Surveillance: Fed Hawkishness with Dudley

to stop the show right now. John Farrell, Lisa Brammitts, and myself, We welcome all of you on radio and TV to maybe the first great discussion of the year. William Dudley is not the normal economist. Yes, his work at Goldman Sachs out of Berkeley, but far more his tenure at the New York Federal Reserve, and he has been very overt in writing not weekly but pretty much twice monthly for Bloomberg Opinion, and today he issues without

question his most scathing essay on where our Central Bank is? Bill? What's it like to write with that language of a remarkable and surreal FED economics? Are you getting criticism from inside the Fed? I'm sure it doesn't make people they're happy, But the reality is I gotta call it like I see it, and what I see right now is a Federal Reserve that has a very benign forecast relative to

what's actually happening on inflation. If you look at their forecast that they published at the December fone C meeting, they have inflation melting away to two point one percent in four even though they don't take monetary policy to a tight setting. The end of two thousand and twenty four, the Federal fundrais two point one percent below what they think is neutral. So how does the inflation magically disappear of the fedusors not? That's the question I want to

raise in this piece, Bill Dudley. Alan Greenspan at least talking about the measurement and measured and the idea of a graduation a step by step approach. Alan Blinder, in an essay in two thousand five said, the Greenspan standard is suspect. Are we going back to Arthur Burns Burns in the pipe smoke, where we're gonna lose quarter point

measured and start to see some real jumps. I think they're gonna go fairly slow at first, but because they think that the inflation pressures that we're seeing right now are going to subside as we go through the first half of the year. But the real new information is the tightness of the labor market and the fact that that tightness of the labor market is resulting in higher wages,

wages above what's consistent with two percent inflation. So I think even if the initial impulsive inflation turns out to be transitory, they now have a problem because the labor markets sufficiently tight that wages are going to continue to accelerate. Bill In your piece, you reiterate your call for three to four percent as the potential and a rate for the Fed funds uh figure. I'm struck by the fact that you include the idea of an end rate for inflation at two and a half to three percent, which

is actually a commonplace suggestion. What happens to risk markets if the Fed funds rate gets to three or four percent? Do you think that this economy can sustain that? Well? I think that's the fundamental question. Uh. In two thousand four two six, the economy is sustained the Fed taking the federal funds rate from one percent to five and a quarter. Yeah. In two thousands sixteen to nineteen, the economy didn't do so well with the Fed taking the federal funds rate to you know, he'll go a little

bit over two percent. So I think that's the fundamental question. How does how do markets reactive Fed tightening? I think that right now, this idea though that the Fed is a small amount of tightening is going to cause markets to go down precipitously, and that's going to cause the FED to stop. I don't think that's the most likely outcome.

If you think the inflation subsiding at two and a half to three percent would result in what could be a crippling FED funds rate, that are you saying that we need an inflation rate below two and a half percent to have an economy that is sustainable over the next decade. I don't think a three or four sent fiddle funds rate is crippling in any way. It's only unusually high relative to the last ten years. It's actually a pretty low relative to the last thirty or forty years.

So I think the economic can do just fine with the federal funds rate in that range. I think when markets are really uh mis pricing is the fact that the FET is actually gonna have to move to take Madre policy setting. At some point the FED has turned more hawkish in the very near term, So a lot more hikes are being priced in in two thousand and twenty two. But the terminal fiddle funds rate the markets expecting it's still very low, only around two percent or so.

But what's important here, and I think to summarize the message, you think for inflation to come lower, the feed needs to engineer trying to financial conditions. But I'm trying to want to stand from from your standpoint, where do you think that tightness begins? Where do you think it is one and a half, two, two and a half, What does it start to become restrictive? And where we can

sit here and say the fet is now tightening. I think it's when the market start to price in more tightening than what they've breaks in at this point in time. I mean, it's the fact it's the fat just delivers what's priced in today. I don't think markets reacting very much because it's already priced in. So the feder reserve essentially has to go further than what the market anticipates. The markets to react. Uh, I think what will happen

is the first boules will go out further. Uh, you know, we'll probably see boules in the two and a half three percent range. And as once we have higher tenure treasury no yields, that will start to weigh on the stock market a little bit more and other you know, you know, risk assets like say cryptocurrencies for example. But what you just said, though, the original piece of this is that you think when that happens, the ft doesn't

back off. It's not the old playbook. Well, the ft has to do his job at the end of the day. I mean, if you if you try to defer the fight against inflation, all you do is get more inflation. So it's not like, you know, trying to be a nice guy gets you to a better price. We sort of saw that mistake in the early nineties seventies. So I think the Federals ave at the end of the day,

will do his job. I think it's just slow. I think to realize right now the consequences of the tight labor market, which they've engineered at this point built totally. I want to go back to Dudley McKelvey, Goldman Sex. There's not a moment to lose. That's what I hear in your essay this morning. It's like, Okay, guys, let's get it going. The Taylor rule is described on the Bloomberg is stunning. It's something you and I never would

have envisioned. John Taylor Stanford never would have envisioned where we are. Which moves quicker the Taylor rule coming down with all of us moving parts, or does the FED move up at a greater speed. Well, I don't think the Taylor rule is really that relevant to what the Fed is doing right now. I mean, if you listen to Cheer Polo, he talks about the importance of financial conditions, and I think that that's the key issue. The financial

conditions today are extremely accommodative. To slow the economy down, the Fed needs to make financial conditions less accommodative. How do they do that? They raised short term rates. They raised short term rates more and faster than what markets expect. Bill, How does balance sheet reduction play into this as well?

From your standpoint, Well, it's interesting that that there seems to be a growing sentiment that the balance sheet reduction is gonna happen sooner than last time, not just in time, but also in terms of the level of interest rates. Where the Fed is going to start the balance sheet normalization process very daily last week talked about getting going, you know, after a couple of rate hikes. I find

that a little bit surprising given that the Fed. Fed officials have also said that they want the federal fund rate to be the primary tool of entary policy. Well, if you want the federal fund rate to be the primary tool of monetary policy, you need to get the federal fund rate up so it can actually react to adverse shocks in the economy, so you can push it back down. I think the case for being a little bit more patient with the balance SHE is still pretty strong.

But it certainly looks like, judging from Fed officials commentary, that they're gonna go a little bit faster this time, not just in time, but also in terms of what level of interest rates we have to get to before they start to normalize the balance SHE. What's your sense of how much they should raise rates this year. I think they should go faster than what's priced into the market.

I mean, obviously it's going to depend a bit on how the economy evolves, but my my best guess is that they need to do at least four or five rate hikes this year, and it wouldn't strike me at all if we if we get into an every meeting kind of cycle at some point. But what went wrong for this feder reserve. Let's finish that. What went wrong? Well, I think there are essentially four mistakes that were made.

Number One, the way they operationalized the two percent average inflation targeting machine by saying that they're not going to even begin to lift off until they satisfied the goals of inflation at two percent, expected to be above two percent in the future, and at full employment. So that means the starting point for monetary policy lift off is economy is already overheating. Number Two, I think they were wrong about the labor market. I think they were surprised

by how fast the labor market tightened. Participation rate has not come back to the to the degree that they were expecting. Third, they were surprised I think about inflation. Inflation, the transitory story hasn't played out very well. Uh it's I think a lot of the inflation pressures we're seeing our transitory, but that it's lasting longer, for a lot longer, at a lot higher rate than they anticipated. And then finally, I think they were a little bit too concerned about

worrying about a papered Hendrew. So I think they were a little bit too gentle in terms of their communication to financial markets because they were worried that was going to provoke usself off in the bond market. And I think in the fact, the problem right now is that the markets aren't taking them seriously enough. Bill, just wonderful. You've been wanted about this for more than six months. Bill Duntly a Bloomberg opinion and of course the former

president of the New York Fed. We need to kick things off in this equity market with Lori Canvassin of the head of US equity strategy at NBC Capital Markets. Laurie, you came into twenty two and said it would be a story of two halves. The first half of this equity market would look different to the second half. Laurie, start with what you expected and what you're seeing in

the only part of twenty two. So look, well, great to be here as always, But look, I think last week we saw a lot of things we'd expecting to see unfold in the first half unfold with a certain ferocity that surprised even us. So we thought that the first half of the year was going to be the find by another big hurrah. We called it the last hurra on the value trade, so things like financials and

energy fline. We certainly didn't expect to see energy of ten percent on a week, but we did think that we'd see this big move because you typically do see strong value leadership before first FED rate hikes and when the economy is running hot or above average. And what's interesting John to me is that with all these changes on rate hike use, we're still seeing an economics community that's looking for very, very strong growth this year. So

that narrative is still intact. We think eventually this market will shift back towards growth. Um. But we've still got some woodchee chopped there. The valuations haven't corrected. There's still some time to that March lift off. If we end up getting it then um, and it'll be quite some time before markets start digesting a slow down in growth, which is what's penciled in as a risk for three. So I think we've still got to let this process play out. This is a repricing. It's painful. Um, it's

got a little bit more ways to go. You're killing me. Lorio in the Tao is painful, Lorie, good morning. I want to talk about the most important research piece of the weekend, which was Bloomberg's Mark German's fabulous essay on Apple and would Apple go into fintech? And I want to use that as an overlay to year world, which is will corporations adapt given rising rates? And the answer is, you know what, corporations? Will corporations can adapt to this scenario?

Is that true? I think that we have seen, going all the way back to when the China tariffs really came into view, there's always this fear in markets that whatever big issue comes out, that it's going to cause a growth stare that companies are going to be able

to navigate. But time and time against whether it's the pandemic, whether it's supply chains, whether it's the tariffs, companies have been able to manage around, and you know, I think it's hard to bet against that adaptability of corporate America going forward, Lori. At the same time, you did say and a lot of people do expect some of the

pain to continue. I'm wondering where, in particular, always really struck by Sundial Capital coming out and saying roughly four out of ten nast companies have seen their share price cut in half from their cut more than from the fifty two week highs. I mean there's been a complete recalibration of certain tech valuations. LOOKA, we updated all of our valuation models on Friday. I didn't quite catch Friday's closed,

but I did catch Thursday's close. And whether you're looking growth versus value tech relative to the broader market, we still have big valuations on that side of the market. I do expect we'll be able to buy those those areas back before the year is up, but we're simply not there yet. And frankly, Lisa, I was surprised that we didn't see more improvement on my tech valuation model.

It's not as expense, it's not the most expensive sector in the market industrials is, but it's still ranking second. It's still ranking pretty extremes. So that's really telling me this free pricing still has a lot of room to go, Laurie, when you're thinking about FED right high, So let's finish finish here. What's the difference between help us distinguished between a rotation and broad based de risking that we could see off the back of the FED coals light to

this year. So what here's the thing is that people don't want to sell out of their equities if we're not on the precipice of a growth scare or a recession. And that's the real difference here. Um. If you go back to when quantitative tightening was spooking markets, it was also against the backdrop of the trade war which was just getting started, and there were real recession fears that

were starting to build. We are hopefully at the tail end of this pandemic, in recovery mode with a hot economy that no one's really arguing against for the moment. If you see that hot economy start to be questioned, that's when markets are really going to have a problem and you're going to run the risk of really seeing the substantial decline. But we're not there yet. Fantastic work.

Laurie as always going to hear from the Lori Canvassin and that of obviously Capital Markets a Tommy conversation and one of those companies that needs to adapt to the world around us, it's FISA and output Bola, the chairman and CEO of FISER on place to say join us. Now, don't de fantastic to catch up with you, sir. A series of announcements from your company led by the four year research collaboration with Being Therapeutics, expanding m R and a effort here it's pretty clear to see. I want

to understand though. My first thing to think seeing the news why the partnerships instead of straight acquisitions. I think sometimes being a good partner provides better results than if you own a company. And right now we want to place multiple bets and collaborations, and we have proven that

this works very well with buy on day. So I don't say that we would then you would not see also acquisitions from our side in this front, but right now, in these specific areas, we felt that partnerships will give us exactly what we want without dedicating amounts of capital that would be needed if we wanted to require the companies. Well, that's what I wanted to ask, That's what I wanted to go to next. What does that mean for capital

annocation elsewhere? What kind of doors does it open up if the strategy elsewhere as a series of bets and a series of partnerships. Clear early this is one of the top priorities that the visor and myself personally are having for for this year. I wouldn't say is the number one because the number one it is to stay ahead of the virus, to stay ahead of COVID. This is what the company needs to do because this is

what the world needs. But clearly number two priority it is to invest a lot of capital that it is accumulated either through the normal course of business or through COVID, and that needs to be an investment on science. We believe that we have the machine right now, the developed clinical development machine, the manufacturing machine, the commercial machines, all these platforms are waiting for a new science, highly break through science to come in and produce allusions for for

for humankind, and this is where the capital will go. Well, let's talk about the platform getting the most attention right now, m A and I. It's been met with hope, confusion, and to some degree skepticism. Dr. I'm trying to understand from from your standpoint, communicate to people the hope around this when we keep getting told we need another shot. If it's so good, why do you need a second, a third, and a fourth. Yes. First of all, let me say what I think about MMR and EMER and

it is not the holy Grail. But it is a very very powerful technology. It is a very powerful technology that has produced dramatic results, positive impact, and we are only scratching the surface. So our strategy and our vision it is to harness the power of this technology to multiple other areas. The first area that is the self evidence and the lowest hanging fruit. It is other vaccines for other infectious disease and this is something that we

are doing mainly in partnership with BioNTech. We just expanded with a third target. You said, why if it is not good, it's not producing longer lasting results. It's not something that's related with MMR and A is something related with the virus. As you most probably know or if you ask experts, the natural infection with this virus also

doesn't produce big immunity. In fact, the natural infection in many times it produces half the time that you can get in terms of how long you're protected then the vaccines. So it's not right to say that the mRNA doesn't create durable protection. It is this virus that is very difficult to tackle and it takes constantly. That's why we're happy that we have mRNA. But it's not the only area that mRNA can help cancer. It is another area and we're having significant efforts right now in the world

and internally. And another area that we announced today partnership would be are there are diseases. These are diseases mainly that uh they have as a cause a mistake in your DNA and genetic mistakes. Something is wrong with your DNA and there's a result you have a disease. What we try to do with the base in editing technology, which being is a master it is to targets that will be delivered through a marina that will be able to correct this mistake. There are several the in editing technologies.

We did a lot of new diligence and we thought that the base is how scope technology base is the best. And also did a lot of new diligence about companies and the best one was BIM and this is why we did this partnership. We're having some other deals that we're announced today that will help us to improve one further the ACUITOUS, which is given us license for ten different targets in the l m P target ellen P. It is the lipid nonparticles that are used to transfer

the RNA. And the last, but not least, it is the Contex what Condex technology is all about. They are uh creating DNA instead of biological manufacturing, which means that you have virus to make it. It's just in happy bottom line. What does this mean? Instead of having a process that takes a very important process for the production of our amor and a vaccine, instead of one month, you can take it down to a couple of days.

This is very very important because imagine, for example, you can have a new variant right now, if we were successful theoretically, instead of creating a new variant vaccine in ninety days one d days to do it in two months rather than three months. Instead of being able to create a flu vaccine that you are six months or five months ahead of the target, now you're three or four months before the season and you have better months.

Very important technology that will allow us to solidify our leadership in this area and more important, to deliver to the world what they're expecting from us, better health care solutions based on this technology. To you run it down o'clock. So I've got a champion. I apologize this from not Djokovic. In the last couple of moments a story. I'm sure that you've been following. I'm pleased and grateful that the

judge I of have a term my visa cancelation. Despite all that has happened, I want to stay and try to compete in the Australian open As you know, doctor, he got that exemption by having a previous infection. You said something quite important. I want to want to stand from your standpoint whether a previous infection provides similar protection equivalent to a vaccine. First of all, I'm a fan of Djokovitch, but I can't even go to this dispute

if he has the documentation or not. This is something between him and the authorities and their doctor, so that's it. I think previous infections, they are in general, not in this case. In general, they are protecting against the infections

for a period of time, the same like vaccines. The comment that I made was that, for example, in a lot of European countries, the validity of the certificate of vaccination in six months after your last dogs for naturally infection, it's go to three months or four because they know that the protection of you are getting after an infection doesn't last as much as the vaccine. This is what they said. Can you talk to me about margins on the vaccine as compared to say, the oral pill paxslovid.

What's the difference that doctor? Right now? Look, the difference is big because rest of all, in in the backs gloved, we are under person all the process and we don't have any royalties of size or size of a royalties to provide to any people. So we are having under of their chronomals and the production margins are are bigger in pills rather than the in this vaccine. Find a

question from me, and it's a sensitive one. You've set up a strong stream of recovering revenue now with this vaccine rollout, you're being insulated by government policy the world over. Do you worry sometimes dr about the pr fallout from that? The backlash that you could get making money off a vaccine has now been mandated in many many places, being insulated, having that revenue stream largely insulated by governors around the world,

do you worry about the fallout from that? Although I'm not sure to understand the world insulated, but I think I understand the meaning of your I mean, what you the meaning of the insulated but I understand I think the overall concept no, I feel very very very good. If you have to believe that it is appropriate for private sector to be entrepreneurs and produce, let's say, product

medicine that they can get some profit out. I couldn't think of a company that would deserve more to make money other than a company that did so good to hu money. I'm very proud and for what we have done, and I'm very very enthusiastic that this example will create way more risk taking in this industry, the health care industry that will result in way more breakthrough the products that will save way more like doctor a ton of issues that you and I need to cover in the future.

We appreciate your time this morning, though, thank you very much, Sir Ababuild that the Fighter CEO, the move we saw in crude last year, it's part of the inflation story, not all of it, but part of it, particularly the energy story in Europe, and that's complicating matters for central

banks and policy make is the world over. It's complicating it, but it takes complicated analysis, and someone that can do that is Francisco Blanche, Global Commodities Head of Bank of America We're gonna focus here on what you want to know, which is the price of a barrel of oil. But Francisco Blanche takes it down to the micro theory of companies minds production worldwide. Francisco, let me start there and

save the glory for Lisa and John. On a hundred and twenty dollar Brent crude, what do smelters do it? Aluminum plants? Given the Francisco Blanche call, what is an aluminum producers supposed to do? He tol thanks for having me. Uh, I'm hoping producer is supposed to be pretty in China pairing back supplies. And what we are saying now and we've seen now for some time, is the fact that the Chinese government is very focused on curtailing the energy

intensity of its exports. Remember that for the longest time we've all lived with over twenty five years a show we've lived within clearly cheap Chinese exports, which were driven by cheap labor, cheap capital. But also many people forget

about this point cheap energy. And uh, I think I think the Chinese government is increasingly uh focused on climate change uh and and and also focused on turning around its energy economy, which in turn, of course, as you just pointed out, it's it's impacting the price of aluminum quite severely. And you know, we're bullish aluminium this year. We think it's going to continue to go up and part of part of it, large largely is driven by

the energy. Increased energy costs, so as a smelter pretticularly here in China, you're supposed to pay back your production, but the same thing goes for Europe and ultimately um, aluminum and many other energy intensive commodities are heading towards North America, which is the world's energy haven from a cost standpoint. Francisco, you came out with a pretty stunning call earlier last year about dred and twenty barrels for crewe, the potential for that increase, and we've seen at that

time oil prices were climbing very significantly. Since then, people have cooled it a little bit. Do you still think that that is the pace of travel, that's the end point here? Based on the increased production from OPEC plus and based on the fact that we do have this omicron kink that is reducing demand at least temporarily well so, so amicron is is definitely impacting demand in the first quarter, but we've seen cases speaking South African and rolled down

pretty meaningfully. UM. I think a lot of medical experts, a lot of UH people on the field are calling for a peak in omicron cases in Europe and the US within the next within the next month. UM. Big question mark in terms of our call is what happens in China and whether the Chinese government can maintain the zero COVID tolerance policy, which is of course leading to lockdowns in different cities with something as contagious as omicron.

So that's I think the biggest question mark around our call. But we still think triple digit oil is within the works. Heading into a second quarter, we see demand recovering quite meaningfully. And one one thing we've been noting for a while is that opex supply OPEC plus supply, it's likely going

to start leveling off in the next two months. Remember, a lot of Russian companies have not been able to meet their export quotas, and UH ross Nift has been kind of left as as the main supplier of incremental barrels. Even then, we think Russia's incremental supply will level off naturally within a month or so, and then it's really just down to Saudi Arabia and Emirates to produce incremental barrels for the world markets. Fits it's going to be

a tight demand recovers here, Francisco. There's so much in there that I want to impact, but I want to start with the China and the zero COVID policy. Can you give us a sense of the bifurcated outcomes to your call, depending on whether they try to stick with it or whether they give it up and try to adapt to a more open type of policy. Right, Well again, I mean, I think I think the big question mark

here for for everybody is what happens in the Winter Olympics. Um. We are a month away, and many people may included which are not necessarily experts, really question how you can run a zero COVID tolerance UM policy under this influx of athletes from all around the world and diplomats and and and kind of everything that the Olympics brings with it. Um. So, So I think assuming that, you know, assuming that there is there is some relaxation of the policy, UM, we'll

see continued growth in demand. But remember China's fifteen and a half million barrels a day in a hundred million barrel day market. UH is the second largest consumer in the world. It's the number one oil importer in the world. So obviously a strict lockdown in China broad based, will lead to meaningful demand laws. So so we're keeping a close eye UM and UH and and and that's the

main risk to our view. At this point, we think Iran, which is the supply risk, is less of a challenge given UH seems like a resolution to we run a new e standoff is looking less likely by by the day. But those are two main downstair risks to our view. Francisco, forget about all the Wall Street chit chat. What does triple digit oil, triple digital aluminum, triple digit live cattle, What does all that mean to us out in the real world. How's our world gonna change with the Francisco

blanche of barrel oil? Well, what's going to change? And you guys have talked about it in the prior segment. Is going to force the Fed to tighten policy a little faster than the markets anticipating I think four hikes

this year. It's pretty much baked then. Um, so we're gonna see that I'm a little more worried about the balance sheet runoff UM, partly because what we saw back in In fact, back in the day, we wrote extensively about this in our process at publications, and we looked at the impact of that on pieces entitled one of them entitled Mind the Unwind. And I do, I do believe that that the fat bounce sheet has a huge impact on on just generally asset values. Maybe let's sew

in commodity values. But we're still saw a big sell off in commodity prices as the FED started compress its bouncy in the second half of twenty eighteen. So so I think I think that's that's what it means. It means the Fed's going to be um having to to press all harder on the brakes. And uh, and of course we know that the big forces of demographics and technology could come into play in a minute. So so it's it's a difficult job for the FED to to

slow the economy to bring inflation back down to two. Um, they could overdo it. And and uh, that's I think the big risk we're looking at into into the second half of twenty two And and and I guess first half of twenty three. That's what everyone's got in mind here as as we go over the next six months, Francisco, can you give us a sense of the pace of that increase to triple digit oil and what the trigger

could be? Right, So, the trigger is going to be primarily a competition between gasoline and middle de slids things like diesel and jeffuel that refineries need to produce so generally, and you have two big forces in the oil market, the driving and trucking and flying coming together and clashing right with this backdrop of incredibly high global gas prices um creating substitution into oil. That could I think be the trigger from a demand standpoint. Refiner is really trying

to catch up and produce both both products. And remember the incremental barrels that Saudi Arabia can bring into the market are going to be heavy and sour. And I'm going to do technical here, but heavier and sour barrels are harder to refine, So I fires are gonna have to work twice as hard to bring the gasoline and

the jet diesel the market once. But at the same time they're gonna have to do that with incrementally heavier barrels that are harder to refine, and and that's a little bit what we saw back into plasser and eight. And that's one of the reasons we remained quite bullish on on oil heading into into the summer months here. Plus there is a big pent up demand story. I think we all want to travel and move around and

and see friends and family and visit places. So so the pent up recovering services, I think it's going to be quite spectacular once once the the omicron wave faiths and and and of course, assuming there's no third or fourth or fifth transformation of of of the virus here. Francisco, just quickly you mentioned the back end of I think a lot of people would have sat up when they heard that, because we went from seventy three down to forty five and q fouren it was a big, big

down draft. It feels different this time when I look at the screens every day. Yields her up and equities to suffering crews pretty good. It's resilient. Can you walk me through the different dynamic now compared to say, back in the back end of right, So, so I think I think it's different. Uh, interest rate hikes are different than than bannanship compression. UH interest rate hikes do not tend to slow commodities down in the early stages, and

we've seen that repeatedly. Commodities are late cycled performers. Inventories right now are very very low for crude oil and for many other UH raw materials. So what tends to have in UH in in FED tightening cycles is the first few sites, the first few hikes are are less impactful, and then as you get towards the end of the of the hiking cycle, that's when things tend to roll off.

And that's what we saw the last time as well, Right, So the second half of eighteen was going to at the end of the FED tightening cycle, if you like, UM and UM and and and that's why we expect this time around, except for the FED seems to be UM trying to accelerate everything a little more than they did back then. Back then they were very very very gently hiking rates. Now things could could happen a lot quicker.

So so we do expect a lot of alativity in two and I think that's true for all markets, not just commodities, and things true for equities. UH it's true. For for fixed income assets, We're gonna see a fair amount of vall uh. And you know I say that as part of my role in in the real business, but research business. So we do think alativity is gonna be extremely high this year compared to other years. Thank you as always, Francisco Blanched the Bank for America. It

is a time of resolutions. It is January, and you need to do something now, so just possibly you'll be smarter twelve months from now. What's interesting is the shortest answer that I know, and I've trumpeted this for years, is a physical subscription to Foreign Affairs Magazine on radio. It's simple. You throw it on your table, you read one or two articles every month, and you are way better off. This month is no different. The Digital Disorder.

A tour divorce to Force, including Joseph Nye, Valley Nasser, and Elizabeth Economy. Dan Kurtz Failan joins us right now, editor of Foreign Affairs Magazine. I went right to the Elizabeth Economy article. Dan. She did some great work with us with Ian Bremer. A few weeks ago. She passes China in America and says, maybe China is looking at the battle and they may win the battle, but will they win the our peace set out first? Now the

battle in the war in Beijing. So right, So, Thomas, you know, Liz was really one of the first people to remind all of us and to really point out just how ambitious Chi Jimping was when it came to is what he wanted to do within China, what he wanted to do with what do you want to do globally? So Liz was really on the ambition of Chi Jimping, the extent to which he really represented a change in Chinese leadership, and what she sees now is just the

truly global extent of what he's trying to do. When you see it in in Belton Road, you see it in China's ambitions in in its own region, in Taiwan and the South China, see some of the crisis we can see coming this year, you see it, and it's economic role globally, and and what Liz really traces out in this piece is the tension between Chi Jimping's leadership

style and the extent of those ambitions. So you see, you know, we also had a lot of time reacting to some of the you know, gigantic top line investment numbers to some of the ambitions, but Chi jimping as we're starting to see also a lot of real challenges, and he may be his own worst enemy when it

comes to some of this. And one of the really worrying things I think at this particular moment, especially as you have huge imping Ivan not left China in a couple of years, it's unclear what kind of information he's getting, what kind of feedback epe. So you see this gap between ambition and ability to deliver that could manifest in

slightly worrying ways and the months ahead. You're an expert at dancers failing on another time and place of China's fractious relationship with America, and that's George Marshall after World War Two? Who's Joe Biden's George Marshall. You know, there's that scene where Marshall retires and FDR calls him up like forty six hours later and says, unretired, Now you're going to China. Who is the George Marshall for the

president to get this done? I think what what you see that is similar between that time and now is really this fight within the administration to define the basic objectives what we're trying to do with our China policy. So in the nineteen forties, it was a question of what you do to try to stop now from coming to power soft into a Chinese victory, which is something is uh, we we all know now we failed to do.

And there's a similar fight today among different parts of the administration, different parts of the government to decide just how tough we need to be in to what extent we can be conciliatory. So you have you know, someone like John Carey trying to find ways to work with China on climate change, and you have others with the administration at the Pentagon, Kirk Campbell at the White House. I think you're trying to craft a tougher line and it's really this uh process of working out how these

different forces fit together within the administration. So you can see some slightly incoherent elements to this over the course of this year. And I think the challenge for the administration going through this year is trying to really craft that into a strategy that reflects those various considerations and pressures. And the President himself is behind There's so many incredibly

important topics. I do want to stay on China. But I do also want to address another essay that I thought was fascinating about the rocky transition to green entered g especially in light of what we've seen in the price of oil, the surprise rise because of a lack of supply, a lack of investment in production. How does the global revolution and green energy rejigger the global powers. So so this is a great piece called Green Up

People by Megano Solomon and Jason board Off. And what we what really comes through, and this is that even as we start to think about new energy sources and look towards a different energy future, the geopolitics don't go away. And that's true both in the in the medium term and also in the long term when you do see

a truly grand transition. So in the short term, uh, there's no better example of this than what's happening now with Russia and Ukraine and Europe, where in the short term Russia has more influence from its energy resources and that's a big tool that it brings to the Ukraine crisis. And then in the long run, when you look at things like rare earth materials and the kinds of inputs to all the parts of the green supply chain. All of that's going to become geopolitically complicated, just in the

way that oil has been traditionally. So even as you consider a very different energy future, a lot of the dynamics and risks that are very familiar to us from past decades are not going to go away, and in fact, in the short term they may go up. Especially policy makers don't really appreciate those risks in the near term.

I was just thinking also about Kauza, Khistan for example, and the uranium output that they're basically the Saudi Arabia of uranium, and people are suddenly aware of this because of its input to nuclear energy. Who are going to be the powers of the green future that you foresee, even with some of the rockiness along the way. So this to to go back to China. You know, China has been very very deliberate, as you all know, in building up its power here and I think before most

other governments were really thinking in these terms. China saw that by becoming the green energy superpower, it's obviously still using a lot of coal and using plenty of a dirty energy, but it really set about trying to dominate a supply chain to dominate a lot of these industries, a stuff that I these industries really heavily. But you also have a lot of much more kind of complicated geo political spaces where mining is really is really prevalence. So you have the d r C, the Congo where

they're they're important minds. You have places like Chile and Bolivia.

All of these bring their own foreign policy questions. So there was obviously a time when we would have worried about, uh securing oil supplies in the Middle East, But now it's gonna be this major foreign policy consideration thinking about those uh, those materials that are in again some some complicated countries that are going to bring political challenges with their own Dan thank you Danks failing that of foreign Affairs, tell him what a staff for geopolitics and twenty two.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern I'm 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