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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. We begin this out with stocks looking to recover as geopolitics fuels major volatility. Sebastian Page of tro Price, writing this the bear case is a prolonged war, prolonged closure of the stratiformers, and escalating attacks on energy infrastructure. Our Brent range then would be one hundred to one twenty. Sebastian joins us now for more. So, welcome to the program. That's the bear case? What's the base case?
Our research platform has been on overdrive over the weekend, as you can expect, and I've been reading and reading the research from our analysts, and John I can say there is no base case. It's extremes on both sides. I hate saying the range of outcomes is wide because it always sounds like an out But we have two scenarios,
one short, one long, and the short scenario. You know, I think the Wall Street Journal reported that this is a bit of a race in terms of the missiles and drones from Iran and then the defenses from the golf countries that both are running out. And then you just reported on news that you know, there's some I don't know if you call it rumors or something else, but there's some news items that are pointing towards the short scenario and then the long scenarios an escalation, and
you just outlined it. So, John, there is no base case. We're looking at scenarios. That's the only way too this right now, between short and long. And what we want is, you know, geopolitical hedging in the portfolio, which we've had for a while, so we remain long relasset equities and including energy but also metals and mining and commodities.
Scept went to bonds fits in as we can front a shock like this one.
Yeah, you know, that's tough question. I'm kind of I'm a bit of a correlation NERD. And one of the studies I've done is a study of a correlation between stocks and bonds. And if I were to boil it down, because we talk and I know in surveillis we talk about this about stocks and bonds and the stock bond correlation, you can boil it down pretty simply. If you get an inflation shock, both stocks and downs can go both
both stocks and bonds can go down together. If you get a growth shock, then I still believe and the evidence is there that treasuries remain a hedge for a groad shock. Now, these things are always ingrained, so it's which factor dominates well if you look at the current situation,
and inflation risk is clearly there. One of our analysts studied several oil shocks and he calculated that peak oil on average occurs twenty three days after the beginning of the attacks or the military military intervention, and then that oil rallies on average twenty seven percent. Again, these are averages, a mix of extremes. The range of outcome is wide. As much as I hate saying this, so it's it's
a matter of hedging. And you'll see that in those cases when oil is driving and when inflation concerns are there, and you saw the one year inflation swaps go up around these events, well then bonds are not the same hedge as they used to be, and you have to have alternative hedges in the portfolios.
Seast how important.
Is nonfarm payils and Friday? And light of this, given the fact that a lot of whether this is an inflationary shock or whether this is potentially a shock to grow is predicated on how much momentum there was heading into this, I.
Think the geopolitical headlines will continue to dominate into Friday. Non Farm payrolls are always important, no single data point matters, but we still debate employment quite a bit in our Asset Allocation Committee, especially in the context of AI. I believe the unemployment picture is okay in the US for the time being. You know, we're still at four point three percent. I always remind people that the long run average unemployment is five point seven percent, So the economy
in the US is humming. Of course, if you get a tax on the consumer in the form of higher gas lead prices, and then that can change the picture, but that won't be in the non farm payroll numbers on Friday. So I guess, Lisa, I'll say moderately important. It's part of the mosaic, and we have to I like the question because sometimes we get carried away with geopolitical headlines. Of course, this is a major event. I gu it's just like it's in some ways. Another word
I hate to use is unprecedented. But I'm using all the words I hate to use this morning. But you know, growth and inflation are still major forces driving the US economy, and if we're running at five five and a half six percent nominal growth, stocks should do okay. And by the way, is a nice study by Merrilynage that shows that about sixty years of geopolitical shocks and seventy percent positive stock returns after a year and an average of
nine point five percent. So that kind of good sets this narrative as you buy the dip, and you you know it's a buying opportunity when you get a geopolitical shock. But I think the picture right now is more nuanced than we're advocating for hedges, including in the stocks portfolios, including real acid equities.
Sebastian, I'm going to give you another word that you probably hate using.
Is this market virtually.
Untradeable based on the lack of fundamental backing behind a lot of the potential moves.
Yeah, I'm tradable. Here's another one, Lisa, thank you. I think the markets are deep and liquid, and we talked about treasuries. I mean those can remain ahead if we get a growth shock, which I don't necessarily expect.
That's not the base case.
You see oil markets behave you know, we're already in the eighties and crude. It's been interesting to follow the oil price reaction on my Bloomberg terminal. You know, from this idea that will escort ships around the Strait of Hore moves and that will ensure them, and then you know, you saw oil prices come down a little bit. But then this morning it looks like, you know, we're back up, and so you were just reporting about Wall streets skepticism.
I think this is hard to do, but overall markets are behaving, Lisa.
So we're confronts in a lot of sharks and have done over the past month or so. I think there's three broad shocks, AI disruption being one, the second being the JIT is in credit, and now the third is the energy shock over the weekend. I'm interested in two and three and the interplay between both the credit jitters need a rate off set. I just wonder how you were thinking about the prospect of the rate offset being constrained by the story developing, which is three, the energy shock.
We're not getting a loosening of financial conditions. We're getting a tightening of financial conditions at a time when credit git is a heightening. They're not de escalating, And I just wonder how you think that's going to play it in the weeks to count.
Yeah.
Look, the major risk for multi asset investors is that the treasuries don't behave as you need them to be when stocks sell off. But let's I think I heard Lori Calvaccina say on surveillance earlier this week, let's all take a deep breath. Right right now, stocks are doing okay, and I think there's this narrative that geopolitics won't drive everything. You know, John, I have you have a AI tool
now on the Bloomberg terminal. It's in beta version, right, but I was using it just for fun, and I thought I mentioned it on the show and I was looking out Okay, Wester relationship between oil and stock prices, and only six percent of stock price volatility over time, not during specific events, you know, can drive the S and P five hundred. So it's a lot of different factors splaying all at once. AI is a huge debate on our Asset Allocation Committee, especially in terms of what
it will do to employment and how fast. Some of us are saying, look, you know it takes a lot of resources to clean your data and tag your data and upgrade your infrastructure, so maybe actually hiring people to deploy AI. This is just me being controversial. But then we all know that over time it can replace jobs,
and how is this going to play out? I was driving to work earlier this week listening to Bloomberg Surveillance and my drives about thirty minutes Jonathan, And it was thirty minutes I got to work, and there was no discussion on surveillance of AI because of all the geopolitical risk, right, and so as wow, they haven't they haven't talked about AI or the FAT even once, and I'm at work already it's been thirty minutes. But those factors, let's not
forget them. They still matter very much in portfolios and Before all this happened, we saw industries fall one after the other, which we ended up debating in our Asset Allocation Committee. It's this idea of dispersion, John, and that's going to continue dispersion across industries. Our portfolio managers like healthcare stocks. It's interesting they like technology, but they also like materials, and you know, even energy stocks.
Stay with us. More Bloomberg surveillance coming up after this.
So here's the lacest this morning and Givran reportedly coming to the negotiating table. The New York Times reporting Iranian intelligence operatives approach the US government over the weekend with an offer to discuss terms to end the conflict. John liber if you raise a group rights in the following, the Iron conflict will likely take her off within two to three weeks as the US and Israel successfully to great Iran's military can abilities. John Jones, Now for more,
John Michael to the program. What gives you the confidence that we'll end this in a ta to three week timeframe, Man.
I don't have a ton of confidence that this is going to be over them, but there is an issue where the military capabilities just aren't going to be what they were when this whole thing began. So the Iranians eventually run out of ballistic missiles. We just heard about the large number that they've been launching against other countries
in the region. Eventually, you know, they do have a large quantity of drones that I think the US is going to have trouble getting access to before they're launched, which means that a run's defensive offensive capabilities will remain fairly aggressive for the for the immediate future. But at some point this is going to taper off when they start running out of ballistic missiles and the US starts to run out of its ability to defend its own
ships in the region. Now, I think if you listen to what Donald Donald Trump has been saying, he's been pretty explicit that there's more to come here, that this is kind of the initial phase of these strikes, and we think this probably escalates over the next several days to maybe a week or so as the US tries to end this quickly. The US does not want to be in this war for the long haul.
Now.
Of course, they're going to remain committed to the region because what they need is regime compliance, not regime change, and the way that they enforce regime compliance is by maintaining a credible threat to bomb whoever.
Is coming next.
But we think the most intense part of this fighting likely tapers off in the next few weeks.
How concerned are you, John about the asymmetry and cost between what the US is deploying and what Iran is deplying. And I'm thinking about all those drones that you said are going to be hard to identify before they're launched. The US is shooting them down with million dollar missiles. Each of those drones is relatively cheap to produce.
How much of a.
Problem is that.
Yeah, it's a huge problem. I mean the advantage here, of course, is the US is industrial capacity, which over time is going to be able to make sure that those ships are resupplied at any cost. Is trying to increase the defense budget. It seems like Congress is more or less willing to go along here. So the US has a large store of production capabilities that it can draw on with time. Iran doesn't, and it won't. It probably has these stocks of drones, it's got these stocks
of missiles. It will run out of them at some point, but they can cause a lot of damage in the meantime, and that I think is the major concern for golf partner states around Iran right now, less of a concern for Israel given the distance that Israel has from Iran.
John, just quickly, how did you and the team react when you heard the president's vague? I would say, framework to have traffic through the stratiformers.
You know this could work.
I mean, if I'm a shipper, I don't want my tankers destroyed or sunk, so it's obviously quite risky. But the US is now putting taxpayer money behind ensuring that these ships can get through. I think we have to wait and see what the details look like. Legally, it seems like he probably has the authority some flexibility the DFC in order to do this. But I think that you know and clearly they've thought. This isn't a totally
slap dashed plan. I think that they actually do have some reasonable planning behind this that suggests they will be able to compensate for losses. The question is are shippers willing to take those losses and then need their risk.
Stay with US? More Bloomberg surveillance coming up after this.
If on move continues you'd slightly high for a third consecutive day, inflationary fairs making a comeback, and some people out there trimming Federae cup bets.
Feder Reserve.
Governor Stephen Myron, I'm pleased to say, joins us around the table for a conversation about that and a whole lot more.
Governor Maron go and Mornick.
Good morning, Thanks for having me, Thank you for being here. Sir.
Let's start with the shock over the weekend. What is the prudent response for policymaker confronting a shock like the one playing out in the Middle East.
Well, at the moment, I think it's too early to sort of have any firm views. As a result of that, oil's gone up. But the bigger question is does oil stay up or does it come back down? And that, of course will depend on how things play out. But even that said, even if oil stays at these types of levels, to me, it's difficult to get a lot
of read through as a result of that. Sure, oil will feed into headline inflation, but the evidence that it feeds into core inflation in any sort of material way unless there's a huge move in oil prices, I think is quite limited, so it's difficult for me to get very excited about a policy implication of what's happened thus far.
So some people come on the producgram spike to Leister nine said, these Fed Reserve officials might be conditioned by the post pandemic experience coming out of twenty one into twenty two and the inflation spike then and the energy shock that developed at the time emin thing in Russia. It's this different, I mean, a different place.
I think it is.
I think that attitude is a little bit of fighting the last war, and I think that the Federal Reserve for decades has had the view that you know that headline headline inflation shocks like oil are best looked through, and you sort of focus on core inflation because it's indicative of weird inflation is going to go in the future, and you focus on the labor market, and that type
of reasoning lead you to look through an oil shock. Now, of course, what happened in twenty twenty two was a bit different because the other policy settings were different.
Right.
Don't forget monetary policy was as expansionary as it had ever been at the time. Fiscal policy was injecting trillions of dollars into an economy that was recovering thanks to vaccines and medical medical improvements and COVID passing on its own, and so the policy environment was very different, and so it was very easy for a slightly inflationary shock to feed through into the broader economy and create this type of persistent inflationary problem that the FED dealt with.
We don't have that right now. We don't have.
Fiscal policy that's slamming on demand. In fact, if anything, supply is moving out quite aggressively, and monetary policy is still modestly restrictive in my view. So the policy settings, the economic environment is different. To focus on that as you described moment ago to me is fighting the last war.
That was a unique circumstance.
At the same time, some people have argued that the January jobs report raised a question about just how weak the labor market actually was. Even Governor Chris Waller came out and said, Okay, now it's a coin flip for whether we should cut right to the March meeting.
If we do get.
Confirmation of that strength with the February payrolls report that we get on Friday, would that make you rethink whether March was an appropriate time to cut rates.
So look, for me, we've got two years of a trend, two plus years of a trend of gradually weakening labor markets that's sort of setting in twenty twenty in twenty twenty three, it's way too early to reject the notion that that trend continues based on one or two labor
market reports. And when you look at the totality of labor market data, there's still evidence to me that it needs more support from Montaria policy when I look at things like employment levels of young folks and folks without college degrees, When I look at people who areemployed for long periods of time, long term unemployment, to me, that's indicative of theirs still being slackened labor market that Montaria
policy can accommodate. So I think it's too early to reject the notion that a two plus year trend is over on the back of one print.
Are you concerned though, that right now the market is moving the way that any rate cut would be perceived as heightening long term inflation pressures just by virtue of some of the supply shocks that we're seeing. And frankly, the fact that people do see strength re emerging in certain pockets of the economy. I mean, how worried are you that a rate cut in March could be potentially counterproductive and cause the.
Long en of the yield curve to rise?
Yes, So if you saw evidence in inflation markets that markets were concerned about longer and inflation expectations, that's the type of thing that would give me pause.
But I don't see evidence of that so far.
Short run inflation expectations have come up quite a bit, and you look at CPI swaps, but that's just because the mechanical read through of oil prices into headline inflation. When you look at longer tenors, there hasn't been much of a move, and so as a result, I don't get the impression the market is concerned about longer and inflation expectation.
You've used this price modestly restrictive a few times in a conversation already. What is modestly restrictive to you? Can you put numbers on that kind of thing?
Yeah?
I think we're probably about a point above neutral now, and so my view is that we ought to start by getting getting back towards neutral.
So the one hundred basis points and reductions. You want this year is not to become accommodative. You believe it's to get back to a neutral setting.
Yeah, pretty much.
What would it take for you to start thinking about the need to get accommodative?
So I would, I would want to start thinking about inflation coming in below the target, which is a risk that I've highlighted if I end up being you know, I've I've emphasized.
At risk, governor, what would be the source of that risk to get below target inflation?
Sure, I've emphasized housing markets a lot that I'm expecting a faster convergence down of renewal rents to new rents, which will lead the housing inflation to converge quickly to new rent levels. And there's reasons for that that I've talked about at length. I don't need to repeat them here unless you want me to. But if I end up being right about housing and wrong about tariffs, and so I've also argued, I've also argued that I don't
view tariffs as driving goods inflation. You know, I don't view that because imported prices, imported good prices are not inflating faster than all good prices, which is what you'd expect to see. And given that backdrop, I don't view
tariffs as driving and as driving goods prices. So if I end up being right about housing and we get a sharp desileration in housing this year because of quirks of how housing is measured and because of dynamics of renewal rents versus new rents, and I end up being wrong about goods prices and goods inflation comes down quickly over the course of this year, then we're going to undershoot.
We're going to undershoot our target.
And you think that's a risk we need to get ahead of.
No, I'm not saying we're gonna we need to get ahead of that.
That would get me to argue we go balloon.
Conversation we're having about how preemptive you might need to be in a moment like this when it's on the committee of thinking let's wait and see, wait and see what happens. Lisa was asking, how would you vote the March committee meeting. Is this a moment to wait and see or a moment to act?
No?
I think I think it's a moment to continue acting. I have pulse I have projections for unemployment. I have projections for labor markets, so to my for inflation, so to my colleagues, and I believe it's appropriate to continue acting in accordance with those projections until you get evidence
that you have to change your projections. And thus far the evidence from event from events over the weekend haven't led me to change any of my forecast for the labor market for inflation over the medium terms, so it's too early to respond to them.
You said that you think that the new story is a point below the three points seven and five where we currently are, and I'm just wondering how quickly you think it's important to get to neutral based on the uncertainty, based on the disagreements that people have about a where neutral is and be how things are going to transpire.
Yeah.
So last year I was voting for fifties because we were higher away from it, and then as we made progress cutting and getting closer towards neutral, I felt it was appropriate to say, ok now, I'm okay moving in twenty five clips. I prefer to still continue moving in twenty five clips until we got to neutral and then to reevaluate because at the end of the day. I don't see an inflation problem in the United States now.
Of course, if we get evidence that what's happening in the Middle East is bleeding through into broader inflation, then that would change my mind.
But thus far there's no evidence.
So Kevina, what would that evidence look like? What would you look for? Specifically?
I'd look for inflation expectations starting to move as a result, starting to move on it, or consume avice, I tend to think that the market based ones are more important, are more important to me, or evidence that or evidence the economy is starting to in some sense overheat again. Then I then I would be comfortable sort of changing that view and moving more slow, moving even more slowly. But at the moment, you know, I see, I see it as appropriate to continue continue cutting.
Do you have any company on the committee?
Uh, you know, I can't speak for an I can't speak for anyone else. And I think most people probably end up sharing my view that it's too early to draw dramatic conclusions.
As a result of that, we're.
Coming to a very different conclusion about what to do. As a result of not drawing conclusions. They say, Okay, well, then don't move you're saying keep moving.
So I mean that's this they started.
Every everybody is I think people are generally where they were last week, right, And it's just too early to change your mind based on based on what's going on, my forecast for inflation and employment and my view call for continuing continuing industry cuts. Other people disagree, you know, and so they also haven't haven't moved yet. But as we get information about.
It, TIMI thinks the words right, So the credit JED is one, an AI another. I want to squeeze in both then if we can, So let's start with the AI. Jet says, so Block, a fintech company came out in the last week or so and cut almost half of its staff, and they set them make it a mas, save AI productivity bad as a policy, make it for you.
Do you consider that noise or signal?
What is that?
So that's you know, that's one, that's one company. It's indicative of what you could have more of. But this is just how this is how productivity gains and technology work. They allow you to produce more with fewer, fewer inputs, with fewer, fewer resources. And so if you were able to produce the same amount with fewer workers and less capital, then your productivity goes up. That frees those workers not
necessarily into unemployment, but to do other work. And this is this is this has always been the story of human technological progress and the human economic growth. We create new technologies, they destroy some jobs, and then they create new jobs.
They free people to do new activity.
I don't think it's different this time.
Uh, you know, I don't have a reason for.
Like I said before, you know, it's too early projected to your trend of of of labor market moving in a gradual cooling direction. It's too early to reject tens of thousands of years trend of how technology works in the economy.
We've talked about.
These sources of risk and one is Spain the geopolitical problems. This is another two and the third one is connected in some cases to what's happening with AI. It's also the credit jitters as well. So this riises the question about potential financial risk for you and the committee. How are you thinking about things as they develop?
But just one last point, an AI, even as it destroys old jobs and creates new jobs, that is the type of that is the type of job transition that is typically accommodated by a central bank. Right, you don't want to prevent the new jobs from being created by having policy that's too restrictive. If you have an increase in job loss due to new technology, you have to accommodate that and allow the new jobs to get created instead of preventing it.
Do support what's developing and credit. Sorry, oh, what's developing and credit?
So look, you know, I am, like with vents in the Middle East, I'm not at the point where I have a strong read through from what's going on in credit into the economy.
I don't.
I'm not at the point where I think where I think there's any sort of policy response that's necessary or adjustment to forecast this necessary. One thing that I think is interesting about what's going on in credit is, to me, it highlights the potential shortcoming of our financial conditions and disease. We've got a lot of people who argue it's inappropriate to cut because financial conditions are so loose.
They've been arguing that for a long time.
But one hypothesis of mine that I'm exploring is that those financial conditions and disease aren't showing you what's going on in private credit because you don't get the marks for them, and to the extent that private credit has been a major driver of credit growth over the last half decade or so, that's missing from the financial conditions
and disease. So when we get these jitters in private credit markets and then say, oh, financial conditions are so loose, it's just because we decided not to look at the part of the financial markets that are tight.
So I do you think we are seeing it on warranted toynic of financial conditions so far?
Well, you know, sort of unwarranted is a bit is a bit of a heavy load, But I do think I do think it's it's I would be cautious about concluding that financial conditions are so loose when you're getting these things happening in private credit markets.
I just want to ask, have you talked to President Trump recently?
Not since I resigned, now since you resigned.
I'm just wondering how difficult it is to conduct policy with a huge unknown hanging over the committee about who is going to be the next FED sure and what this process is going to look like past April.
Well, I mean, I.
Think we have a pretty good idea of who's going to be the next FED chairman. We don't have a good idea yet of exactly when he will become the next FED chairman, but I'm hopeful that we get that type of that type of clarity soon. I think it would be I think it would be great to have that type of clarity gone.
It's a weird thing on the Federal Reserve and not knowing when you're going to ACCEP just sort of like there with an open ended calendar on what's going to happen next.
It makes it difficult to plant it.
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