Surveillance: Latvia Defense Minister Pabriks

team at Bloomberg, including Bloomberg's Maria. Today, I'm bringing us some of the conversations out of Brussels and out of the continent as well. And we have another one right now, Hey Maria. Yes, Jonathan, and we're now joined by Latvia's UH defense Minister of Babis Atkis who of course he he's one of the most outspoken ministers, I would say in in the European Union when it comes to defense, Sir, you were telling me off camera Europe really needs a

reality check. We needs to be much more forceful on Russia. When you say that, what do you mean? I would like to say that the job is half done, because yes, we reacted in quite a unitary form as far as the sanctions towards Russia. And also as far as the military and umlitarian assistance to Ukraine. But now we are already in the third force week of this aggression from Russian side, and the job is half done because there are still companies in Russia which are functioning for different

types of reasons. Then as far as Europe itself, I think we have to go complete with completion of this deep butinization of these societies where the corrupt oligarchic, autoritarian Russian people have been really very deeply routed now in

these societies and this have to be done. And as far as the military and other support to Ukraine, I would say that maybe it's sounds at the beginning very kind of even dangerous approach, but I think we should consider to reverse this very early escape of number of our embassies from Kiev because the country needs to support Ukraine needs to support. And And so when you say deepotinized, I wonder what do you mean by that, and if

and if it means what I think it means. Many europe say that's very provocative, but you say Europe should not be scared being provocative when it comes to Russia. So how do you go about that? Well, first, of all, Kremlin thinking about provocation is very simple. If they will be willing to do they will always find an excuse to tell that this is a provocation. So that's not important. I think we simply should looten to the eyes of Kremlin leaders and say, now you committed the crime. You

committed aggression. Now we will act. And there is nothing provocative by simply telling. Look, you have been by corruptive or other means, buying these villas, buying these proper taste, and you are now waging an aggressive war, just like Hitler's Germany against a neighboring country. But at the same time you still want to enjoy a great life in the rest which you despise. This is not possible. And and and of course I want to ask you one thing. You know, you say deputinize, you say a lot of

this is almost like Hitler after Nazi Germany. Uh, your country has a history with Russia. Of course, it is no not a secret that you were a part of the Soviet Union. I wonder when you look at what's happening, is this Vladimir Putting being a madman? Or is this someone who has made very clear over twenty years. My idea is to restore the U. S. S R. Because it's greatness for Russia that I'm after. In many ways, we have been warning already for almost twenty years. So

he's not a madman that's happening. What is his state of mind personally at this moment. It's difficult to say, because we don't know the information from the first hands, And of course he is kind of confused because he was obviously not thinking that this type of war will

not succeed. But at the same time time we still have to act in a way that we force all the Russian society also to think it stands and I think it includes also very much of information sphere and and all the possibility to break this bubble of information which Kremlin is using for their own population and and searches. Two very brief questions. There's a real debate about what

to do with energy imports. It is becoming clear that your sanctions and you said this is going to be the mother of all sanctions, but they're not for Russia. They continue to meet females and dollars. Is it time to step it up and target energy? Well, first of all, we have to get out all the Western companies from Russia, it's their model duty to leave this country now. As far as energy, of course, if the country have been on the gas or oil needle for twenty or thirty years,

it's difficult to do it in one day. But imagine the situation. What if that not be Ukraine invaded by Russia, but would be European Union invaded. Would be still go into the war and buy GUS. So it's so it's a mistakes. So when Germany says the reality is we can unplug, you're thinking, as a Germany is wrong. You can't do it. Well, it's probably very difficult to do it immediately, but let's put it like this, to be rational.

At the same time, we probably have to be hyper active and very fast to unplug as fast as we can, really as fast as we can, and not to think about returning to this anymore. So you say after this is a point of no return. Essentially it's it's isolation for Russia. But when it comes to Ukraine, there's many out there who believe at this point this is a hell of awards. Twenty six days, it's been brutal on the Ukrainian population, just negotiate any ceasefire and get on

with it. What's your take on that ceasefire is not a way out, as a way out is immediate withdrawal of all the Russian troops from Ukrainian territory. There is no other way out. And I would say that Ukrainians buy their blood paid also for the membership in your union. So I understand you cry Ukraine cannot become a member today tomorrow, but there must be a certain fast track established along with the way how we will pay because we would have to pay for the construction of this country.

So I believe that five years that would be the limit put also in our planning when we, if everything goes okay, should accept this country as a member country. And and over the weekend we saw the Russian say you have to surrender Marouble. We also saw them bringing out the big weapons of the hypersonic missiles. When you look at the situation on the ground, do you really believe, seriously, look into your heart, the Ukraine can win this war. You can already won this war. Yes, there will be

more sacrifices. But even if Mariopo falls, even if key of falls, which I don't think will happen as a struggle will continue because these people have nowhere to retreat. And in fact I must say also our particularly Western European and friends and sisters and brothers also we have nowhere to retreat. This is a way where we have to stand and keep the lot time because we have been retreating on the front of this aggressive and dictator for too long and that was our hugest mistake. And

just the final question. I know you have communications with the Ukrainian government. Were you here for Zelenski? Is it obvious to you that does man will either win or die in Ukraine and that's his thinking here will win and we should stand with him. Well, sir, thank you so much. Of course, always good to speak to you, and you certainly are are very open with your words. Of course I was glad VIA's Defense minister. Mr Fabric's joining us here in Brussels today, Jonathan Maria, thank you.

Wonderful work has always Leslie Felconio joined us now seeing your fixed income strategies for the America's at UBS Global Wealth Management, Leslie, I want to start with this bond market. Can I be blunt? Is bizarre coming out of chairman pound the news conference on Wednesday to see break even's higher, not lower, real yields lower, not higher, the curve starting to invert a little bit, Leslie, can you make sense of this why we're pricing almost in some parts some

pockets are fixed income. It was as if we had a Dovish news Comforts and a Dovish meet sinc. Well, I don't think it's surprising that the short end of the break evens are actually moving higher. And when you think about really what's happening with sanctions and now with Russian Ukraine and some of the an increase in the supply chain bottleneck and the increase in oil that we're seeing.

But to your point, I mean, having the tenure break even reached that three percent level, you know, it's not you know, concerning, but it's something that definitely believe that the FED is going to watch going forward. I mean, and I think the real gield rate now our expectation for real guilds, at least in the tenure area is to move higher. Ian we do expect break evens, particularly the long end, as the FED starts to become a

bit more aggressive, to come down. But that short end, which is really you know, moved by sentiment, and things like oil might stay the breake evens might say happen quite some time. So Leslie, this is the aspect that really doesn't make sense to me that not only do we see tenure treasury yield still relatively low versus the expectations for inflation over the next ten years, but also people are pouring money at the fastest pace, uh, some of the fastest paces we've seen in the past decade.

If you look at the e t F that tracks the longest dated e t f s. Does this make sense to you that people see value in two point one eight percent yields on a ten year note. Well, I think that the expectation is at least our expectation is only looking for about like a two point three percent ten year yield. And you have to remember how quickly Removed went from one a half percent in the beginning of the year all the way to a two point two four within ten weeks. That is an incredible move.

And now that the ft is has become fairly aggressive, not to menagtion, the fact we do have qut in may more than likely, you know, there is a normalization of the yield curves, So I do understand why people would really want to stop and take on some interest rate risk at these levels. Normalization of the yield curve. Let's talk about the yield curve. Leslie's two stands. Does it invert? If so, when I think there's a potential that you know, two tents can invert, you know, the

latter half the year. But I also think it's important to note that it's not just tipps and verts, it's a magnitude of the inversion and how sustainable that vision is. I mean, we all know when the curb and verts, you know, it's a it's a coincident indicator in our opinion, you know, two or three years out, you know, does can indicate a recession. But we look at things like

the two year yield which went to two percent. I mean, this is some of the biggest moves that we've seen, with the FED only going twenty five basis points right, that magnitude of the moved two year yield, the FED funds ring would already be a one and a a quarter one and a half min now nicely, just looking at the yield curve, then let's sum it up. Threes are

basically in line with tens. Five yields above tens seven year yields above tens should not constrain risk appetite our swhere or do you think investors will just look through some of this. I think it's really gonna depend on real guilds. I remember, real guilds are still negative. The term premiums on me, you know. And at the end of the day, again, I know we always say this, but it's true. It really does come down to the consumer, and you know, real consumption is still still very strong.

Let's not forget the majority of consumer debt is mortgages, and the majority of those mortgages are fixed. So I mean, we do think that obviously that you could have some headwinds from the inversion, but really you'll still remain negative. So Leslie, what are you actually doing well? We've been, you know, are we've had we would say, in the fixed income side, more of a risk on. I mean, our expectation was an interest rates of rise heading into

the year. We've liked that floating rate asset things like senior loans, so we've had a bit of what we could consider credit exposure. But now again as we started starting normalize Advan, and we've seen this headwind from interest rates going higher and spreads widening the two variables, which is a major headwind towards total return and performance on

the fixed income side. You know, it may not be a bad time to you know, go a little bit up and fality, and as we said, even on the right side, we don't expect indust rates to really move materially higher from here. Leslie, thank you for your perspective, and so White so Lesie found county of that of UBS Global Wealth Management. We have got a perfect conversation now with Dave Eltzic, the executive vice president and director of Research at the Federal Reserve Bank of Atlanta, the

president also of the National Association for Business Economics as well. David, come to you first. That survey is pretty brutal. That's the fact that these respondents think is going to stay behind the curve. Dave, what's this fact going to do about it? Well, I mean, the the the form C is going to do what the fform C does and and conduct monetary policy of course as they deem appropriate

to meet the committee's goal. So I'm not quite sure the survey is going to move the needle and it's worth recognizing and remembering that the survey was done a week it was in the field a week before the meeting itself, so we're not quite certain how that might have moved the needle on sentiment. Uh. I imagine I will be talking to a lot of people today who are going to let me know exactly how it's going

to move the needle in the sentiment um. But the messages were pretty clear that are our members on in name have some concerns about inflation and about the course of FED policy. Do they think that the FED is deliberately going to remain behind the curve or do they think, Dave, that we're going to get a FED incapable of curbing inflation at a cycle when it's a lot of supply chain driven issues, when you have really a conunsum we're the only way for them to counter it is to

damp in demand in a tenuous recovery moment. Yeah, it's a little bit hard always to kind of uh interpret what any group of individuals mean when they answer a survey like this. There are a couple of the details sort of in the survey itself, which gives some clues about what might be generating some of this um, not so sanguine view of inflation. Um, Ukraine is very deaf only sort of looming large, and it's loom and it

shows up in two places really in the survey. In In the first place, uh, there is a clear sentiment that the situation Ukraine is going to exacerbate and sort of elongate the process of getting the supply chain disruption sort of back into order. Uh. And the second is reaction that, because of the uncertainty associated with the situation in Ukraine and probably broader geopolitical concerns, that it will create a scenario where, um, there will be a more

cautious approach than what otherwise would be. So I think in part those are elements underneath of the pessimism. I don't think it's a didn't pick up any sense that it's a belief that the situation with the rate of with the inflation rate is not being taken seriously, or that the pivot towards of the inflation fight is being uh just just lip service. I just think it's a lot of the confluence of a lot of these other things that are making people a little concerned about whether

things will be as aggressive as they would like them. David, moving beyond the survey, what's your view on the ground as head of research at the Atlanta Fed, because they do concredible research on GDP, on wages, of the resilience of the American consumer. Well, I mean, we're still detecting virtually no signals of any um softening of demand when we talked to firms. Uh, and we talked to a lot of them. I mean, we spend a great deal of our time with our boots on the ground talking

to the people actually making pricing decisions and employment decisions. Uh, there really is not much of a signal we're getting that of consumer demand is substantially weakening. UM. Pricing power appears to not be waning at all, at least from the anecdotal reports and actually from survey reports as well. And there's some you know, the question is always how long can that last? UM? But no one is sort of ringing the bell about the process of of fairly

strong uh consumer demand and fairly resilient demand. Uh. That seems to still be the play on the subject of demand, and it's in elasticity or elasticity though, Dave, at what point would you start to expect demand destruction to to kick in. Is there this historical level that you'd be watching um no um. I mean, one of the things that we've obviously been fairly uh concerned about and tuned

into is the waning of the fiscal stimulus. But if you if you, for example, track consumer spending with wage and salary income, those things tracked very closely, and what that means is there was an awful lot of the stimulus that was essentially kept in reserve and not used to um support in a substantial way, uh spending beyond the early age, you know, early days of the pandemic.

So it would seem just from that sort of information and that sort of data that there um uh there's not a situation where the consumers way out over their skis and unable to kind of sustain through uh the fading away of all the support that happened as a result of the pandemic. I've awsome to catch up because I've got a busy a few days, busy week ahead of you. So thanks for spending some time with this

stavertic that of the Federal Reserve Bank of Atlanta. Devid Raley join US now Chief Investment strategist of Blue Pay Asset Management, David. I won't ask you a pointed question, I'll ask you an open one. Your reaction to what's happening in this bond market at the moment. Yeah, I think the bond market is um you know, clearly signaling that it is not as bullish as certainly the equity market.

I mean, I think there is a little bit of a sort of disconnect between those two, and if you look at the one year forward tend to it is already inverted. That being said, I don't think the bond market is necessarily pricing you know, a high risk of recession. I think what it's pricing at the longer end, it's just a wider distribution of outcomes. This uncertainty that you

know you've been talking about in during the program. You know, where is inflation going to settle, how far is the Fed going to raise rates, and what's the outlook for growth? Not this year, which I think is reasonably going to be reasonably kind of solid, but you know, if we're going to twenty twenty three, and what we do know and is getting priced in the two year no, is

that the Fed is on a hiking cycle. Um, they're going to be raising rates twenty five basis points every every meeting, is going to start balance sheet reduction as well, and also wants some tiding and financial conditions, and that I think it's going to be quite a meaningful headwind

for risk assets and particularly for equities. David, if we were to price stagflation in fixed income, and this is not a view of mine, a personal opinion, this is an observation about what is happening in fixed income, you would say what would happen ultimately is that you would start to see an inversion of the yield curve because

this market would start to smell out slowing growth. And what you would also see is elevated break evens because this market would believe that even with slowing growth, inflation will remain elevator. And David, I have to say, that's exactly what I could see post Federal Reserve. What we've seen is the curve slowly invert. Nominal yields to his out to tens. We've got three ye yeelds above tens, five or year olds above tens, seven year olds above tens.

That's nominal sorted. Look at break evens at the highs of the year last week, David on ten year break evens. Isn't that what stagflation starts to look like in fixed income? I mean, you're right to highlight that, Jonathan, But also I would say, look at the five year, five year in terms of inflation break evens, and that's actually not that far above what you would consider to be over

the medium term the Fed's target. What the market has done and what the bond market has done is say, we've got a stagflationary shock coming from uh, the Russian war on Ukraine. We don't know how severe that's going to be, both in terms of growth and in terms of inflation, because you know, it depends on how that conflict develops, what happens in terms of commodity prices. But but we do know that inflation is going to be higher um as as a result of that, particularly in

the nearer terms. So you know, clearly the market, I think is pricing, and the bond market, as I say, is pricing a sort of broader distribution of of of risk, and I think that's why you know we're starting to get a bit of a bid at the longer end. Um well, that inflationary pressure is feeding through. In terms of this, you know, more hawk is few if you like, in terms of the FED. But you know, I actually think now we're pretty fairly priced at the short end.

I mean, we've closed are sort of short duration positions at the short end of the curve because I don't think the FED is going to be more aggressive than they're setting out at the moment. But I do think the FED is clearly signaling and power is very clear. I thought on this in the press conference is if we want to avoid those stagflationary risks, we need to

get to neutral sooner rather than later. So I think, you know they are on a path to more aggressive or you know, hence whether they kind of validated that more aggressive path for for for eight heights and then you know, let's see what happens in three. My bias is actually the FED will have to do more big as are those sticky in inflation. But right now I think the market is recently well priced, particularly at the

short end. David, just quickly here, if you're just as confused as we are, what's the safest as a class right now? The safest as a class, I think, I mean where I would go and where we've been, you know, at the margin, adding some risk is basically for example, in in in credit, I mean the credit market. You know, it is the other part of the broader bomb market,

and it's not signaling near term recession risk. But we've seen a pretty meaningful repricing both in yield and spread terms, and I think you're getting adibly compensated for the default risk over the next twelve months or so. So UM, I actually do like some of um you know, parts of the credit market, and in places like within structured credit, getting exposure to the US consumer through for example, mortgage

securities and other structured credit. I think, as your previous guest was highlighting, the U s consumers still proving to be pretty resilient. So if you're a little bit cautious around sort of corporate risk, I think actually US consumer risk is a good place to take exposure. Interesting David Raleigh, Thank you, sir. Fantastic to catch up with flood Bay asset Management. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m.

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.