Surveillance: Adm. Stavridis on Worsening Iran Conflict

Bill Lee with us on the comments of the Vice Chairman and the choice set forward. Let me start right with the immediate on a Friday, which is there will be a Friday soon, doctor Lee, where we get another jobs report in America. Alan Ruskin and Deutschebek really emphasizing in his note the importance of this next print on a weaker labor economy. How we is the American labor economy.

That's the key question, and that's the one that that I think Rich tried to dodge, but hinted to you that they were very concerned with because right now the weaknesses in the trade of sector and in investment of business fixed investment, and those are the things that are weakening around the world because of these trade uncertainties. The service sector is really struck quite strong, and that's the

bifacate economy we have. And what Riches was trying to say was, you know, even though we're not meeting our inflation targets, were still concerned about backstopping the economy. And and and they think that he said that was really interesting that you got him to say was our models are linear, but we the policymakers recognized nonlinarities. That to me says they'reybody to do fifty basis points. They just need the right clue and the right hint and the

right nudge. Let's go a little Matthew here. Then we talk about anertial forces physics. Envy in your world of PhD economis Clarada is definitive on this. Okay, that's the physics. Our listeners aren't living physics. They're living in the American reality, which is they want some need to do something. Can the Fed do anything? Or there are other institutions. You know, it's not the cost of capital that matters for business

to invest. They want to say I want to invest because I'm gonna make money, and I don't have growth. I'm not gonna make money. So they want to fit to backstop the economy and give them confidence that no matter what happens, they're gonna put the floor the pedals of the metal and and and also make sure the US economy and the global economy grows and to overcome the trade tensions and the restraint on investment. The FED is going to do whatever it takes, including multiple rate cuts. Well,

they're gonna do multiple rate cuts as well. What what is the what is the impact of a first rate cut and then that second rate cut, whether together or separate, What actually will happen? In order to build a confidence you can't be temped And so I think what what riches saying by saying that the policy makers are nonlinear means we've got to do something big to confirm the sense that we have the economy backstop. So we're going to do a major confidence is building gesture. Well, they're

gonna do a confidence building Jester. That's all great and well, but as he opened our discussion, he thinks it's a two percent economy. Now others think it may come down. It was and has been a two percentage looking forward, somebody listen to the interview, I didn't know. We're not sure where the economy is going in I think, and

that's the key to the order. The first question, which is if employment starts to kick over, that means that the metastasists into the service sector is showing up in the labor markets, and that will get them to move. Explain the internationalist moment I mean, I mean that special library, that little room with the original Federal reserved tables stuck in a corner. The books are overwhelming in that library, first editions of VVLEN, etcetera. Just extraordinary, um uh library.

None of the stuff in that library is what we're dealing with now right as as rich that we have that history, but boy, those tactics, that strategies they recommend no longer apply. When I was on the board staff, I used to sneak into that library to look around him.

It is so impressive. But all those theories give us the framework, but we now have to change the strategies of how to implement that framework in order to get the economy going, especially in the globalized economy where the e c B is is saying we're gonna do whatever it takes. The b o J has got negative rates. What do we as the US Federal Reserve do? We'll I I have like eight more questions, bill Leye, but I've got to go to the moment in Hong Kong.

You were one of the definitive experts on the actual business and economy of Hong Kong with your leadership at the I m F and basically setting up their Hong Kong Watch years ago. Your thoughts on the protests in Hong Kong. This is a Hong Kong that has been catalyzed and galvanized to worry about their independence. It wasn't

there when I was there and has suddenly developed. And one thing that you should notice is that people doing this are the young people, and they are concerned about what their future is going to be a generational so, Phili, thank you so much with the Milk and Institute. Their chief economis of are more than that out of Columbia and the good work of economics. This is an important interview on any given Friday, because over the weekend we

do what we do. It may be on a kitchen, maybe on the back deck, maybe in the car watching offspring play sports. You speak to Leslie Falconio or your reader literature and that of the UBS about what to do. It's this asset allocation game and it's important always and even more important now Leslie Falconio with UBS Wealth Management trying to figure out how to move the money around. Leslie, quite a week. Is this week adjusted your core asset belief? Let's say, I mean you you really hit the nail

on that. It's been quite a week, and you know, the market although was do wish going into the FED, you know, there's no question that the out the outcome was even more dovish than that we had anticipated. So this was the a dovish snow cut um in the scenario that we had had seen. And I think that for us that UBS, I mean, we would be the first to admit that initially we didn't anticipate the FED too.

We knew that they wouldn't do anything in June, but we also didn't expect them to do anything really for the majority of the year, given the fact that our second second quarter GDP was much higher. So you know, I think that the mark was definitely caught off a big guard in terms of the amount of the decline the doctrine, even though the median stayed stayed the same. Um, you know, what do I do with my money this week? Is it's it is its steady as she goes for UBS?

Or do you actually make a bond equity reallocation given price up, yield down in bonds. So we've we've an overweight equity to fixed income and we continue to be overweight equity to fixed income, you know, because because again our our outlook is for you know, slower growth but can continued fundamental growth in the US. So we like

the equity or fixing. We've also, however, had this overlay in terms of, if you want to call it, the quote unquote equity hedge that you know, the investors have in terms of just as as as a sharp protection against a you know, a business cycle that has is reaching World War two historical expansions that you know, we had this heage. So this has actually worked out quite well for UBS because we've had this equity long and we've had a long treasury hedge. And given what we've

seen with raids, you look like geniuses. I tell you, I mean, I mean he said, I want to get Matthew here folks on a Friday. So let me translate what the pro just said. I'm in the stock market, but I'm buying fixed income paper to hedge my enthusiasm about the stock market. You got Leslie price up, yield down. How many basis points of performance did you get from bonds nailing this call? Did you actually pick up a hundred basis points? Again? Close to that? Yeah, I mean

we did. Actually we've done very well with that. And actually what's interesting about this is if you look at, you know, how many people sort of you know x the correlation between you know, equity and and fixed income because post Brexit, as industrates normalized, you had yields going up right and equities going down. So at that point in time, such such as we thought it was a difficult allocation. But as things do, they mean revert and over the longer term, the longer treasury is the best

hedge against equity. Okay, equity, let's talk about the stock marketing. It's like I po frenzy and you know all that can a conservative investor by revenue growth? I mean, is it so overpriced that you can't buy the fangs or the sort of fangs are the kind of like things. I mean, are they on a valuation basis so on a reach that it's silly for a concert investor. I don't necessarily say it's it's it's out of reach, but

it's definitely I would call it very full. And you know, maybe part of really the incremental gains going forward may be as limited versus what they were, but it's it's just at the point where it's getting definitely getting a bit toppy. It's getting a bit toppy as well. So then where do you go. I mean, it wasn't getting a stock strategy from Richard clarative, but um, clearly the

street has been defensive. I know you're you're good. U competitors at Bank of America had an exceptionally gloomy long only by side report this week of what people are actually doing with their money. Do you see that? Do you see people running from equities into bonds? Um? Well, actually, I mean when you think about it, especially over the past this week, you know there's there's but there's always

this fear factor. But you know, we think that, you know, fixed income is actually a bit rich to equity, particularly with the decline of the yields of the scene. So again, I mean, so we still prefer over the long term, you know, equity to fixed income. Um, you know, it's it's it's one of these stays is where for our you know, our equity portfolios, we always have this type of strategy where I mean we will always have this overweight and we'll always have sort of the fixed income

against it. But when you look at how you how much guilt have fallen, and the fact that the market is expecting much lower growth than within what we actually are, fundamentally better better to be able equity at this time. You know right where I was going. Folks, this is so important and you heard it, particularly in the first third of the discussion, the conversation with the vice chairman. This is the recession call of I'm not hearing that from ubs Leslie. I certainly didn't hear it from the

vice chairman. I mean that's coloring everything on the street. Is a certain set of our listeners believe in a recession, don't they? They absolutely do it. I think it's a really great point because what you when what do you look at in terms of what's pricing in for the FED fund futures or the FED funds you know, the next for the rest of this year. What they're making in is much more than what we're anticipating. So it's much more than you know, ann ounce of protection, you know,

is a pound of cure um. But they're actually pressing in something that we really really believe that the market thinks is a little bit too recessionary in our view. So it's not that as though we don't believe that the Fed will ease, we just think the market is pressing in too much of an ease. What does that do to revenue goes through? And I don't want you to be a securities analyst here, but I think this is really important folks. You can take Oracle in the

news this week or any other company. There's a revenue belief in growth and if you have a dooming gloom view, you bring your top line down. Is everybody brought their top lines down and that folds right into asset allocation, doesn't it? Lastly, it does, It absolutely does. And I think that you know, again, you know, the the having interest rate is lower, and obviously having the FED move methodically without a potential in our view recession in the

near term is very favorable for equity. Well, it's very favorable for equity. But I mean, come on, let me, I got to get the Bloomberg out here, leslie to do this is too fancy math on Friday. Uh here sp X year to date up, We're only up eighteen percent year to day? Did that? Like? Are you out there telling people were going up thirty six percent this year? No? Not love, I love busting shops like that list. Can

we extrapolate out to your end? I know, if you know, if you annualize that, that looks very trapping, But no, we're not. We're not. We're not saying that at all, maybe not the three to four percent going. What do you do? I mean if I me in this, I mean U b s. I listened to you. I listened to uh Jeffrey, you dotta dotta everything's great. What about going to cash right now and just sitting out the year that we don't recommend that? Do we? No? I said, listen,

you know it's it's we don't. And we we did have a cash position in terms of Barbell for a fixed income meany that we had cash, and we had long end treasuries. And the reason why we had that was as you're well aware that you know, for a long period of time we've had this three month ten year in version, so going into a cash tye product

was actually yielding much more than it had previously. So there wasn't actually a horrible allocation that that you know, people in the industry for years know that something that you don't want to do for a long period of time. But given the fact that we had this barbell, it actually worked at well because we had the yields coming down the long end. We were actually also learning that incremental carry because that you know, the cash and one year bill, given the yelker was so flat, actually was

fairly attractive. Yeah, this, folks, I I hope folks, this has been helpful on a Friday, because every pro including I can speak for the vice chairman, everybody's head, his spending over what we think we we've observed this week really beginning with the Mario Draggy speech, but then you actually got to fold it over to like, okay, what do I do with my small pot? And the answer is what we heard there from Ms Felconio is just one example of one view in that case that ubs

view of I would call relative optimism. Lessie Folconio, senior fixed income strategists, had a hectical fixed income allocation at UPS that was just brilliant, without question. This is the

interview of the day. He is Daniel Jurgen, always joining us in Davos, but at other select times through the year when it truly matters, we are on and that Dr Jurgen could join us today, the author of Commanding Heights, the author of the Quest, and before that, the definitive moment for so many of us in the oil crisis is magisterial. The Prize, Dan, you're gonna I want to

talk about your underrated book, The Quest. Everybody focuses. You have to on campus, folks, if you're cool, you have to walk around with a copy of the Prize, just so you're you know, like you're cool. The Quest. I remember reading it and going, this is just as good or better than the Prize, and through it, you know, in the middle of the Quest, you'll go right to where we are right now, which is the shifting sands

in the Persian Gulf. In terms of securing the supply, let's begin with first principles, Dan Jurgen, do we need a Rand's oil Uh, we don't need a Rand's oil or Rand's oil has been part of the world market. But what is surprising is how well the market has adjusted to the cessation both of Iranian oil and Venezuelan oil. You have always been a measured voice at the clearest memory of the hysteria of barrel. You were like, wait thing, you know the economics will play out. You were always common.

Can you be calm now with what you've witnessed over the last two weeks in the Hormos and in the Persian Gulf? Well, first time. Part of the reason for reaction is I really do believe price actually matters. People forget that price matters, and it affects how people make to see Asians and what happens in the markets. UM. I think that we are seeing a pattern of kind of call it sporadic escalation. A number of different things happen.

It's not just in the Gulf, it's UH, it's drones, miss hale attacks in Saudi Arabia, it's UH rockets in Iraq and to where American companies are operating. So I

think this is a rising tension and UH. And really the Iranians, I think are saying they're really feeling squeezed right now, and they have many different mechanisms through which to respond, and I think we're seeing some of them speak to Americans, our listeners coast to coast and frankly speak to the gentleman just down the street in our Washington studios at Pennsylvania Avenue. When people suggest Iran as a threat, how do you respond? I think that Iran

is continue to develop its missile programs. The Revolutionary Guards has a program and talks about all the Arab capitals that it's capturing. So I think there's a struggle for influence and power and hegemony going on in the Middle East, and Iran is is very much engaged in that. At the heart of it right now probably comes down to an Iranian Saudi struggle UH for pre eminence. But on top of that, of course, is the UH ending of

the or the backing away from the nuclear agreement. And Iran is just exporting a paltry number of barrels right now, and I think there's a part of their response, and they're probably also looking down the road and saying, well, we've got about a year and a half to go until maybe there's a new president in the United States. Well, let's let's go. That's right where I wanted to go with the heritage of Daniel Jurgen the Prize, those moments in the prizals vignettes of new people showing up in

the Middle East. One of our things of Persia the Shah that some of us older lived and then moving on from the Shah is the separation of religion and culture in Iran from a fairly complex and successful economy that was in Iran. How do you partition the people of Iran, the economy of Iran from the religious extreme

and the religious leaders of Iran. I think the understanding is that you have a young generation that really uh wants to be part of a different world, doesn't want to be part of this world that was created in nine nine with the imposition of the theocratic regime. But the instruments of power are all in the hands of the theocracy and they continue to wield them. And the economy, of course is in pretty bad shape right now because of the sanctions, and even without the sanctions, mismanagement of

the economy, corruption and everything like that. So Iran's economy is is suffering. One final question if I could, Dr Jurgur, and that would be to hearken back to your exquisite effort commanding Heights. I kid you every year at Davos at we need to see a second edition of that as possible. How do the commanding Heights look right now

from six Pennsylvania Avenue. Well, I think that from that it's uh, there's a question about how much of the commanding heights does the person who's the top commander command. And in terms of on he had and I ran a tech going on and he brought I believe the New York Times reports he canceled the mission while the planes were in the air. Yeah, I stand corrected if I'm wrong. Well, I think I'm thinking about in terms of the economy what you've been talking about the relationship

with the FED. But I think that that he doesn't. I mean, there there's obviously disagreement administration about what to do, and this is an uncertain territory where you don't know where it's gonna end up and what are your goals At the end of the day, Daniel, You're gonna thank you so much. Do we have a new book coming up? Can we? Well? I did send in a manuscript yesterday, oh, yesterday,

literally about three o'clock in the afternoon. A hint. You know, well, it's kind of some of these six themes we've just been talking. We'll leave it there, Daniel greg In with a top secret manuscript. It's out there somewhere, folks, and we await that publication here six months. Maybe when you're out, Daniel, you're gonna look for the movie Commanding Heights fourth of July and Imax. We are thrilled they have that as well. This has been, even by recent standards, a busy week

four market participants. We've had, of course FED comments coming out earlier this week. Geopolitical issues always in play, including over the last twelve to twenty four hours, and then of course, uh the trade issues with Mexico and China with the G twenty coming up. Do you get a sense how one professional is factoring all these into uh the investment outlook. We welcome our next guest, Diane Jaffee. Diane is a group Managing director of the Relative Value

Group at TCW. Diane, thanks so much for joining us. Let's just start with the FED. What did you make of the FEDS comments this week? I think they acknowledge the fact that market participants are worried about global growth, US growth specifically, and now we have to add Iran potentially i Ran strikes to the list of their worries exactly.

And so the the issue is do you feel I guess the question is do you feel like the FED is on top of this in terms of Okay, we're gonna keep the rates kind of where we are, but we are clearly opening the door to address rates going forward. Absolutely, that is one of their goals is to you know, instill confidence in the US markets, and so that's a very important point right now. So on the geo political front, it just obviously it just seems to be a front

burner issue all the time. And of course over the last twelve to twenty four hours with Iran, how do you factor the volatility that these seems to be escalating geopolitical issues play on the markets. It does give us more opportunity. We're bottom up fundamental investors, so we're in it for our clients for the next one to two years in terms of the investment prospects for the individual holdings. Um So it does give us opportunities to uh NIT

and tuck around the edges. So it's interesting. One of the issues, Diane is, you know, kind of the impact that the president and UH and the President's tweets have on short term moves in the market. Again, we had some more tweets from President Trump this morning. How do you factor that in? I know you're a long term investor, but it just seems to introduce a layer of volatility into the marketplace that can be nerving unnerving for some.

We had one of our analysts do UM scenario analysis going back to UH early two thousand and eighteen when Trump started tweeting quite a bit about China and tariffs, and we noticed that UM with a high degree of statistical significance that if the markets were down five days proceeding UM, he was less likely to tweet about China and hariffs. UM they has a t step score of you know, two point six, which is quite high, and so we would be less likely to anticipate a China

Careff tweet if the markets were down. I think this is his long term game, as he of course has the advantage of being the incumbent running into but he needs the economy and he needs the markets to be behind him, Diane, good morning, and it's just thrilled to have you on with with decades of portfolio management and long I mean miss Jaffee Folks doesn't want to ever admit this, but long ago and far away, you know, ten years ago or so, she was a security analyst

as well. And you know, Diane, that it does come down to revenue dynamics. Just as a summary of the last thirty days, there's gonna be a recession. We're all gonna die. Revenue is going to be terrible. I know, a TCW, you don't buy that. But what will be the lessening of revenue as you look out over a year or two in the stock market. Business uncertainty, of course, is what will directly lead to capital expenditures being down,

and that is something that we are watching quite clearly. Um. If you look at the small business economic um expectations for capital expenditures, they are up um for since early January, but they are down since last August. And I think tariffs have created business uncertainty about where they should if there is the demand put their manufacturing capabilities. So, Diane, I know you're in the relative value group of TCW, where do you folks see value Relative Value now we

um you know so. One of the unsung heroes over the last couple of days of uncertainty, of course, have been energy stocks. And one of our disciplines is always to maintain exposure to all the main economic sectors. And while sometimes um it seems like hey, you should be completely out of energy or completely out of another economic sector, we always trying to find the best names within every sector and that has turned to be quite fruitful for

our clients over the last few days. Diane Jaffee, thank you so much. Diane is a group Managing director of Relative Value Group at TCW, joining us on the phone. There are those that talk and there are those that do. We were thrilled to have joining us in our studios in New York earlier this week, General McCrystal. We now finished the week strong with Admiral Stravidis. James Trevidiz of course with his public service in the Navy and with NATO, and then it toughs in their Fletcher School and now

the Carlisle Group. James trevidis at an important moment for the nation. Ad will you always speak in grace of the public institution, The executive the president who was also our commander in chief. If I look at the definitive Eric Larabie one volume on Franklin Delano Roosevelt, I just don't think I would have seen a tweet uncocked and loaded or locked in loaded from the gentleman from another time and place simply your thoughts on the execution of

our military policy by tweet. It's so unhelpful, Tom, and uh, you know, to throw another book back at you. But the new biography of Winston Churchill, Walking with Destiny by Andrew Roberts, I think addresses what Churchill did very well, which was to gather his allies about him, come up

with a plan, and then rocks to carry it through. Um, when you're taking these espresso shots of tweet after tweet after tweet, very difficult for the military to execute, and more importantly, it's difficult for our allies to follow, and it encourages our opponents. I want to make clear, folks that this is delicate for the ad Bung. He was of course vetted as a vice presidential candidate the last time around. There was some talk of that is, well, how do people like you respond to this who are

still wearing the uniform. What does the joint chiefs do? What do the line officers do on our ships on soil in the Middle East? When they see this action by a president, they are at this point two and a half years into it, they recognize the unpredictability, the variability of the decision process, and they're also concerned, Tom about the lack of a civilian leader in the form

of a Secretary of Defense. At the moment, we don't have a fully vetted, seated, congressionally approved secretary of Defense. These are the moments when you really wish former General Jim Mattis were in the chair to answer the question what are troops do in the field? However, is operating professionally and they will continue to do that. Admiral, let me bring in my colleague Paul Sweeney in New York. Paul,

thank you, Tom. Admiral, what do you think a separate from what just happened over the last twelve to twenty four hours with the strike and then the non strike, what do you think is a Rand's strategy here? Iran is simply working their way up the ladder of escalation, hoping over time to produce an effect of a reduction in the sanctions and they will continue to do that. They're taking a page out of Kim John Huns playbook and deciding that, uh, the path to attend and is

to continue this type of offensive escalatory pattern. So unfortunately, I don't see this diminishing and I think we're going to continue to to see We're going to continue to see challenge ahead. So given that is the case, that is the strategy of a rent, how do you think or what do you believe the U S strategy is right now that we have a definitive strategy from your perspective, I don't think we do. And that's our problem. I'll

tell you three things quickly. We ought to be doing is working more with our allies and our partners and our friends. We've got to get this out of a US versus Iran and get it into a global community versus Iran. Drums are one thing, but when you're blowing

up tankers um that ought to galvanize the international community. Secondly, we need to give the president more options than just a Tomahawks strike, and that means cyber activity, offensive cyber special operations c i A. Give him more options and tools that he can deploy. And Thirdly, and you'll under stand this at Bloomberg, we've got to get the private sector working with us. At the end of the day keeping the straight open. It's gonna be escorting tankers protecting them.

That's going to require working with the international maritime community. There's three things we ought to be doing that would form the basis of a strategy. I don't see that so far. So ad, We'll just give us a sense from your experience of the U. S. Navy. There's a carrier group over there and that part of the world that seems like you look at it on the map, how how narrow that straight of the hor Moves is

and it seems very close quarters. Give us a sense of what it's like to serve in an hot area in that part of the world. So I commanded a carrier strike group built on the carrier Enterprise. I've commanded destroyers and cruisers in and out of that waterway. When you go through the straight of horn Moves, you're at general quarters. Every man and woman in the ship is up away, battle stations are manned. It's very very dangerous and as the temperatures go up as the summer heats

up decision making. That's harder and harder um ahead, and well, I want to try to take this down to a granular moment. I may be wrong that the USS bunker Hill c G fifty two is on service somewhere in the vicinity of the Persian Gulf. That's one report I have from weeks ago. A. Well, maybe that's true, maybe it's not, but it's something. You know, the Ticonderoga class guided missile cruiser. It's not getting the press of the

George Washington and the big aircraft carriers. What's it like on one of those smaller ships at sea, as Paul mentioned in the Heat of the Persian Gulf. Yeah, so you're loaded up with Tomahawk missiles. That's principally what you have. It's a missile that'll bill fifteen miles. It's so accurate we can choose which window to fly it through in a building. You are up seven, you're watching for Iranian

small boats that are harassing you. You're so are is trying to make sure US an Iranian diesel boat doesn't sneak up on you. Everybody's tired. It's it's extremely intense operations. You know, you're on the forefront of defending your nation. It is our navy and the military in general. Are they overextended now with exhaustion or as you mentioned with the lack of coordinated effort in Washington, is there an urgency to get a more cohesive plan because of ship exhaustion?

There is, indeed, and we saw evidence of that last summer with the terrible collisions the two Harley Burke class destroyers. We lost seventeen sailors in simple collisions. That see clearly exhaustion as part of that the Navy is trying to address. At bottom line, Come, we don't have enough ships. We only have two seventy five ships to cover the planet Earth. We need at least three hundred fifty. By every study, that is the print of a way you solve the

exhaustion problem. Lad Well, this has been an honor to have you on with us today in general Crystal. A few days ago Stravits of Carlisle Group where this as well. Paul. You know we do economics, finance and investment, but I must say it's important to have these authorities on our military reach with us today. Yeah. Absolutely, Tom, It's an honor to have the Admiral on and giving us a what are clearly, you know, very well informed thoughts of what it's like to be serving right now in the

golf at this time of uncertainty. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.