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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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 latest
this morning. Global bonds seeing their biggest sell off since May, with the Middle East conflicts reigniting inflation fears, Thawson's Slock of Apollo, writing, the key issue is the duration of the shock. Markets may quickly get used to a situation that could last weeks or even months. Tawson joins us now for more. Torston, welcome to the program. Does this shock have the potential to become an economic issue in the months to come?
Yeah, because this is steflationary imp So it's actually quite similar to what we saw with the trade war. Prices are going to go up and Ultimately, if it persists, GDP is going to go down. So this creates a huge headache for the Federal Reserve because the Federal Reserve.
Now needs to assist the dual mandate.
Where is the hit the hardest is to hit the hardest on inflation. Should they worry more about inflation going up or should they begin to worry about the downside impact on the label market. That's why this is a complicated shock, just like we saw with the trade wall, just like we saw with Ukraine Russia, and thus we're seeing.
Today talstin relatively speaking? Is it a bigger problem for the Bank of England for the ECB?
Well, the challenge for Europe is that they depend more on energy. The US produces, of course, a lot more energy than it consumes itself, whereas in Europe we do have a much bigger energy dependency. And that's exactly why markets are trading the way they are, where Europe is getting hard to hit because this simply is a bigger energy dependency in Europe.
How important Touriston is it for a styflationary shock for there to be enough economic momentum in a country to.
Withstand and prolong price.
Hikes challenge, Lisa, is that this starting point is extremely important. Inflation and cod pc each to day is three point zero. So if inflations today had been one point zero, it would have been a completely different discussion. But now that we have inflation already at three and now we're adding on top of that more upward lift on inflation over the coming quarters, potentially that is certainly a risk that the fare of certain needs would take very seriously.
Well, this is the reason why I was surprised towards starting the conversations that I've had with a number of different investors, even companies, they seem really excited actually about the opportunities ahead. They think the economy is chugging along, they're looking to invest. The sort of manufacturing boom feels
like it's actually getting legs. How much could that amplify the risk of a stagflationary shock, because it could cause the price increases to be more significant in a way that isn't just necessarily a one off shock from commodities.
No, you're right, and I mean if you just think about what has happened in the last few weeks, first we would talk about, Wow, the US economy is strong. Then we were talking about, oh my god, we're all getting unemployed because of AI. Now we're back to talking about, Wow, inflation is going up. I mean no wonder that the people inside the Federal Reserve are looking at this and probably scratching their heads and saying, well, now there's another
shock that we need to take into account. But in combination, the issue is still that the US economy is doing really well. We have three very strong tailwinds from AI spending, we have a strong tailwind from in the dustal renaissance. And let's not forget that the Congressional Budget Office they estimate that the one big built of a bill will lift GDP growth this year by zero point nine percent. That's an enormous boost to GDP coming from fiscal policy.
So taken together, it is a very strong economy. And it is an argument that has been made by many, including me, that we are at risk, of course, of seeing more upside pressure on inflation. And now you add here in the last few days on top of that, some more upside pressure because of oil prices. And finally, let's not forget also if this was just a few days, well, the risk is now that even today now we're getting
headlines about new oil facilities potentially also getting hit. So the challenge here is that, well, what headlines you we then expect over the next several days. Again, so it really is a complex situation because of this incredible risk we might begin to see even more upside pressure on in fision from an already pretty bad starting point.
Well, Toss, and let's unpack the bill case for the US economy and the tax component of it. Let's go with tax refunds. And you mentioned the labor anxiety connected to what's happening with AI developments. I think that's a
feature of the conversation going forward. Does that hold back people when it comes to spending those tax refunds given that they're not going to see higher energy bills, potentially high utility bills potentially, does that make them more risk averse conservative in the months to comet?
No, you're right, John, because last year, if you go and look at, of course, what tax refunds normally are, they were around three thousand dollars per family. And now this year, if you think about that, the one big built of a bill is done retroactively starting in January one, twenty twenty five. That means that we have all paid too much in taxes in twenty twenty five. That means that our tax refunds will be bigger this year. On average, they will go out from three thousand dollars last year
per family, so now four thousand dollars. And there's one hundred and twenty nine million households in the US. So if you multiply these two numbers, that's a one hundred billion dollars more in consumer spending coming along here POTENTI in March and April and May. So over the next seven months we're going to get quite a lift in consumer spending. But you're right, if consumers are very worried, they could be saved more. But that's why the key indicators to look at on that is to look at
consumer confidence. Consumer confidence has done a little bit better, but our consumer confidence indicators getting impacted by this or not that becomes very important over the next sevel readings.
So to uston that feels like much more of a European story potentially than the US one. How do you expect central bank is to guide us through this moment? We had some guidance from the Australian Central Bank over nights saying every meeting is live. What do you think will the approach will be of saving Europeans of the Federal Reserve the ec Bank.
Well, I think it's easier for the Fed because they will probably be more two handed and say, on the one hand, we have inflation going up. On the other hand, we're worried about what this means for the labor market. It's more challenging for the ECB and the Bank of England because they don't quote unquote.
Care about the labor market.
They really only target inflation, and if the only target inflation, they should begin to be more hawkish. So that's why it makes sense that and rates expectations and central bank expectations are moving more in Europe because the Europeans have simply a different mandate, namely only inflation.
Twist and does this torpedo the bull case for Europe and frankly for a lot of the XUS discussion, because even though yes, the United States could face the stagflationary shock, other places could struggle with that even more at a time with the market seems to be overly positioned that way.
Well, the challenge for Europe is that the main book case for Europe is really that Germany has said that they will spend five hundred billion euros in infrastructure and spend unlimited on defense. So the question that of course is immediate here is to ask, well, what are the Europeans going to do now in the form of defense spending. What are they going to do in the form of more government spending. So the policy reaction becomes very critical.
How is Europe going to respond to this. Are they going to say, well, too bad, inflation is just going up, or are they going to say, well, wait a minute, maybe we do need to do more on the fiscal front, and there is not much room to maneuver on that front. But it becomes very critical that on the policy front the Europeans are likely going to at least say and indicate more action as a result, In particular, if this does become more of a niggative risk to the genp.
Outbook, stay with us.
More Bloomberg surveillance coming up after this. Let's justus stend the conversation with US Marine Corps veteran Major General Mastin Roberson of Academy Securities right in the following Aroun's current ability to make clear and rational decisions is likely disrupted, but proceeds are still a problem that it's not easily solved. The Major General joins us now for more. Major General, welcome to the program, sir I always appreciate your insight.
Let's just start with your assessment of the operation so far.
Thanks John Laser. So, I mean, it seemed to me that the number one objective was to try to ensure that the nuclear capability for Iran is off the table, and it does seem that that part of the operation has gone well. If the objective was to take mid range and short range are particularly long range and mid range missiles and destruction of the navy, that's gone well.
The challenge is the side effects of those, the closing of the straits, the attacks on Middle Eastern countries and their capitals, which doesn't really surprise me, because you've got to believe that everything that's happened from the Iranian side of the house over the last four days was probably prescripted that if we get attacked, these are the target season things you do, which probably at hindsight, is not best for Iran to be attacking the other Middle East
countries capitals because it certainly plays against their ability to have an emotional connection to the Muslim people in those countries and separate them from their governments.
So major general, that last point I think is quite important that the response we've seen from forces in Iran so far has been scripted. As time goes on, how do you think ILGC forces are operating or will operate in a leadership vacuum?
I mean that's the hard part to predict, because I do think they're operating in a vacuum. I don't think that there's a central government that is in essence making decisions to say this is what we're going to do next, These are our objectives, this is what we want to achieve in order to get the upper hand. So it
is going to be interesting to watch. At what point do they have the ability to name a government, and then even if they name it, does it have any control Given the amount of destruction that's occurred to their network, Do they have the ability to control their military or is their military pretty much now in isolated bubbles doing
what they think are best without any centralized control. And that has a danger all to itself, But it also means that they're not going to be unified in objectives to be able to try to disrupt what the coalition right now is trying to accomplish.
Major General, I wonder what we're learning about the nature of modern warfare in terms of the way that drones are being used and deployed by Iran and the asymmetry and pricing. Right, these drones are cheap, they are multiple, and they are quick to produce, and at the same time, some of the missiles that we're using to shoot them down cost tens hundreds of thousands of dollars.
I mean, how is that mismatch playing out? How could that.
Be something that shapes the nature of war going forward.
Yeah, you're absolutely right, Lisa, that we the US have to figure out a better way to do this. We've got to figure out a cheaper way to do this. It doesn't make economic sense to do what you've just.
Described with.
Million dollar missiles shooting down hundreds of dollars drones. So it was fascinating to me to see that President Zelensky had offered to help us figure that out better if and help the Israel figure out out better, if they could convince and the Middle East could convince Russia for a thirty day ceasefire, so who knows that may happen?
Well, Major General, the way that war is being fought is so different. In this case, there's a concern that retaliation could come in the form of cyber attacks or other.
Types of disruption.
How are you monitoring that given the fact that it could be kind of one off events in different places.
How well protected is not.
Only the US but also other Middle Eastern countries against that type of attack.
I think we're pretty well protected. I mean, there's no way that you're going to get one hundred cent protection. But I think let's remember that even though this is a four day war that's just been on now, cyber attacks and penetrations have been a serious threat for years
and buy and large. Even though Iran has a capability, their capability pales in comparison to some of the other capability of nefarious actors that are out there in the world, who certainly could insert themselves into this in a disruption type style, but I'm not sure it's to their advantage. It appears at this point that the Chinas and the Russias and the North Koreans are content at this point to sit on the sideline and watch this play out,
and that's our advantage. That happens if it broadens and they become part of what you're describing, you know, a cyber type offensive defensive war, then that does complicate things for everybody. But I think we have a better defensive architecture. They probably we're willing to advertise for obvious reasons.
Stay with us.
More Bloomberg surveillance coming up after this. Of course, the main focus this morning remains on the rising tensions in the Middle East. Shipments of oil and other goods passing through the Straight offorll meerc have come to a virtual standstill. The Flexports CEO Ryan Petterson, writing, what began as a regional security crisis has now become a direct disruption to global supply chains. Ryan joins us now for more. Ryan, welcome to the program, Thanks for making time for us.
Just how much capacity have we just taken out?
Well, on the container shipping side of things, you see, there's sixty seven ships that are inside the strait.
Of our moves right now. A lot of those are smaller ships.
So it looks like zero point six percent of all the container shipping capacity and the world has taken out. And that is the equivalent of the idle fleet today and is one of the main ways that capacity can be controlled to kind of keep prices in place is
if there's too much capacity, you idol ship. So it's a bigger deal and it sounds and what's going to really play out here is that the major container shipping lines and I've spoken to three CEOs of the big ten ocean carriers in the last forty eight hours that most of them have either paused bookings to the region or really diverted. They've all stopped shipping inside the strait of form moves but many of them and said, hey,
we're not going to take any bookings. And so what that means is these containers are going to sit at ports around the world, especially in East Asia, China and Southeast Asia and not move. And so you're going to start to get real congestion at those ports. And we've seen this movie before where that congestion can lead to spikes and prices and all kinds of problems.
So around let's talk about that. Some people reflected on the Energy Shark of twenty two the conditions coming out of the pandemic.
Are there parallels here? For you?
I mean, you know, the history always seems to rhyme, and it is about that congestion and how it flows through the supply chain and builds up in unexpected places.
And now it all depends on how long this lasts.
If it lasts for a long time, you're going to see major reroutings.
In fact, In fact, Flexport's.
One of the largest providers of ocean freight in the world, and we built this new product called Atlas. It's Atlas dot flexport dot com where you can monitor all the ships in real time and see where they're sailing. And so it's actually going to be a big challenge for us to see can we keep this thing up today as the ships get diverted, as services are less reliable.
We have seen that movie before, so yeah, I would expect to see it the services start to degrade and be more difficult to operate run.
You've got great visibility on these things, so says Domino start to fall. Are you thinking about secondary bottlenecks that might emerge as well?
And where might they emerge?
Yes, I mentioned a few of those in unexpected places like congestion, but you can see pricing be a global phenomenon here.
Ocean freight prices.
We already we're right in the middle of contracting season.
It's just starting to kicked off.
And all the ocean carriers have told us this week, not all, but most of the ocean carriers and I think it'll be all pretty soon, have told us that all previous discussions on ocean freight contracts for this year out the window, that there's too much uncertainty, and they expect prices to go way up from where they are today. We're already hearing rumors of five thousand dollars a container from China to the US East Coast, which that's almost that's more than double where it's been for the last
few months. So yeah, we're already seeing big spikes and that will lead to all kinds of secondary effects.
Right, some of that, as you know, it might just be a reflection of extended transit times as well. Could you give us an idea as some of this traffic reroutes what the extension to transit times might be for say, traffic between Europe and Asia.
Yeah, well, then in the ocean market, it's really just what which of these strings these services call in.
Jebalali's the ninth largest port in the world.
Abu Dhabi has a large poor there's several other important ports within the inside the Strait of Barmouth, So the first thing is okay, which services call there. Those are going to be heavily disrupted in because they're gonna have to stop and unload all of those containers. One of the Ocean CEOs I talked to you said they were going to unload it Oman. But of course the port of Oman got hit with a missal yesterday to a
ship near Oman. So it's really difficult to say exactly how each carrier is going to reroute things, but that will for sure lead to service issues.
Let's not forget the air freight market.
Whereas the Middle East is a major hub for air freight, we estimate around eighteen percent of all the global cargo capacity for air freight has been taken offline just temporarily.
We haven't seen planes get shot down.
But temporarily, and a lot of you know, you have Emirates and Cuts are at the hot All of these are major cargo airlines that operate in that region, and Asia to Europe flights tend to go over either stop in the Middle East or fly directly over Iran, so just big disruptions to the air freight market as well, and there it's a relatively capacity constrained market. In general, you can see huge spikes in price from a small disruption and capacity.
This is the bloomberg S Events podcast, bringing you the best 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.