Surveillance: Energy Shock with Folkerts-Landau

Barely describes his contribution to economics, and I think of Michael Dooley, David folks Landau and Peter Garber and their important research on intervention of two decades ago. Dfl you and others at Deutsche Bank are talking very seriously about a need to intervene here the weak euro intervention of another time and place was eighty five cents ninety cents.

Now you're talking intervention one ten. Why is that, Well, it's a question of how to control inflation without doing too much damage, and there the easiest way and the most effective way to do that would be for the European Central Bank to raise rates, or to find some way of talking rates up and indicating that that's what they will do. You will recall that when they went negative in two thousand and fourteen, the dollar appreciated from somewhere around one three six to one ten in a

matter of nine months. And so any move now to increase rates and to the signal that they will be going positive would precipitate a very very quick dollars appreciation, which would re cost be great for inflation within within Europe, which will be one of the main problems they will have given what's in the pipeline. Now, let's go to Rudiger Dornbush and can Ago if they would suggest and

less coordinated intervention will not be effective. Do you see this as a singular EU effort or would it be coordinated? There is not a chance in the world that we will get it coordinated intervention, even in times like this with the door in Europe's on Europe's doorstep, those days are gone, I think not. Even the direct intervention for the sake of getting moving the change is something that

I think the ECP would do. It's more a question of indicating concern and changing the tonality around that rather than direct intervention. I think that's just not in the cars right now. So what would they have to say I mean, is this basically them coming out and saying, there are no great hikes on the horizon, We're going to continue all of our emergency purchases in full for a prolonged period of time and we have your back. Is that basically the idea, and that would weaken the currency,

It wouldn't necessarily strengthen it. So what could they even say? No? I think they would have to go back to the narrative of saying that we will raise rates this year because the inflation is our top priority and there our main objective, and that that will be reflected hopefully in

their inflation forecast. And we have inflation in Europe somewhere around six and a half per cent for this year, and that number just cannot stand without being being confronted with the policy tradition to admit that they will undoubtedly and say that we will now think start thinking about moving this year and rather than pushing it further out,

and then what would that be enough? Though, David, And the reason why I asked this is because we've got an increasing number of analysts and economists coming on and saying we're getting to the point where central banks lack the ability to really influence inflation and even growth, given

some of the exogenous shocks. Do you think that that will actually make a difference, a sort of tighter verbiage at least from the ECB at a time when the economy is getting hammered by some of the pressures from the from the invasion. There's no doubt if it went for the exchange rate that the raising rates themselves, it would feed slowly through the economy, of course, to impact on demand, impact on credit availability, and things like that, but the exchange rate impact will be dramatic and it

will be fast. So that's why I said at the outset that the best tool for them available is to talk up the exchange it as best as they can. They will do that by giving the market greatest certainty and greater conviction that they will raise rates and that they will think in terms of moving towards a positive depot rate this year or certainly very early next year.

That's certainty is important, and I think that you would see an immediately beneficial effect for the exchange rate, and immediate feed through through inflation would make it much easier for them to macro manage the economy. David ruled a one thirteen brent crude to one thirteen as well, that's just by convenience. And the answer is these are shocks to the system as they filter through to the balance sheets into the right downs to come. Is commercial banking

in Europe at risk? No, not at all. I think commercial banking in Europe has improved tremendously in terms of quality of balance sheet, quality of earnings, so I don't think that's an issue now. Clearly, like any other industry, these shocks will affect the banking system, but in terms of a serious impairment, I don't think that's an issue. But but basically, the two big forces in Europe right now. One of them is the inflationary impact of the oil price.

Energy price increases and what that will do to to aggregate demand to production manufacturing, and so that's clearly a big shock. But on the other hand, you have to remember there's also a massive positive demand shock coming from

the rearmament in Europe, in particularly in Germany. We're talking about a hundred billion, not all in one year obviously, but the amounts of money that are now in play, particularly the early disbursed of the quick dist perseman coming out of the europe European funds as such that this is a very serious stimulus. So these are the two forces. On the one hand, you have the deflationary force coming

from an energy price increase. On the other hand, you have the estimuative force coming from the fiscal expenditure, which is which is close to as much as the Americans did, not quite but but it's a very very significant impulse. What is the significance of euro one sixteen long ago, far away, and you were directly involved with this was the pricing of a euro in a much more peaceful, maybe an ancient time as well. If we see intervention, if we balance off against strong dollar, it's not night,

it's not the financial crisis as well. Here we are at one eleven. Is one sixteen the fair value of euro? No? Uh. Ultimately, once the ECB indicates incredibly that it will move positive on a depo rate and that increases, we would expect the euro to go right through one twenty into the one thirties. So it will be it will be a dramatic change, just the way it happened in two thousand fourteen on the other way around. UH. And that's something

we're quite confident about. So there's nothing there's nothing special about one sixteen and it is in fact, there are a lot higher than that, regardless of what the e c B does. Your comments on fiscal spending, and frankly Germany's pledged to actually meet that two or more target for military spending is really notable. Do you think that because of some of these fiscal expenditures that talks of stagflation in Europe are perhaps overblown? Yes, they're definitely overblown.

I think that when I look at the press and I listened to what everybody's saying, the the impact of that additional expenditure will be quite dramatic because it will support manufacturing all across Era, and it will be spend very widely. And also and also the money is coming out of the Recovery and Resilience Fund, the quick distperson

is there. For instance, Italy is already on the way to spending six billions just for income maintence to to cope with gas price increases, that is income immediately, and so we will see a big, big impulse, fiscal impulse

coming from that. So yeah, so my senses, I do not expect that the Ukraine and and the subsequent price increases in oil and gas and commodities agricultural as well, will have more than half a percent impact on the European on growth within the Eurozone, not much more than that. What would have to happen, What would have to happen, David, for for you to rethink that, for you to think that perhaps the impact of higher commodity costs will have

a greater effect on the prospects of growth. There is a seven d pound gorilla in the room, and that is if not stream one the gas pipeline gets disrupted in otherwids, if either the Europeans are no longer able to want to buy buy the gas or from Russia or Russia or Russia custom of either way, that will be a very very significant chock now Europe, Europe gets it's a gas from Russia, Germany more. If that gets cut off, then you will have to see some form

of prioritization. Households come first, industry comes last, and you will have a very serious recession in that case. So that I think is something that you can sort of see it playing into the market now. Some people and and and what my drive this is, surprisingly enough, is a social media This is the first war major war that we see all around the world and social media. The Russians attack Kiev, which they will shortly and other cities. Everything that goes on, you will find their per video

around the world. That will create enormous pressure to stop buying oil and gas from Russia. And and if that gets cut off, and then I think we will see much more significant impact in Europe than we've seen so far. David, Thank you, sir. As always, David focused land that of Deutsche Banks. I'm really important points on Europe and the risks, the tail risk around the story at the moment. Laurence Somers joins us. He is at Harvard University and of

course the former Secretary Treasury of the United States. Professor Somers, thank you so much for joining this morning. I want to go back to mc chesney, Martin, and Truman. I want to go back to mc chesney, Martin and Johnson. In war, what should a chairman of the Federal Reserve System do in a time of crisis? In war? Stay on plan or amend to the politicians. Let me just first say that I was very proud of our president

last night. I thought the way in which he spoke to the stakes of what we're involved in in Ukraine, what we're involved in, and what the obligation of the United States is to uphold world warder at a moment like this was profoundly important and profoundly inspiring. It We're gonna talk about economic and uh financial stuff in just a minute, uh Tom, and I'm happy to do that.

But the real stakes ari in freedom, in the maintenance of civilization, in the resistance uh to naked aggression, and history is going to remember that a lot longer than it's going to remember anything. With the FED funds rate, Larry, I think a lot of people would agree with you.

I'm sorry, so sorry, but to follow on to really get to the FED funds rate, you know, what is the cost the US is willing to bear when you talk about exactly preserving those freedoms, and then the Fed's role in trying to tamp down if they already missed the boat on that, I think the FED has been very late. I think it's been way behind the curve. And I think one of the reasons why it's costly when you're behind the curve is that sometimes you can get shocks that make it harder for you to act.

But I don't think the FED has any alternative now but to mount a strong response to inflation at a time when I think we are at or over the brink of a spiral of rising inflation UH breaking out. You're seeing that in the numbers for expected inflation over the next year or over the next couple of years. The place you're seeing it most clearly is in the wage data and the data on vacancies, which are pointing to wage inflation at close to six percent and pressures

for that to accelerate. And I think that knee to be ringing all the alarm bells at UH the FED. So I think there's much more risk of the FED doing too little than there is of the FED doing UH too much at a moment UH like this. I think the Fed's obsession with a high pressure economy was way excessive because they didn't think about how pressured an economy we were going to be able to have over the longer term. And I think the next recession probably

has mistaken monetary policy written all over it. Larry, there is a discussion about this before the invasion of Ukraine by Russia, that perhaps the FED was way too late and had to move very quickly. Now, the suggestion coming from markets is that even if the FED moves quickly, it's not going to matter in terms of staving off a near term recession. It's not going to matter in terms of landing this economy in a more controlled way.

Do you agree with that sentiment. I think the difficulty of getting a soft landing where we both brought inflation down and we brought and we avoided recession was always very difficult, and I think with ten dollar oil it

is uh that much more difficult. And so I think we're gonna have to if we want to bring down inflation, uh and we don't have a financial accident, We're going to need to see interest rates higher than the FED war markets are now priced, are now pricing in Larry David focused Landow, of course, of the academics of Duley Focus Landown. Garber in a Deutsche Bank now is suggesting that EU will need intervention to see strong dollar become a weaker dollars worried about two weeks of a year

as well. He made very clear that this time around it is a less than coordinated intervention. Can a singular intervention work at any time in place. I don't think the track record on currency interventions is very encouraging. I don't. I don't envision that you're likely to see uh currency intervention by the United States to weaken uh the dollar, Nor is that something that I would uh advocate UH

very much. UH. The contrary, I suspect that Europe's gonna that the more relevant tool is uh the use of monetary policy rather than currency intervention. Professor Summers, thank you so much, the former Secretary of Treasury of the United States, Lawrence Summers always from Harvard, Silbert de Gallo, and John. What joy to have ALBERTA gool in the studios with us, A real symbol of the end of the pandemic, a gentleman of Europe is public service to Italy and the Navy.

And a guy who knows it's priced up and yield down. John a friend, How better back. I didn't even know he was here in New York until I saw him in a commercial break. How better good to see you. Let's just start with a massive distication we've seen in this European credit market recently. The extent of destruction you've seen in the market Albetta and where you've been taking opportunities, where you've been taking some purchases in this is a

bear market, it's a high ball environment. We want to be preserving capital and we want to be in companies that have government support or shareholder support. Now, the good thing is there are regions of the world which are in a defense mode in towards state capitalism. Europe has supported companies during COVID and we'll continue to do so

during the next months. So you know, there are names that in the in the travel sector, in the industrial sector that go down, but then they have sovereign support and those are big opportunities and they yield a lot more than inflation. You know, think about also the banks. So we are buying in these sectors. We were very cautious at the beginning of the year and we're buying slowly. The weak spot continues to be emerging markets. And when people see the FED, you know, doing less, I think

that's wrong. The FED will continue to tackle inflation that will continue to hurt emerging markets together with political and geopolitical risk. Better just to pick up on what you were talking about and where you're buying, do you do that throughout the whole of Europe. Is the revis towards a particular part of Europe? How do you think about that? We are doing it across However, there are countries in the world there are more vulnerable to high commodity prices

and high energy. So you know, Southern Europe is more vulnerable. But outside of the Western European countries, you know, you've got Turkey, You've got Egypt, There's a lot of countries that are more vulnerable, and um in emerging markets, you would say that there's still a mine field. There's still a lot of a lot of countries that are going to be affected by the combination of high energy prices and higher interest rates in the US and a stronger dollar.

So we're very very cautious there, and we are using limited dry powder at this stage. We expect a little bit more volatilely later in the year. Alberta, you were saying that the FED is still going to high rates as much as perhaps people have previously thought, because inflation is still very much an issue. Is it the same story for the e c B. E c B is likely to step back, perhaps only do one hike this year.

They clearly have a closer issue. But also inflation in Europe is a lot more driven by energy, So half of the you know, five percent inflation in Europe comes from energy. In the US, you know, it's around one third of the seven and a half percent CPI year on year that comes from energy at least so far. So European inflation can still be you know, deemed more transitory. But in the US, you know, there's rents, there is a serve dess in wages, so it's a kind of

a different problem here. Does that make you in general more bullish ironically on European corporate debt, on European rates simply because you have the e c B benchmark at a time when the FED is going in the opposite direction. That's exactly right. We're in a in the context of a bear market for bonds. The place to hide, the

least bad place to hide is still Europe. And within that, in the credit market, you can still find companies and sectors that have sovereign support, so you get a less howkish e c B and then you get some sovereign support for example, to French companies or two UK companies, So there are some places to hide in Europe, where

you are where you want to be kosherous. The most is still in e M in my opinion, because you have compounded effect of higher commodity prices, which is bad for some EM countries, and then you have a stronger dollar and higher fed rates. Bet so you mentioned the federal reserve. You think they still hike Most people have seen as the case. Whether it's own, it's about how far they can actually push it. The e c B is it even part of the conversation for twenty two anymore?

As far as you're concerned, it's possibly the one hike in in two dozens and twenty two. It really depends on how long this lasts. European countries have around five months of gas supply of gas reserves, so you know, if it's if the conflict in Russia Ukraine is a matter of weeks, then you know we could still see

you know, positive growth and more physical spending. Think about Germany up in the defense spending, so it will become a reflationary environment which is positive, and the c B will have to hike if the last months instead of week, If if the war is not over by the summer, then we're really looking at um. You know, much lower growth in Europe. Let me got a big problem gas right now by more than thirty percent in Europe. I better.

It's great to see. You've got to catch out, buddy, hopefully next time in the different circumstances to have a more broader conversation about this market. We have done everything we can to bring you informed gas on these many topics of war, and an informed GAS on oil, on supply demand and indeed on international trade. Is Amrita Sand, founder of Energy Aspects, out with a spectacular note on

the realities of what we're reporting. Em Rita sent, I learned a long, long time ago to have immense respect for the trust of the system, and that trust is the basic idea of letters of credit. Tell me how letters of credit are going to work now, next week into April or to the point of backgradation that John Farrell just talked about. Yeah, it's the best question I've been asked. I'll tell you that much. Come because you know, the problem is exactly like you said, there is no

letters of credit right now. No nobody is willing to issue refiners any bias with letters of credit because of the banking uncertainty now what does it looked like in a week's time. It's hard for me to say. However, I will say this, the US in particular, but even some European countries are fearing oil prices gas prices being so high it is going to hurt the economy, so they want to carve out exemptions. They need to be

very specific and clear about these exemptions. Once those exemptions are announced, then letters of credit can resume again with those certain banks and you can see some trade startup. But right now it's complete paralysis and RATA in the mad time OPEC plus decreeing to raise all output by drum roll, four hundred thousand bowers a day in April according to a delicate I mean that's nothing. I'm rata have a blast on Bloomberg opinion saying the situation called

for emergency measures. What are those emergency measures? Yes, the four on a thousand, and we all know that in reality is going to be half of that, because most of these countries don't have the spec capacity well emergency measures. We saw the idea releasing sixty million barrels of spr yesterday night and prices rallied by six dollars on the

back of that news just tells you. I've been talking to traders and they're like, well, if you really wanted to make a difference, you needed two hundred million barrels. So that's not happening because we don't have that much oil. What's the pricing mechanism here? I'm readA You've got some people saying this is a completely type market where people can't get physically physical delivery, and other people saying there are some oil companies that are taking advantage of this

and kicking up pricing. Which is it? It's the former. I mean, look, yes, it's not that the oil isn't there. The Russian oil is there, but if you don't want to touch it, then you don't have that oil. I think it's very important to understand, particularly for Europe, this

is very short haul barrels. Now, if Europe needs to go and get something to substitute for Russian oil, say let's say they get US oil or West African oil, the sailing time is a lot longer, so they will be left with the period of no oil coming to Europe. And that's why you're going to get refinery suffering. That's why the ultimate solver mechanism is high prices demand has

to come down. Well, but I'm real to the reason why I ask is because people have been arguing, for for example, the US to support the shale industry, to support the local the domestic energy industry, and other people have come out and pointed out, you know what, they could actually increase production dramatically. They're just not doing it

yet on their own volition. What's your view on that? Again, I mean, it's a tricky one because, yes, they are not doing it because shareholders are making them return money

right to them because they've been lost making for a decade. Yes, absolutely right, But they are also uh getting or they're trying to send the signal to the Biden administration because the Biden administration ultimately wants to transition to a green energy and a lot of the measures more medium to measures that they are taking doesn't encourage a lot of

really in the US. And that's the conversation they want to have, saying, Okay, if we're gonna drill right now, get more oil out, but we also want that certainty that we can continue doing that in the medium tum and reads. What you just said is so so important, just moments ago. Essentially what you said is spring in reverse. And I remember when Jeff Curry of Goldman came on with Tom and I on radio and he said, basically,

we need to breach storage capacity. And once we've done that, you could see negative prices and everyone was like, wow, negative, that's ridiculous. And then we had negative prices. That's what's happened. You need to reverse engineer that for me? And how me understand down, Rita, if it's spring reverse, how high decrude prices need to go to destroy demand? How much more higher from here can they go? That's exactly it. This is COVID and reverse accurate. We have never tested this.

We went two hundred and forty seven two thousand and eight. That's not what killed the market. It was a credit crisis. We can easily breach hundred and fifty. We have genuinely never tested what price do we need to be okay? If the economy is okay to really curtail global growth? We could be really talking about numbers. We've you know, one s. You could get to be picking a number right now, John, can we go nerd here? I think we're trying right now? Is oil a gift and good

big chunk. If it is, we've never tested it. Yes, we've never tested it, and it's in elastic. Right, you're coming out of COVID. You still want to travel? John? You like that? Just like that. I mean that the numbers on sight, it's what we could be testing here. And Rate said, we need to continue this conversation, come back soon, thank you, and descent of energy aspects now on our politics and particularly the pass forward for very much his Democratic Party, Howard Dean is whether us. He

is a former presidential candidate. Dr Dean is chair of the Democratic National Committee and his skied every black Diamond at Killington, Vermont. We welcome him, uh this morning. Yeah, Well, I want to go away from the normal political talk, Howard, and I want to ask you a difficult question. You and I grew up with John Stennis. We grew up with Democratic Southern senators were in a war. We have a wartime president. How does the Democratic Party get the

military back? I'm not worry. I don't think we I think we have the military back. I think the vast majority of military people do not believe we should live in a fascist society. And I think the leadership of the military is doing a great job. I think both thought they did a great job resisting trump craziness. So I'm not the least bit worried about the military. I'm worried about the people who are driving around in the trucks and clogging up the works and just talking about

neo Nazi ideology on the floor of Congress. How does the Democratic Party and particularly newer candidates come on in the quarters maybe in the coming years. How do they fight off these autocratic tendencies. How do the Democrats collalesce around a middle message. Well, that's the key question. Um, look, I think they re message. I don't. I thought, Biden, whatever you have happened to think about this particular issue.

I thought one of the great lines in Biden's speech last night was we don't want to defund the police. We want to fund the police. And what he means by that is we do need police reform, absolutely. But Eric Adams is mayor today in New York City because he because most of the people in the community that voted for him most enthusiastically, which is particularly black immigrants,

do not want to defund the police. So I think Biden hit all the high notes yesterday as I was we were driving around before the program, I think people have low expectations. I thought it was one of the best day of this Union's addresses that I've seen in the last twenty years. Aheads being, I apologize for interrupting. You know, you're saying he hit all the high points, and he did of the Democratic Party and what he

wants to sort of push forward in his agenda. But right now, there is one conversation that is dominating American families and it is inflation. It is what they spend when they go to the store. It is only exacerbated by the Russian invasion of Ukraine with gas prices. And yet the message has been, you know, keep going with some of these plans and eventually it'll work its way out.

Do you think that the Democratic Party needs to go further with respect to supporting national domestic oil producers and refiners to try to give them more support to increase the domestic production to isolate Russia. No, the problem is not domestic production. We actually, as you well known, in this country, produce more oil than we use. The problem is it get it gets sent all over in the world market. We're probably gonna have to figure out a

way to keep that here. Look, we've been practicing modern monetary theory, whether you like it or not, for the last fifteen years. The Republicans, who probably don't know what monetary modern monetary theory is, have been practicing a big time run the deficit up as high as you possibly like. Well, when you do that, and what monetary modern, modern monetary theory says is that inflation is the problem, and that

is what we're hitting now. We're gonna have to raise interest rates and there's no nice way to say this, um, but the the oil market, you know, this is all short term stuff. Uh, And I think trying to tackle the oil market and bring oil prices down by doing anything other than reducing removing oil from the um from the reserves and putting putting that in the market is silly. But we're not going to go our way out of this. And that's that seems to be a one line that

the party seems to be taking. You have other members of the Democratic Party, including Joe Mansion of West Virginia, coming out and saying, actually, this was the way that we need to go. I'm just wondering if there are other concrete steps to take so that some of these shocks. Because the price increase that we've seen in oil has been a shock, the price increase that we've seen in wheat is increasingly becoming a shock. These are major issues

for the global economy. At what point you have to say we have to take an immediate reaction to this. We are taking an immediate reaction. Look, there is a war going on, and the war is being conducted by one of the biggest oil powers in the world against one of the biggest grain producers in the world. What do you expect The solution to this is a deal with Putin? And I think Biden is doing a great job doing that. Governor Dean, the junior senator from Vermont,

is eighty. He will enjoy his eighty first birthday here in September. The Democrats are about to lose this, that, and something else in Washington. I'll let you and the experts decide what it is. How far his Senator Sanders in the Liberals overreached um. Look, I think the biggest problem with the so called left is not that they're wrong, it's that they can't get their messaging straight. And one

of the interesting things. Is this a over medicare for all? Um, we should have medicare for all, but we should have medicare for all who wanted you. This is the most libertarian country in the face of the earth, and that includes left, right or center. People don't like to be told what to do. They like to be given their own choices, so we often do the right thing. We

need a system of universal healthcare that works. Is our healthcare system is absolutely broken in terms of it's in terms of the way that we spend money and who has to pay for that and suffer as a result. But the fact is you cannot message a package that alienates a significant portion of American people. And that's our problem. Our problem is not what we don't know what to do. Our problems. We insist, or at least on the left side,

which I count myself on on many issues. We insist on messaging it in such a way that we hit people over the head with it, and that conveys the message that we're smarter than you are. And that's one of the reasons that people like Trump, who are completely unqualified to be anything uh managed to win. But because we alienate people, we can't alienate we can't alienate ordinary Americans.

We have to stop doing that. Well, how a daint don't you need to refresh if the senators then, because there's a lot of sentences to speak that way when you I'm for term limits, I'm for term limits in the United States Senate. I think it's worked well in the presidency, and I think we ought to limit terms to at maximum three terms six year terms in the Senate. We have to limit terms in the House. Look, the political institutions in the democracy are always far behind where

the public is. That's the nature of democracies that the public runs the place. But there's no organized way for them to do that other than through the political process. When you have a party that doesn't give a damn what happens to the country as long as they are in power and willing to cheat on the voting uh and and and refuse to confirm the president's most basic appointments,

that is a democracy that doesn't work. And the way to do that is to limit people's terms so there's no more incentive to do all this gerrymatting, mannering, and all this crazy stuff so that the democracy works again. And that's and I've I've thrown up my hands. I think we need term limits in the worst way, and to including term limits on the Supreme Court, which is

now nothing but a bunch of partisan hacks. If three of themselves admitted how it, would you have said that if there was a majority for people with more of the old views, I would have said that if you get a Senate that's completely out of touch with where the rest of America is, and when you're having people who are ninety years old running for re election in Iowa, which is just ridiculous. We had a nice he wrote, speak for the House last night, didn't we? Yes, we did,

and I stick to my guns. Term limps are good for everybody, both Democrats and Republicans, and we need them how it dained. Thank you, sir, Gonna catch up. 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 In. This is Bloomberg. M