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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. General Karen Gibson of Academy Securities writing, as long as Iran retains the ability to contest astray, we could face enduring challenges to navigation. This may not end until we have an enduring diplomatic solution. General Gibson joins us now for more general Good morning, good morning. How much closer are we to that diplomatic solution.
Well, I think the fact that there's an exchange of points, obviously, that we continue to talk, and that now we've paused and we'll weep forty eight hours to hear what Iran has to say. That's a positive development. It will be interesting to see what Iran has to say, and this is kind of it sounds a bit like what Iran has asked for to decouple. Let's address the navigation issues first and then get into the details of the nuclear negotia.
How difficult will that sequencing?
Big?
I think depend on a couple of things, And of course I don't know what the details are in this one page memo. Do we retain the blockade until we get a nuclear agreement or is this just about getting ships in and out.
Of the Gulf.
When it comes to the straight up removes, why would Iron be willing to give up that leverage because that is really their one piece of leverage over the United States and the rest of the world.
So I don't see how they even give it up. I mean, so in what I wrote that you quoted, it's their ability to contest. They don't even have to control the strait. They just have to have an ability to contest and make it more dangerous periodically, and as long as there is a drone within range of the straits, I think they will retain that ability to contest the straits if they choose.
Even if we are moving into a phase where there's diplomacy, and they're going back and forth with these memos and then potentially even a meeting. They will just still try to maintain this ability to contest it with drones or whatever they have speed boats.
I don't mean to say that they'll actively contest it. I just mean it's hard to eliminate that ability. And I think as long as there are there's positive progress for them economically in terms of lifting sanctions, in terms of prolonging the negotiation for a nuclear deal, it is in their benefit to demonstrate good faith into allow ships through. But they'll always, I think, have that ability.
Last night the President put out a truth social posts saying that he was pausing Project Freedom. That's a humanitarian effort. Why would he pause it?
I think yesterday's or I guess it was now the day before. The initial Project fre Freedom mission was interesting, again, like so many other things from a narrow military perspective, tactically successful. We safely escorted ships through Iran demonstrated there could be a cost for that kind of movement with their strike on the port in Fugyra for the Amoradis or hitting another ship or two, and so I think
there's a desire to. Let's see if we can negotiate something that will ensure additional safe passage rather than do these contested navigation the results in strikes elsewhere.
How important is China to all of this, given the fact that earlier this morning we had an official Chinese statement say that they were urging Iran to discuss this diplomatically and prevent any kind of resumption of kinetic warfare.
So certainly it's very much in China's interests to have this safe navigation through the Strait because they receive so much of their oil and petrochemicals, not all of it, not even the majority, but they receive a lot of it through there. I think they have an ability to influence Ran because of the tremendous amount of product that they buy from them, But I don't think they want to own Iran's response. So we also have the she Trump coming up, and I'm sure this will be a topic.
Well, I just want to tie this all together because until now we really haven't seen many official Chinese statements other than that they hope that there's restraint in all sides and that they never enjoy warfare, et cetera, et cetera. Otherwise, there's been pretty much of a back seat. A lot of people have been wondering where they're playing in this
the speculation on various things. At this point, though, do you think they are a more key player because of the upcoming meetings with g and Trump and because of some of these backchannel communications between China and Iran.
Certainly, I think the She Trump meeting raises their importance in this discussion, and it will color much of the discussion that will occur between those two leaders. And perhaps there's even some leverage they may use in trade negotiations. You know, their ability to influence Aron is something that they could offer as the two leaders discuss other issues.
Headlines like this will certainly incentiviize things this from Bank of America just Mamsgay. The TI rates as follows, the summer of four dollar gas, not the four point fifty a gallon on average across this country will certainly lubricate the talks.
I would say in the weeks to come, they might.
Be lubricating some of the headlines and some of the dialing down of the rhetoric. Given the fact that oil prices in the United States had the highest average price is going back to July of twenty twenty two, heading into the midterms and heading into the summer driving season. This clearly is going to be on the minds of political operatives in.
DC, and it's on the minds of every American that drives past a gas station.
You see it.
That is a tax on American families every single day. And this is what really hurt the Biden administration and obviously Trump, who said he was going to bring prices down for American people, understands what's going into the midtermal life.
General and the seconds we have left. Clearly there is some optimism this morning. What is the language that you'd look for throughout this morning to validate signs of real progress.
Well, if ARAN is going to be silent for forty eight hours, we may not see anything, but I would watch to see their rhetoric. You know, do they say we look forward to reviewing this or do they reject it out of hand immediately?
Do they put out.
Publicly stay with us More Bloomberg surveillance coming up after this. Paul Donovan, the chief economist the UBS Global Wealth Management, joins us now for more. Paul, welcome to the program. We'd lovely reflections on the latest news. But first of all, just set the stage for us with the US consumer. How close were we to a consumption crunch.
Well, we're not out of the woods yet. I'm afraid what we are experiencing in the United States at the moment is, if you'll forgive the technical economic jargon, the wily coyote effect, we've run off the edge of the cliff. We're running through mid air. But we have not yet had economic gravity pulling us down. And that's because US consumers have been tapping into their savings rate to pay first for the tariffs and now for the higher gasoline prices.
So as long as consumers are using savings, we can carry on with normal levels of consumption elsewhere. But if that burden gets too much, if they're no longer prepared to continue to draw down their savings rate to afford these shocks to consumption from terrorism, from oil prices, then economic gravity exerts itself and we drop down into the abyss poor.
Typically, and that sounds terrifying, but typically when it comes to central bankers, they track a basket of goods for consumers. I remember a note you put out in the last few years a really important note about the frequency bias of the average consumer, that they pick one thing that matters to them and that shapes their perception of how high prices are. How's that going to shake their perception of how high prices are across the economy, and how might it change their attitudes to spend it.
Well, So this is where I think we need to make a distinction in the world of social media hype and sensationalism, that consumers are very focused on high frequency purchases and that shapes their political perceptions as well. We've seen, for example, President Trump's approval rating on the affordability crisis in the States is very, very weak, and that's reflecting this false perception that inflation is higher than it actually is. Because you remember the price of gasoline, you remember the
price of the Snickers bar. That's what shapes your inflation perception. The reality is, however, that consumers are saying everything's terrible, inflation is out of control, but they do still have the ability to go out and spend. And if an American consumer has the ability to go out and spend, they will go out and spend. And so that's what we're actually thinking, is this divorce between perception and reality taking place.
Well, this to me is the reason why a lot of people are talking about the idea of some sort of new regime for inflation where consumers can complain about it all they want, feel terrible, but they're willing to absorb it in a way that maybe they weren't before the pandemic.
Do you see that behavior.
Trickling out in something that companies are taking advantage of.
Well, I think certainly if we look at the US in particular, the tariffs would pass through to the consumer pretty much one hundred percent. Now, what I think we are seeing here is exactly the same thing that companies feel more confident about passing on the costs. We're not necessarily at this stage seeing profit lead inflation where they pass on the costs and then a bit more and
increase their margin. That's not necessarily taking place. But certainly I think consumers have been more willing to accept the higher prices. And that's because not just in the States, but in Europe and the UK and Japan. Consumer balance sheets began this year in actually a very strong position. We've had unusually good conditions for the consumer, and so that has allowed them to weather the shock a bit
more readily. If consumers have been more constrained, then I don't think they would be so willing to accept the price increases.
Do you think then that we could see some sort of broadening out, some sort of consumer lead rally taking over from what we've seen, which has been dominated by tech.
Well, I think certainly earnings growth for the time being for consumer companies is not going to be too adversely affected. If you can pass on the cost one hundred percent, then your earnings growth isn't going to be affected unless we get to that point where economic gravity suddenly kicks in the consumer says, actually, you know what, I'm not prepared to keep cutting back on saving. I'm going to cut back on consumption. And that might come either because
there are concerns about job security. It might come because you start to see dramatically higher oil prices because of physical shortages around the world. It's not going to come I think in the next few months. It's something really I would be pushing out into late summer early October. Perhaps at the outset. That would be something which would then start to damage the volume of But right now, consumer companies are generally in an okay position.
I would argue stay with us. More Bloomberg surveillance coming up after this.
Chris Harvey of CIBC writing ATTACKO has catalyzed a sharp shift from risk after risk on. We believe geopolitical risk has crested, but risks are still lingering. Chris joined to stand for more. Chris and Mornic, You've had a great year so far. I'll say it for you. I remember catching up with you at the very start of the year and you said this market was sleeping on a lot of macro risk. Then we had to drop off
in the equity market. I think it was March twenty seventh, you dropped a note and said, we're interested in adding some risk here, just slowly. Then this market's ripped. Where are you in the team now?
So right now you've had a lot of catos play out.
Equity markets are we're thinking more consolidation, We're thinking more you buy the room or you sell the news.
Markets are ripping right now.
That's great, But as you were talking about, we don't have a deal done just yet. Things are not moving through the straight of horror moves. Oil is not just going to it's dropping today, but gasoline prices are not going to drop that quick and until we have a deal done, it's hard to see this. In addition to that, that keeps the FED on hold, and so we're just thinking the short term, it's a bit more consolidation. We like the market longer term, but near term consolidated.
Help me understand from where? So is it faith? The index level?
Rally?
Say the tech win is of the last month. Faith the rotation we're seeing so far this morning?
What is it?
John?
It's not so much fade, it's just okay, we had that directional move we saw we thought there was ten percent upside here. We got a lot of that. Now it's about stockpicking right, get the portfolio right. What we've been saying all year long is hey, stay away from those the contrarian bet. What you want to do is you want to buy things that are working. We're still of that opinion. But right in you need to have good balance sheets, you need to have good fundamentals. Right,
you have to marry the two. So focus that in your stock selection, in your portfolio. That's where the attention should be.
So do you think that semis are expensive or a buy?
What we think is I'm not going to answer that directly.
What we think, Come on, Chris, his friends.
You and I had this conversation earlier this year. It's like, don't go bond and fishing. A lot of semis still have positive price momentum, they have positive earnings, they have good sentiment. Will we say by them, Yeah, they should be part of the portfolio. Part of the portfolio should be things that are working part of the portfolio. What you should be doing is staying away from things that are broken. The economy is not going to value out.
You have to have things that are working in the portfolio, but you also have to have good fundamentals, and you have to have a good balance sheet, and semis match up some of that.
Some people have noted that this rally feels a little bit different in earnings just because the earnings have come in so strong, and frankly, it's so broad based. It's not coming just from the tech sector. Deuid you Bank pointed out that all eleven top level sectors are expected to show your over year earnings growth for.
First time in four years.
Does that give you confidence or are you saying this is a one off for easy comps and a couple of other reasons say away.
So what we've been saying is, hey, go with the AI beneficiaries on the bounce, go with the AI beneficiaries. You can get them in utilities, you can get them industrials, you can get them in tech. That's a pretty broad base. The one thing we're still not there is we're not there on small caps, right. We're not negative, we're not positive, but we need for me, we're not going to hit everything. What we want for small caps to work is we want race to go down. We want a stronger economy,
and I'm just not seeing that yet right. And what we saw in earning season is if you're AI or AI adjacent, great, If you're a general cyclical, you're saying, yeah, I'm not really sure about what's going on. And if you look at what's happened to small caps since the middle part of January, they really have an outperformed, or they've only outperformed by a little bit.
I'm still worried about the back half of the year for earnings and earnings growth.
We need the FED to get involved, we need race to go lower for for that to really work longer.
This is what he and Chris, because I did ask if you'd fade the rotation as part of the story, because you're seeing that our performance on smalls this morning, small caps up by more than two percent off the back of this moving crude, off the back of this move in yields. Would you fade that? Then specifically, I.
Would fade that.
Here's here's something that's really interesting. So we're going to have the Russell rebalance in June. If you look at the top names in the Russell, I think they account for about twenty five percent of the return.
You're going to graduate those out.
Okay, So what's going to drive small caps at that point in time? Again, you're going to have to have the macro on your side. And for the macro to be on your side, that means a then that's more accommodative rates that are lower and an economy that's accelerating.
We just don't have that right now.
I've got to watch you that. Outside of tech, what do you.
Like again, it's the I don't mean to be evasive, but it's the AI beneficiary. So in utilities, it's more the gen co companies. In industrials, it's the one the cooling companies in tech.
It is.
It's the secular themes.
It's more than secular themes.
It's really it's hard to get involved with these general growth themes because we're they're saying, if you listen to an earning season, hey, we're not sure. Hey, it's unclear, right, And the economy is not accelerating at this point in time.
When it comes to the FED, though, they need potentially a resolution in the conflict in the Middle East to understand where inflation's going, right, they do so for small caps. Actually it's reliant on what is going on abroad.
That's right.
So here's the bold case, right that we get some sort of resolution between the US and Iran. The worst FED can say, hey, this is a supply shock, we.
Can look through it.
FED funds are too restrictive at this point in time, we need to lower them. And suddenly small caps begin to work. Small caps begin to work, the consumer begins to work. Why because helocks become more attractive, Auto loans become more attractive, and then the economy begins to accelerate, and we can start talking about the housing market getting involved, and the housing bill that hasn't become a larger yet.
I keep thinking about what Max Kettner said at the beginning of the show, which is that this equity market is increasingly independent from the economy and is increasingly economically independent the S and P five hundred. At least if the FED were to cut rates because they have an excuse to do so, and that would spur some sort of rally in small caps and beyond. Would that cause a bubble in big tech that seems so far to already be flying without that kind of stimulation.
Yeah, I don't.
Know if it causes a bubble in big tech. But can we talk about a melt up? Yes, we can talk about a melt up again. What would happen is tech is working. It would continue to work, but now you're going to start to bring in all those economically sensitive names and oh, by the way, activities should start to kick off. The one thing we haven't talked about is the credit markets are very, very healthy, very strong.
We should see more mina activity.
In addition to that, there are all these storied IPOs talking about coming to market. We could see that and suddenly we have risk being recycled and a very strong reinforcing risk on cycle. Could that be a melt up. Could that be I don't think bubble, but could that be a melt up?
Certainly in the back half.
Of the year, this move in creates oupen We just saw a ninety six handle on Brent just moments ago at the front end of the future's curve.
Ninety seven this morning. Yeah, and it's not just the front end we keep talking about that.
The back end also seeing a rally.
Also the other way.
Also seeing a selloff. I guess it's the right kind of sell off for this market. When you take a look at Brent crude, people are expecting a resolution because both sides want a resolution. It takes a little bit more than that, but that seems to be the tone coming out, at least from Iran.
And the units.
Just tracking the oil majors in the pre market. Excellent Exon closed February at one fifty fifty before this war started. This war didn't help. The end of this war might hurt. The stock is down to the pre market by five percent. It's now trying to get one forty seven. In Ettie Trink, you.
Saw concerns about what it will cause to rebuild some of the facilities in the Middle East and what has caused some of their earnings beats. It has been the higher prices. If prices go down, well that's a huge tailwind for the profitability going forward.
Exactly, the oil majors were just going to earn, going to track WTI potentially lower. I'm shocked at WTI now is below ninety dollars a barrel.
We were talking earlier.
This week about one hundred dollars a barrel, and for really WTI one hundred dollars a barrel. Husband the line in the sand for this white house, and I think a lot of people have been telling this white house that may is when the physical market is going to get incredibly tight or drawing on inventories, and you might
actually see the futures market catch up that physical market. Well, when you have optimism about potentially a peace negotiation, the straight opening that is going to quickly reverse things.
Hey, Chris, just to find a word on energy and that snacked a great start to the year. Start and then where these things got difficult when the world started. So just walk us through your thoughts now.
So the thought is that people have been parking themselves. So everyone thought that gold was a geopolitical heads they realized that energy is a geopolitical headge So with this we start to see the flip back to gold and away from oil, and you could see some really big moves between those two commodities.
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