we got to get rid of this military capacity to kill Americans, threaten our allies, and we've got to have the straits secure and open to
global commerce. Those two things are critical. I also want to make a point that if you look at this situation compared to those past situations two thousand and eight that I mentioned or nineteen ninety, what's different is the commitment to energy dominance that we have here in America, and I give President Trump a lot of credit for that. We're a net exporter. We are well on the way to building enormous capacity based on the steps that President
has taken. So we are more isolated from the shock associated with what's going on in the Middle East than we've ever been in the past. And others China and Europe and others are not as isolated because they haven't had that kind of capability and leadership that we have in the United States.
Of course, your former job. Our audience knows you very well. You ran Bridgewater Associates, this massive hedge fund. I just would also love to get your take in terms of what's going on with financial markets. Energy prices have been whipsawing. We're seeing trading ranges you would normally see in a year, even two years, that are happening within moments, especially most recently regarding what's happening in the oil futures moment. Do you understand exactly what is going on in terms of
the financial markets. Do you think they're too paying too close attention to potentially what Trump says and not exactly what he's doing.
Well, listen, I wouldn't be one to want to stand here and try to predict markets, but I do think if you look through this moment, so look weeks months ahead and don't get caught up in the day to day whip sawing, I think you can see a path to a circumstance where energy markets more broadly and American interests more specifically are in much better, a much better situation than they were before the President took action in Venezuela and in Iran. So imagine a world where Iran
no longer has the capacity to threaten the straits. The straits are open, and so we have that constant supply that goes through there with security. Thirty percent of the oil reserves in the world are in Venezuela and Iran, and those certainly Venezuela, but hopefully Iran will be much
more amendable pro Western when the dust settles. I'm not trying to be too pollyannish here, but if you think through the path of what we might see in three months, six months, I think it's a much more stable world. I think it's a much more stable Middle East. I think the Straits of Hormouse are more secure than they were before this started. And I think global oil markets and global energy markets are much more stable. And again, I want to come back to this. This happens within
the context of America Energy and Pennsylvania Energy. We're the second largest energy producer in America. We're the fourth largest natural gas reserves in the world. We're unlocking that potential. So I would imagine again when the dust settles, that Europe will be a much bigger buyer and recipient of American energy because they've now seen some of the uncertainty that goes with having Russia as a supplier, the Middle East as a supplier, So I think specifically.
Says that are just specifically on the oil futures market, there was a massive trade just minutes before the President's truth came out, and we've had guests on this program, some of your former colleagues in your old world saying
that is highly suspicious. At minimum, didn't want to go far to say it's manipulation, but are you concern that there has been manipulation when it comes to some of the posts or statements we're seeing from the White House and massive trades taken just before those moments.
Well, in general, without going specific to that, in general, I'm concerned about the fact that information can be leaked in a way out of the government or two public officials in a way that people benefit from, whether it's public officials or otherwise. I just cosponsored a piece of legislation to eliminate the ability of members of Congress to
trade equities. Not because I think there's massive fraud going on or something like that, but because even the perception of people benefiting from insider information that resides within the government I think is extremely problematic. So I can't comment on the specifics of those trades, but what I will comment on is I think there's a clear set of rules and laws thatverybody needs to adhere to if you're
in public life. And then second, we also need to worry about the perceptions associated with that and take the extra mile to make sure that the public can be confident that public officials are acting solely in the interest of the public.
We hear a lot, and I've been hearing a lot how the physical market is so different right now than the paper market when it comes to energy. You mentioned what is going on in terms of how America really is a net ex border now, so we are a little bit more insulated from this. But still, I'm sure you've heard from constituents prices are going up, Gasoline is a hair away from four dollars a gallon. How is Congress set to address this?
Yeah, I'm glad you mentioned that. I should have mentioned that that's a huge issue that's happening on the ground. In Pennsylvania. The gallon of gas is about sixty cents more than it was before this started. And if you're a working family, the meeting income in Pennsylvany is about fifty two thousand dollars a year. If you're a working family,
this pushs real pressure on you. We've made enormous progress since the President took office on bringing down the rate of inflation to about two point five it was on average five during the Bide administration twenty two percent total, and wages up, so wages are greater than inflation. But people are still feeling pressures from housing costs, from healthcare cost and from energy prices, and so there's a number
of things we're trying to do. The President just sat down with a number of the governors from the PGM states in the Northeast to try to bring down electricity prices. These deals that are being done with the hyperscalers for the big data centers. We're a big recipient of that investment. They're now being done with a covenant that essentially ensures that they bring energy that exceeds what their demand's going to be, so it doesn't raise energy prices for folks.
So there's a number of things underway permitting reform to bring down the price of energy. But in the near term, I take your point, and it's a very real one. People are feeling this pressure, and that's I think one of the reasons we hope to get this thing wrapped up in the coming weeks so we could have that stability and get these price increases behind us and go back to normal.
And some of our viewers, of course, might be and I just want to end on this might be going to the airport today and I'm sure you've seen the line, some of them up to five hours long. What is going on with funding DHS. You know, there's lots of reporting that there is this GOP bill potentially where we could fund DHS, but it wouldn't go to ICE enforcement. Would you be a yes on that?
Well, you know, listen, and I hope you help me be back to my programmer. You can you can test this sometime down the road if this ever happens. But whether I'm a Republican or Democrat in the majority of the minority, I will never vote to defund the government or not fund the government. This is a it's a real disgrace, and this is the second time it happened. And what happens is people, the Democrats are trying to use this as political leverage to get reforms in ICE
and the people that are suffering. Are the members of TSA or the Coastguard, the Secret Service SISA, which is which is the Homeland Security Cyber Office. The bottom line here is this is creating additional risk for Americans because the threat levels up based on what's going on in the Middle East. It's a huge burden on those TSA agents. We've got to call in rate in Philadelphia about twenty five percent, So twenty five percent of people aren't coming
to work. They have to go earn money elsewhere, and it's a huge burden. I flew on Monday. It was a disaster. I had flights canceled. I said on the runway it was a six hour trip that took us.
It sounds like you're a yes.
I am a yes. Sounds like you're cost We've got to fund the government, absolutely, We've got to fund homeland security. They reforms that the Democrats are talking about, many of them were already in the bill body cams, money for de escalation training. The President already put forward a set of performs. This is political theater. This is not good policy, and we got to get behind us. I think the American people are right incredibly frustrated, as am.
I this is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, a gio 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.