Surveillance: Kuleba Rules Out Cease-Fire (Podcast)

we are going to go to Brussels. He is not only a foreign minister for Ukraine, but from a family of public service to Ukraine's father was ambassador, including a long tour of duty to Kazakhstan. Maria. Today, oh with Mr Khleba in Brussels, Maria. Good morning, Yes, Tom, good morning. And we're now joined by them Culebra, who of course

is Ukraine's foreign minister. And when this war started, you, alongside the rest of the Ukrainian government, you meet the decision if we're not going to leave, we're gonna fight for our country and we're gonna win this war. I wonder, now you've been on almost a global tour, You've met pretty much with everyone that can support your cause. What is the message that you're sending diplomats when you go

on this tour Uh, you're not believe in Ukraine. But now you can see that Ukraine will win this war. Stand by us and share the victory with us for the sake of the world. Because this is not only the Russia's war against Ukraine. This is the threat that Russia and the challenge that Russia poses to the entire world. We have to stop them here in order for others

not to suffer as much as we do. And one of the things that you say, and President Lensky repeats to is that when you look at the strategic options right now, the only strategic option that works for Ukraine is winning is a victory. Nothing else will suffice. When you say we've got to win, what does it mean in real terms, Well, you have to understand that this is the world for our existence. Because President Putting does not recognize how identity, He does not recognize the right

of Ukrainian state to exist. This is why we understand that we have no other choice but to win this war, because it's a war for our existence, and winning it means first deal occupying our territories, restoring territorial integrity of Ukraine within its internationally recognized borders. We have no intention to capture anyone's piece of land, even inach of it. We but we want everything that belongs to us to

be ours. And of course you often hear I know this really makes you angry and infuriates Ukrainians when you hear things like, oh, but they should just accept the ceasefire or perhaps just give away the dam Bass and this will put an end to it. What is the

flaw in that theory? According to you, one of the reasons why this war is happening is because since twenty and fourteen, some Western countries were countries, you say, some Western countries, which human Germany, Germany, France, to some extent, the United States and other other other European countries. They were always pursuing the policy of half measures towards towards Russia. I guess you're scared, you're putting. Well, you know, every

country is special. Every country has its own reasons to pursue one policy or or another. But one of the reasons why this war is happening, it's because everyone was always telling us Ukraine, you have to consider this to pacify Putting, you have to consider that to prevent the war from happening. Now, this war happened. It means only one thing that this entire policy Ukraine has to consider

something failed. Doesn't work this way. So instead of asking what Ukraine should do for a ceasefire for the end of the war, the question should be addressed to Russia. What Russia should do? And I would like to command now both Germany, France the United States for really changing their perspective on this. We still have some discuss but in principle they clearly understand that this is a black and white situation and it's Russia who bears food responsibility

for what is happening. And Mr Kula, you mentioned the French, and I have to ask you about this because over the past for eight hours there's been a huge debate as to whether or not and then when my com perhaps suggested to Mr Zelenski that he should give away some land in order to get a piece deal that, of course the French denied this. What's going on here? Has anyone ever told you? And when I say anyone, of course, I mean global leaders just give away from

me and give away something in the east. Have you been pressured to do that? I was not present in the conversation that my President referred to in the conversation

with President Macron. So I cannot comment on this, but before two thousand and fourteen, before the sorry, before twenty fourth of February this year, when the war started, yes there was some they were not pushing, but they were kind of exploring the option of what could be the solution, what could Ukraine abandoned in order to make a deal

with Russia. But I want to make it clear, and I think it's everyone who is watching news from Ukraine and sees Russian soldiers committing atrocities, Russian army destroying I'll see this. It's not Ukraine to blame. This is an unprovoked war. Not neither Ukraine, nor Europe, nor NATO, nor the nor the United States provoked Putting to do what he's doing, and therefore he must bear full responsibility for that. And you know, looking for face saving options for Putting

is a simply false approach. Let's Putting himself find a face saving option for for him, And Sir, I have to ask you, of course about NATO. Over the weekend we had Finland Sweden applying for this. We've heard a lot of people saying, yeah, we welcome them. I'm guessing for you as a better moment because you tried that path two and you didn't get the welcome you're expecting. I hope or I wonder are you disappointed or you

said by that? And when it comes to the europe and Union, which we have here in the background, I mean, is this your best hope now? Is that the you you've given up a NATO. I I believe Ukraine is the best hope of the European Union because look how the European Union changed in the last two and a

half months. In the beginning of the war, the perception was then NATO is strong, and NATO can act and NATO can deliver, and the only thing you can do is to express different levels of concern in public statements. And the war proved that everything is completely different. It's NATO that as alliance as an institution can do very literally for anything. Allies, yes, they're very helpful, the Coalition of the Willing, the Coalition of the Willing, who represent

part of the alliance, they are very helpful. We will never forget how much how they support us. But NATO as an alliance did nothing. EU sanctions, strong political statements, economic support, military. If financing military support to Ukraine, European Union is back on track as a driving force, as someone who shapes the future, who can shape the future of youuro and it's Ukraine who gave them the chance to demonstrate that they can. And you make that very clear, Metricula.

Thank you very much. I know you're heading to the Hague tomorrow, so too. I know you told me you want to pursue this case of criminal charges against Russia and the Russian Army. Thank you so much for your time, and we appreciate it at such an important hour for your country. The pleasure is mine. Thank you, Jonathan Maria, Thank you a wonderful interviewed with the Ukrainian Foreign Minister.

Now to get out front of a sacred oath. Mark Esper, you know him as a Secretary of Defense of modest controversy for President Trump, but far more, the most coveted award at West Point. There is a statue at West Point and far more the heritage is seen in the theater hotel of one Douglas MacArthur. And when you win the leadership Award at West Point and an honor of General MacArthur, it's a big deal. One of those winners.

Mark Esper joined us winner maybe doesn't do it justice. Mark, tell me about what General MacArthur would do today with all of his controversy within the Republican Party the middle twentieth century isolationism, and that what would General MacArthur do with this modern defense department that we have. That's a great question. And I guess thank you up front for

the introduction. Tom. You know, I MacArthur what we would consider him today to be a combatant commander right because of his command in the Pacific and later during the Korean War, but you know for West Point, west Pointers and and others in the military were we're most recall his famous saying about duty, honor, and country, and that is the West Point model. He says, those three hallow words reverently dictate what you ought to be, what you

can be, and what you will be. And it was that phrase, and that's saying, as it goes, is what in some ways guided me during my tenure boat the Secretary of the Army and Secretary of Defense. I am fascinated by your thoughts of the and this is a very sophisticated word, sir. I don't know if you saw this at West Point. The ginormous NATO exercises going on right now from Estonian Lithuania on down. This is a new world we are in. Is our Defense Department ready

with Secretary Austin for this new world? We are getting ready. I think a hallmark of the Trump administration was we advanced the National Defense Strategy that I made number one my top priority to implement. But this defense strategy also described a new era of great power competition to find as China as our top strategic adversary and secondly as Russia, and to confront these two countries, particularly China. We really need to modernize the military from the equipment to our training,

to our doctrine, and all those things are underway. So it's important that the Pentagon continue on with what we developed during my tenure, and that we also provide the funding. That's really you can't do it without having funding. And I've been disappointed by the White Houses the Biden Administration's funding request these first two times. They've been flat. And thankfully the Congress increased the spending and that's gonna be

critical to driving change and modernizing the armed forces. Secretary as Per based on what we've seen with Russia's invasion of Ukraine. How should the US military view what to expect with Jijinping and Taiwan, especially as he does seek get another term. Yeah, look, it's it's the great question.

Russia we always defined as a superpower, but a declining power, and it's been evident from their actions last ninety days and uh in Ukraine that they're not quite the power that we thought they were in terms of military capability. So this has been a strategic failure across the board for Russia. But China is very different, right, It's a It's an economy of sixteen trillion dollars, second largest in the world, ten times bigger than Russia. Economic interdependencies that

run around the world. We're seeing just because the shutdowns due to COVID in Shanghai and other places, how the supply lines reach. So we need to be very careful about how we plan and prepared to deal with China. We need to send the same and the proper signals of resolve and determination to defend young democracies or democracies like Taiwan, and make sure they understand that we're going

to defend this world order. These sets of morms and values that have really helped promote prosperity and freedom around the world. For the last seventy five years, Secretary Asper, the Trumpet administration was known for looking inward to being a very nationalistic in the approach to geopolitical concerns. And we're at a moment where NATO seems to be coalescing in order to deal with Russia and the invasion in Ukraine.

How much should the US military and beyond sort of build on this coalescing of NATO and work with allies in order to get some sort of bigger presence, whether it's in Asia or at least to figure out how to respond if there is an invasion of Taiwan. Yeah, look, we absolutely have to. I consider myself a Reagan Republican.

Ronald Reagan promoted American strength piece through strength. He believed in the defense of democracies and the world order as we understand it, and believe that we should stand up for our friends and allies. And I made an important plank of my tenure to really go go out there and try and strengthen our allies and grow new partners. Uh. And I'm a big believer NATO, and having served in NATO's Young Army infantry officer, I believe that we need

to continue to do this. And it's I'm glad to see finally that NATO is coming together, more countries are willing to commit more for defense and uh, and that we have possibly hopefully new to new countries joining. And you know, ironically it's Vladimir Putin who brought the alliance together. So uh, the the key thing will be sustaining this momentum as we at some point look eastward towards China. Marcus Berg, the nation was fractured off of Vietnam. Republicans fractured,

Democrats fractured. It was equal opportunity. But we're still adjusting. And now, as Robert Gates would say, from our our our holiday from history, we're still adjusting to the debris of Vietnam. Are we adjusting in real time? And how do Republicans and Democrats come together to help those with

the sacred oaths? You know, you're you're right. I mean, after the Vietnam War took the army twelve fifteen years when I interacted due to really rebuild under again President Reagan, and I think now we're coming off the war's last twenty years in Iraq and Afghanistan, and again during our time and beyond, we began rebuilding the army and all

the services. So it will take time and money. Look, I said on many occasions here the last couple of months or so that the greatest threat I see facing our country is the extreme partisanship on both sides of the aisle that is creating dysfunction in Washington, d c. And until we solve that problem, it's gonna be hard to challenge to take on the big issues such as you know, are growing budget debt, it's what thirty trillion dollars?

How do we come up with a consensus that with regard to a strategy towards China, how do we address all these big issues facing our country? And that's gonna be key going forward. Going forward is what we wanted to accomplish her Mark Asper was an important book for those of you on radio. You just need to know. There's a certain weight to it, like six plus pages. Mark Esper a sacred Oh, it's really can't say enough.

And of course he leads front and center with a gentleman that he worked for at the white House Law, you're going far away. Before the advent of financial media, there was actually an understanding that bonds were not just full faith and credit or f F and C. The financial media only quotes full faith and credit. Thank you Lisa Bramos, who has made a career of looking at credit and high yield, so too, Amanda Line them joining

his global credit strategistic Golden Sex Right now. In the old days, you had a blue book, a Standard and Poors blue book, and you thumb through it and you looked at corporate bonds and it's say, damn Fuss. The giant at Loomas Sales has said, you can enjoy losing money at corporate bonds. How much are we losing right now? With the aggregate index down ten percent plus? Good morning, Tom,

thanks for having me so. A couple of weeks ago we talked about how both I G and high yield total returns were off to their worst start on record. So it's been a very, very painful year. I think the key risk for bond investors in our view, is that that's been entirely driven almost by the rates component,

and spreads have held in very well. So in the event that we do get a recession, which is not our economist space case, but if we did get one, there's a lot more room for spreads to widen and kind of even exacerbate those losses that we've already recorded here today. And so that is that is one of the key risks to the market. What a what an i G investment grade old style bonds? I want to buy a general motors behind it's a part of the

aggregate index. What do you do where equity people say I'm going to go to cash or you know, I think there's a there's a dialogue about what equity people do. What do bond people do when they quote unquote want to go to cash? Yeah, they often move up in quality or shortened duration. But one of the risks that we've highlighted in our recent research is that actually moving

too far up the quality spectrum. And i G also has its risks because those are the companies that are likely to move ahead with say debt funded m and A or aggressive shareholder returns irrespective of the slowing economy. And so we actually like within i G that sweet

spot of triple B rated firms. Those are companies that we believe are committed to staying investment grade, but are likely going to behave in a more conservative fashion relative to say they're highly rated peers cash rich pharma and tech companies for example, that will do M and A regardless of the backdrop, Amanda, where are we in terms of what we're pricing into the credit market right now? Initially you talk about the worst start of the year,

ever that was largely due to rates. That was not due to the extra cushion of yield that accounts for potential defaults. Now we're shifting into something else. We're starting to see that widen out. How far in that process are we? That's right, So we have not priced in a lot of default risk and specifically kind of zooming in on the high old market, and we do think

that that's probably appropriate at this stage. So, just to set the backdrop, our economists are not expecting a recession as their base case this year, and what we've said is that even if we do have a downturn and growth slow substantially, the high old market is unlikely to experience the uptick in defaults that we're kind of used to seeing in previous cycles. There are a few reasons

for that. One is just we didn't have a default cycle that long ago, right, so in twenty we had a lot of the weaker firms cleaned out of the high old market. Energy and metals and mining and kind of natural resources are also in a much better position now relative to previous cycles, and those are historically the vulnerable sectors. And then also we have a lot of

cash on hand and balance sheets are very strong. So um to answer your question specifically, we're not baking in a lot of default risk in the high old market right now based on current spreads of four fifty. But that's that's probably not inappropriate given that, I would say the higher quality and the increased strength of the high old market movement, Amanda, A lot of people would agree

with you, and we see this note after note. Basically, even if we get a recession, things don't have to get that bad in credit because the people have pushed out their maturity so far because there was this washout. What does that mean in terms of how high the Fed can go with the Fed funds rate before we have a real problem in credit, which is really the market that the Fed watches, and potentially it would respond to.

Not equity is having a bad day right exactly. So our economists expect a terminal value of three to three and a quarter percent. A large amount of that is already reflected in FED funds futures, for example, and baked into the market. UM. I think there's a lot of room to go for financial conditions to to tighten and really for the FED to deliver on the hikes that are already priced in to the market, and I think

credit investors are expecting that. Really the key risk for credit is if we had a freezing up of the primary market activities such that corporates, if they wanted to access the debt markets could not. Right now, we're actually saying that a lot of the muted supply volumes are due to an unwillingness to access the market on the on the side of corporates, as opposed to an inability. And it goes back to exactly what you mentioned. Corporates

have the luxury of being patient. They spent most of one raising cash pre funding years in advance, and so they're not really at the whim of the market in terms of having to execute in a choppy conditions. I know Jonathan talked about this on on Friday Afternoon on his program, but really on those windows of stability, you're seeing a lot of activity, and we think that's indicative of a market that's still remaining open, but yet much

more challenging in terms of timing that appropriately. You have no idea how jettis t K will be, Tom's gonna be South, janis that Roy had got the plug there? Amanda, thank you. Right now, let's move on with this economic analysis of the United States to work global sense off of the Milk and Institute meetings. William Lee joins us their chief economists. Billy, can the markets constrain or restrict

the Fed? If we look at the Bloomberg Financial Conditions Index, it's sort of doing its job right now making financial conditions more restrictive. How will the FED react to that? Well, right now, the markets are doing of the Fed's job because the market increases our way above whereas as John just said, actually increases. But also, uh, the expectations of that aggressive policy stands is something that the markets that cluly priced in, and I think it's based on some

misguided information. My my colleague, former colleague Andrew is an example of that, where he's focused on the aggregate wage price numbers, and I've been looking yet the micro wage price numbers, and I really don't see massive size of a wage price spirals style. In fact, most of the wage increases have been going to where the labor shortages are appearing, the low wage workers that be the younger tenured workers. Billy your world famous for this. And this

goes into a death sile analysis. I would guess economists like City Group love to aggregate numbers together. What part of that death stile analysis matters for Chairman Powell and the view forward? Well, Chairman Poule absolutely cares about the aggregate number, but do you see aggregate wage price spiral? Uh? Now, granted there that has lost credibility since his meetings. The average inflation rate break evens that are priced into five

securities way above three three and a half percent. But given that, I think we shouldn't get too carried away with how much the Fed has to Titan. Don't forget

the fit. For the first time in FED history, we have two policy tools, the balance sheet and rates, and I one of the strategies that they haven't talked about enough is using that balance sheet to cool off and target those red hot sectors in real estate and consumer durables by draining the liquidity from there, especially the mortgage backs, and by then easing up on the amount of rate

increases they'll need that. This is again the first time in history of the FED, with two policy instruments, it may be able to escape crashing the economy, to bring inflation down to its target level and some of that in the market, and did in a bit of a mess in tween when they trying to wind down a

balance sheet. They're doing this at a much more aggressive level, twice the speed once they get going, Bill, can you just add a little bit more kind of to that how much they're about to do with a balance sheet and how this is going to work through the economy through financial conditions. This is one of the most great uncharted territory because the FED has really never done balance sheet before, and as you said, the last time it

did it, it it did in a very clumsy way. Right now, it has to be very careful and using that that mortgage backed securities holdings because that is where the real red hot sector is, the real estate market, and draining liquidity there is going to be absolutely article. But now the treasury run off is something that will be done on almost autopilot because it has been trety holders that

are so short. But I think the key to the feeds policy stands is how aggressive doesn't have to be with rates on top of that, if you you really believe that there's a wage price spiral big priced in, then it has to be aggressive, no doubt. But my my view of the numbers on the labor market is such that you know, if you're above the median wage or median profile of the median worker, you're not getting the ten twelve percent wage increases. You're getting barely two

and three for senior managers. So I think the FIT has the cool off of it in terms of worrying so much about that wage price spiral, there really is no sign of it yet taking hold, and I think that's something that Wall Street has missed entirely. Even so, if the FET is targeting inflation, even if it's not coming from the wage price spiral, there are so many inflationary pressures coming from China from the supply chain disruptions which are not necessarily positive for growth, which are not

necessarily signs of momentum. But still the FET is shown a willingness to target demand in order to respond to supply side responses. What's your view on how far they would have to go to normalize the supply and demand side of the equations. Well, that's our the lesson learned from the seventies. You cannot let prices get out of control, even though a lot of the inflation is coming from the supply side. The Fed's job is to equilibrate supply and demand. If you can't get supply up, then you

certainly have to bring the band down. And the wrong way to do it, though, is through hit targeting investment, which is the cost of capital right now. I think the key to inflation in the future is productivity enhancing investment that has to be encouraged, and I think the FED to choke that off just for the sake of hitting its supercent target in a reasonable amount of time would be a serious mistake because that would cost us the three to five year horizon in boosting inflation without

those productivity enhancing investments. Right now, we've got a two year treasury yield at about two and a half percent. The team over a Bank of America, which will catch up with John in a little bit here, believe that it will go up to three and a half percent. Do you think that would be enough to torpedo this economy to actually send the United States into recession? It would be enough if we drain liquidity adequately from the red hot sectors using the balance sheet. It will not

be enough by traditional measures. And so so I think that this, as they said, there's got to be a time when the thing can no longer say the balance

sheet is the passive tool and the secondary tool. It has to become the primary tool for cooling the economy, and and and and as far as China's concerned, by the way, the real key to watch is whether or not China becomes aggressive and takes over more about Taiwan, because the lesson learned from Ukraine that shocked the leaders over there is that the the world came together and became much more cohesive. That will put a stopper, I think on military encourasions in Taiwan, but it won't stop

their cyber attacks or political uh political strategies. So so there's the supply constraint is a real issue. Because t SMC is global, there is no substitute for advantage IPS. We can find other places to find to buy week. We can find other places to grow horn, but we cannot find another t SMC. But just quickly, within the Communist Party, do you think that the leader president, she is in a position where he can make a step as bold as the one that you just described right

now if he gets his third term. The one thing on she's mind is that he will leave the legacy that he created, the path of returning Taiwan to China. This is something no one has accomplished, doom shaping, no one, not even Joel or Mazy doom and so so this has been a China obsession for for decades, ever since China open. So you bet you he's going to be guilt going after Taiwan. The question is how. And right now the world coming together with about Ukraine, I think

has put a stopper on any overt military actions. But wonderful to hear from me, said as always Bill, leader of the Milk and Institute. Let's kick off the program today with Christian announcing the chief investment officer at Deutsche Bank Private Bank. Christian six straight weeks off the clients in the equity market in America. Christian, when you buy this,

when you make a move. Yeah, fortunately a free underweight equities, And honestly, we are now thinking also of coming back at least to going to a newtube position because we are so seeing so various science in the market. There's probably no change to zero COVID policy, there's still supply chain issues, so everything is superbarious if you look all bear index. So I think it's time to go back

a little bit to a newtube. That's very important. It doesn't mean that we are now getting super optimistic, right. The environment is certainly a tough one to be very honest. Christian ben Leisler's out of the note this morning, or he basically says a lot of companies didn't get the crisis memo. You see that with a great separation which I'm sure you see is well, how does profit matter going forward? Yeah, if you if you look at the markets and you analyze the market movement of for example,

the SNP or here in Europe. I think what's very interesting in the recent weeks, also including this last six weeks, you've seen that very very high correlation of indsease two real rates. I think that's important. There's the inflation component. It has not been so much about the results of the companies. I think that might change down the road.

For example, if you have the Q two earning season coming in then in July, I think, of course there will be a lot of focus on how much margin pressure was there or is still there because of inflation. So I think there's a change. But if you look recently at market that was certainly driven by inflation and and rerangs for staff. So Christian, you are underweight equities, but you are starting to get a little bit more constructive, even as you see the prospect for recession continuing to

climb over the next twelve months. Can you pass through how you can be bullish on equities heading into a recession. No, I'm not saying I'm bullish on equities, but I'm saying we have been underweight equities, which was certainly right call. And you have even in bare markets, even recession, in markets we have one of the strongest values sometimes in markets. And I think if sentiment is all negative, there is some room even in a recessionary environment for for some

market upside you don't want to miss. But it's not that I'm saying you get overly optimistic. You do no massive overweight and equities. I think that's not the economic environment, where in Christingly sounds like you want to get back to neutral. So let's talk about that. Where would you buy to achieve that? Well? Markets which are mostly underweight. Was the US was also China for example, and there's a lot of discussion, of course on China. I don't

see immediate change. Look at the results or the numbers we've seen this morning in China. I've I've done called colleagues in China. The sentiment is extremely bearish. Um no change to zero COVID policy. But if you look longer term, right, the market is down more than thirty five percent since the peak. I think if you at least go to

a more neutral position, that cannot be wrong. If you buy something thirty five one, not overweight, but going to neutral, I think that's that's the actually want to go Christian wonderful cantchas as always question now saying at Deutsche Bank Private Bank. 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.