Surveillance: Delayed Ukraine Rate Decision

The Ukraine at National Bank Deputy Governor Serge Nikolai Chuck joins us now from his Ukraine. Thank you so much, sir for joining us this morning. I want to stay on the financial right now. So many questions to ask you. What do you need is an institution, your economist? What do you need now from the Bank of International Settlements and the major central bank acres such as chairman Power, what do they need to do to assist your nation?

Thank you very much for inviting me, and thank you very much for the globe for supporting the Ukraine against this Russian aggression. Definitely today's today, we are very happy that major advanced countries and also international financial organizations support US and also we try to do our best to impose as most harsh sanctions to Russia in order to in order to UH increase the cost of this invasion on Ukraine. Coming back to your question regarding BI S

and I AM. So far, we tried to persuade the managers, the leaders of this UH, of this organization that in the car environment, Russia cannot be allowed to be the member of this respected organization in the situation with where with this such military military aggression and direct invasion into the territory of Ukraine. That's why we approach this organization with the request to suspend the membership of the Russia in UH. In a way in the financial organization of

the world, it's definitely cover it. Do you know you aware of the I m F and whether it's helping the Russians understand the sanctions and work around the sanctions they're seeking advice from them. Most your interpretation of what's happening between a multilatural institutions at the moment and how

they're actually working with Russia day by day. My understanding that at the current moment, so the active cooperation between the International Financial Organization and Russian financial institution is suspended. We hope that this that is the only first step. We hope that you know, in the current environment, you know, the membership of Russian financial organization like central Bank, like Ministry of Finance, and so ONCEO can cannot be allowed it.

So all this respected organized respected in the past, organization like Central Bank of Russia. So nowadays they try to to you know, to finance to support their terroristic state, which we consider the Russian state. Uh uh is now so we don't think that in the current moment, is is reasonable to have any any operations, any relations with Russian authorities. Your continue. I'm just wondering. We all see these numbers, huge numbers beaing under around. Have you got

to rate? Have you done any studies on how much age you actually need? Do you have a number in mind of what you need right now? Uh? So far we try to keep our financial system under control. But again our preliminary estimates show that on the daily basis, our GDP now only half of the you know, of the normal GDP amount under the peace peaceful conditions. So definitely it will put a huge strain on our public finances.

On the also on the resource of the Central Bank, And definitely we need the support of the global community to to keep our to keep our finances viable, and to support us in our fighting against Russia. But it's very difficult now, you know, to account how many billions of dollars, how many probably hundreds of millions billions of dollars we will need again after the war, to uh to, to to to to to restore how economy, economy, How do we even begin to do normal central banking in

such an abnormal time? How do you even assess the economic damage and even hold meetings at a time when things are so in flux? You know, actually that was that you already eight years from the start of the military conflict with the Russian Federation, And definitely we had some business continuity plans how to deal in the case

of the direct military innovasion. All the time we consider it such scenarios as to be of low probability, but unfortunate plea, this low probability realized neverthe will nevertheless, so we I suppose that we were more or less prepared even for such for such a scenario, and we continue to do our our work in these conditions as much effective as its possible. So, Jay, you wrote a paper in another time in place two thousand nineteen and monetary transmission.

I want you to tell me what the currency will do, not only the revenue, but what ruble will do as ruble weekends. Do you just assume that Russia bombs itself back to a barter economy? You know, definitely the monitor monitory transmission even described in my paper does not work now. So we don't want to play these games and like Russian Central Bank does, and we don't think that they

key policy. Read nowadays, it's an effective instrument. So we just suspended to consider the our monetary policy and as conducted by under the inclation targeting regime. We we suspended to consider our policy rate as the main instrument. So now we would say, so we do we manage our financial sector, we manage our economy. We are monetory instruments, instruments almost manually as an economist, So what do you make of the financial warfare that Western nations have really

been waging to try to isolate Russia. Do you think that when we look back in history it will be considered a success? Uh, you know, probably the unique situation nowadays that um Uh. The unique situation is that you know, you hit the Western world nowadays, hit the economy which used to function in completely normal market conditions, I mean market conditions, normal market conditions in the economic sense, and

also for the financial system. We used to live uh in the Soviet Union, but which was was also isolated from the Western world. But at that time, you know, so they were uh that economy, that economy was you know, was built from the beginning on completely different grounds. Nowadays, I suppose that this hit to the economy which was

really integrated in the global economic and financial world. So it's really massive and frankly speaking, I expect really catastrophic consequences of the Russian economy and for the Russian and financial system. Deely want to finition something important, not just for your economy, but for the rest of the world, and I think it might help papers the tension. We've gone through the stats on this program. The Russian Ukraine supply more than a quarter of the world's we exports.

One fit at the corn sales and any percent of the sun flower royal can't goes at some point, Deputy Government, the farmers need to get back out into the fields. And get back to work. Can you help us understand the amount of devastation we could see to those goods if those farmers can't get back into the fields and work in the next several months. Yes, So that's a very important question for the global equonomy, for for for

the feud security globally. Yeah, Ukraine and also Russia and some extents that are very very important suppliers of their wheat, of the card, of the oil seeds and or sunflower oil to the global markets. And I hope that, I hope that this military invasion will be suspended very fast and our farmers will be able to uh to have the normal agricultural year this year. Otherwise, I'm afraid that I'm a friend that even global consequences could be very

very very very very toll. Could you help people understand what that would look like depu the governor if this wasn't down with quickly enough and this went into the summer, I don't know, I don't know, I I don't I'm not able to provide you any estimates at the moment. And you know, currently we try to do our best to secure there to ensure the function of the payments in the country and secure the financial community in this environment.

So probably will will will we have to do such calculations and to in order to understand how the world will you know, live without the supply of this food stoff from from your queen. Well, let's hope so it doesn't come to that. Deputy Governor, thank you so much for your time today and our thoughts here at Bloomberger with you all, with the people of Ukraine and with you and your government and the Central Bank this morning. Say you Nikolai Chuck there, the Deputy Governor of the

Bank Ukraine. Thank you, sir, thank you very much. Let's get right to it, at least so Mario Gabelli joins to say he's co investment Officer for Value at Gabelly Funds. Barely describes his contribution to investment finance in America, and we do make note of long ago and far away, Mario Gabella used to write twelve page sell side analyst notes on what's going on in the market. Mario, let's

go there. I love your note of this morning where you say look for M and A. Given all that's going on in American finance, and you speak of vertical and horizontal mergers and acquisitions. I love that describe well, Tom,

make it simple. Uh. We have a new regulatory regime in the United States, Lina Khan and others looking at and saying, should a company that has five percent market share in a company that has eight percent market share, should they be combined under the old h F index Without getting into the details of that because I don't know how to pronounce it, but basically what I'd like to see the buyers of companies. The buyers of companies are strategic. For example, Cummins Engine decided to buy what

I used to call Arvin Meritor are meritory. But on the same time, private equity is buying companies in the same and that's Tenneco. So uh is uh? What is Cummins doing is that a vertical integration into products that will then go into the products that they sell. Is that their customer pipeline. So that's as simple as that. Today. For example, well built and from my point of view, you cannot have the government look at things in linear

way the way aerojet was turned down. They are a producer of hypersonic capability in this country, which is a major defense dynamic. Extraordinarily good balance sheet. They've got a couple of hundred million dollars in cash the Maxus assets that they can sell off. Lockheed was trying to buy them, but they can't put five hundred million dollars. You just

don't have it, whereas Lockheed could do it. And we all have to be prepared for I want to get I want to get Lisa Bramitt's and there, Lisa, give me one short answer here from Mario Gabelli. Mario, you're flogging your book on television behind you, uh, merger Masters. I mean, I know you need to sell a couple more copies to make the month go. But Mario, if I look at Merger Masters now when you wrote that book, yeah, get up and get the book on a radio. Folks.

This is this is but but Mario, seriously you mentioned it. Private equity is in there right now. How does your world chase that. Steve Schwartzman is in buying companies now? But they always do that Tom And basically instead of just buying it, holding it and then recapitalizing and then spending it in five years, they not only buy the company, Tom, but they basically then go in and add companies to

what they're buying. And what that means is the follow If you're buying something today, what ideal world, ideal world on a PE world is to buy something that has cash flow minus capex at a multiple that five years or ten years you can sell off at no lower multiple and then uh, but interest rates changing. So that's what they do, and they do it effectively, and they're

raising significant amounts of capital and they're moving around. So any organization, and if Lisa is interested and looking at putting private equity into the funds, because they marked not to market, which is what happens daily to money managers like us, but they market, uh, mark the portfolios to model, which means that institutions like the lag effect that changes in the in the stock market. Then what happens is

not complicated. Uh, you know, more money goes in. So what you want to do, you want to do is buy Schwartzmann's company. You want to buy Keke Henrykravis's company k k R. So by the PE firms now in the public markets, there's one called their public market stocks. John Malone would be a good example of that. Yeah, Another good example would be aren't Buffetts Berkshire Hathaway Mario, I am very interested in all of the different ways

to formulate value. But at the same time, right at this moment, a lot of people are trying to understand the parameters to input into these flip formulas. Where is the price of oil? Where is uh the interest rate strategy? So when it comes to oil, as we're trying to game out commodities, how do you even come up with input prices? At this point, at least when you look at the companies that reported earnings and the balance sheet,

you basically have to look get the ecosystem. Two years ago in March, or when we had a disaster in the market where we had COVID impact, basically the only thing that did well was God gouges and then eventually growth stocks by growth based on a multiple of revenues and revenue percentage growth. Today you're having the market look at let's say energy, I, as a buyer of related products two years ago, was cutting down on my inventory, cutting down to my capex because I needed to preserve

my working capital in my cash. Today, I'm taking whatever I can put into my inventory at whatever price I have to pay, and I need to understand life accounting. I need to understand firefolk counting. You know, we're dusting awful lot of old technologies to get that part energy oil. We as a country, they forgot about it as a strategic element, even though you had the Sundies and the she is fighting forever and you had all sorts of those dynamics. And it was a bad policy. It failed

in transition. We all want we all want renewables, we all want a solar wind hydro, but we need transmission, we need storage, and it's not coming. It's bad policy. We're out of time here, but you're gonna continue on radio, Mario on TV for radio. I need you to hold up Merges and Masters again so we can move. Hold the book up right now, Mario, so we can move. This was written by a colleague of mine on Barrens

for thirty five years. It's a great yea. It deals with how to make money when a romance is announced. In other words, company A wants to buy company B. And it also tells you how the investment bankers, the lawyers, tomp and the orbit treasures work in the process of doing this. And uh, you know, it's a good discipline for someone that has mathematical background, has common sense and wants to make money over there. And we're gonna wrap

this up and go to the headlines to Mario. But all I'm gonna say, folks is this is a grown up book for Global Wall Street. And if you're on Global Wall Street, it's a single best book on the machinery of Gabelli's world. Margot Belly. A quick brief now from Nila Richardson, chief economist at a DP. I'm sorry, Nila, I say automatic data processing because I'm a fossil. Uh, Nila, we do have the US economic data. Does it signal

a buoyant economy or we truly in some form of slowdown? Well, we're going to slow down from last year's high pace. We are a healthy economy. I think we continue to grow robustly, but we are in the economy that has the absence of a high degree of federal spending and monetary easing that is going to fade away. So yes, healthy economy. Uh. And those jobless claims are another good sign how far we've come in the labor market. But

we should see some following growth. And the real battle now, the real the real issue now, not the battle The issue now is inflation, and inflation that is only getting hotter as we see commodities surge the fastest pace, going back at least by one measure, to the nineties seventies. How much do you expect wages to respond to this to the upside versus actually people coming back into the labor market in order to get paychecks in response to

this inflation. Well, we really saw inflation accelerate in the fourth quarter. And the interesting of the thing about it is that inflation in terms of inflation rising for wages wage gains in the fourth quarter. Was interesting about it is through most of the recovery, it's been the low pay sector that's seen the high wage increases, right, so those people who are making lower wages, those wages were increasing faster. Now we're seeing a bit of a flip

in our data. We're seeing those industries that are correlated with high page jobs, information tech, finance, professional business services really accelerate and that might not only show wage inflation, but wage disparity between people who can deal with inflation a little bit better and the higher incomes and people who are still struggling to So to your point, getting people back into the labor force and a time with very high price levels is really important, so as we

as the FED looks to contain inflation, and it's really important that the job's recovery continues because it's not quite complete yet. How do you even begin to game out the ramifications of a hundred and thirty dollars of barrel oil a hundred and fifty dollars of barrel oil as we talk about that on this bifurcated recovery of the haves and the have nots as you put it, well, let's just talk about getting the work. Where most of Main Street sees those higher oil prices is at the

gas pump, and so it's transportation costs and accelerate. We already know that housing costs have accelerated, childcare costs have been high through the pandemic, and we're already high before it's really a material concern for main street families and for working families. And we know that energy prices fill

over into other goods and other inputs. And so if you add on accelerated energy prices to what is already UH supply shortages and the great interview you just did pointing to the effect of both energy and agriculture and perhaps food prices. You're seeing that for people who are

still trying to work their way out of this pandemic. Economically, headline inflation is a big concern if inflation is entrenched, Nila, do you look at top line inflation, does the core and all the fancy economists like you do, all those fancy inflation measurements drift away or do they become more important? You look at the consumer, because the consumer is looking

at headline inflation. The consumers go into the grocery store Belk and they're seeing the bear shelves, and so the consumers expectations are going to feed inflation over the long term. The good news is a year out we're seeing high consumer inflation expectations, but three to five years out they start to decline. That's the trend we want to keep.

So I think that fancy economics has its place, but also go into the grocery store and watching the consumer at the gas pumping at the grocery store has its place to particularly in this environment. It's getting expensive, that's for sure, Nata. Thank you as always, Nata Richards in that of a d P in all of our reporting it is not just oil. It is a complex story.

Joining us now thrilled to bring you Dary County's portfolio manager and a head of commodities at DWS with years of experience on the up and down and right now the very up up on commodities. Don't these are not financial instruments. What is the media coverage missing about the fact that aluminum or wheat have huge fixed costs in their production? What are we missing that these are not the usual liquid instruments were used to good money and

thanks Tom, that's a wonderful question. We do see sniff and price impact across all commodities. However, there's also a human element to all of the prices. We tend to forget as market market protectioners that we focus on price and return. But alumnus used for industrial uses and many countries depend on aluminum as input to help keep the factories going and help keep the workers employed. Wheat is

even bigger issue. It directly links to food security. Both Ukraine and Russia are large exporters of wheat, in particular to areas like Northern Africa, Central Asia, Middle East. For these countries, they're going to experience very sharp press inflation. Should the conflict escalate from here and interrupt the production process for weed, we might see even worse, such a squid shortage that could lead to significance of all This leads to the microeconomics at the moment, how do you

define as a portfolio manager of great success? How do you define demand destruction? Demand destruction really comes in a couple of different ways. One is, if the press gets high enough, for example, the gasoline press gets high enough, people may choose to drive less, trouble less to save money so they can afford other goods. So it's one way to see that it's more impact on lower growth

rate assumption rather than completely replacement. That's a second type of a demand disruption comes in the fact that people could find alternative energy, additive energy shift from gasoline based cars to electrical cars um in the US in particular, that will have a very big impact on energy price.

It's always a lot of people along right now, and the price shift we've seen, the distliccations we've seen when we think about what the hedge is, what the hedges is not what the hedge was a month or so ago. If we got a headline that basically said we had a ceasefire. I'm just wondering when you look across your portfolio, how you've hedged that that way, What kind of instruments you look to, what kind of trades you've got on. Well,

there are two things we focused on. One is outside of oil, what are other commodities that have more long term impact given the current environment. And we think based metal, which is currently behind the other commodities in terms of the price elevation, we think that's actually a great way to hedge the portfolio because we do anticipate trying not to continue to improve off the credit for the economy, and that will help with demand on base metal regardless

of the energy performance. The second thing we are doing in our portfolio is to think about having more deferred exposure in our funds um the back end of the curve, and let me use a more plane language, that later delivery of oil that particular prices is not moving up nearly as much as the prompt the near delivery of oil. We think at some point of two prices will even out, and that's why we are thinking very hard about shifting

some of our exposure to the deferred exposure. We've been talking about whether sanctions will matter for commodities markets that have already priced in a lot of self imposed sanctions

by a lot of commodity producers and importers. What's your sense of how much further prices could climb if the sanctions are written in name without the carve outs for oil and metals, So of for oil brand as an example, are target right now, so a hundred and thirty dollars if there's no change to the current level of conflict. If there's direct impact on delivery Russia's ability to deliver out oil, we can easily see a hundred fifty or more for oil price. Because Russia accounts for a very

large part of the global supply. Out of the eleven million they produce, over seven million comes out of the country, so that's to be interrupted, we can see significant impact. It's just no easy solution to replace it. For the

other commodities. For weed in particular, that's a concern because if we see disruption for Russia to deliver they are one of the biggest producers in the world, biggest exporter, and Ukraine's already experiencing humilitary and concerns, so we don't really know if Ukraine will have the same ability to produce fret and corn both at the same level as they have in the past, So there's be in no

easy solution for that. That last point, there is just going to be such a big deal for global politics, particularly in Northern Africa, as you pointed out that way, Kume that of DWS that way. Thank you for taking us and signed the portfolio. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from

the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg