Surveillance: Pelosi's Taiwan Visit with Cohen (Podcast)

Group barely describes it. He's a former Secretary of Defense, and of course this public service and really bipartisan approach here, but far more back to Nixon Kissinger on China, he among few is on the high ground. Maybe Mike Mansfield up in Jaman, up in Japan would be somewhat the equivalent Secretary Cohen. We're honored to have you here today. Is Speaker Pelosi making the right decision if she travels

and lands in Taipei and greets the Taiwanese people. Well, I think what we have to do is understand what our policy towards China is and what our strategy is. We have taken a one China policy, Uh as far as the last fifty sixty years, and the question then becomes, what is our strategy for implementing that. Do we make a decision do we want to have any kind of a positive relationship going forward, and if so, how do

we get there? And so I think what has happened with Speaker Pelosi's trip is she has raised very high expectations in Taiwan, very high anxieties in China. I believe that are how we deal with the Taiwan is a very big, bright red line as far as the Chinese are concerned, and I think they will respond, if not militarily, I don't expect that to take place. If she should go to Taiwan, I think they will find a way to respond in their own fashion that will inflict some

harm upon us. So it's got a tough decision to make. The military is apparently indicated it's rather dangerous time for us in the region, and she'll have to take that into account. In the arc that we have of our relationship with China A one China and with FOREMOSTA with Taiwan, there have been assurances six assurances over time. You are directly involved with that. How strong are our six assurances

to Taiwan. Well, it's the assurances are inconsistent with the passage of the Taiwan Relations Act, and I was a part of that. Going back to nine, we said that we will help provide for the defense of Taiwan. Since that time, President Biden has said we will defend Taiwan. That has caused great confusion in terms not only with China, but also our Asian allies. All of those in the Asia Pacific region are now the Indo Pacific region are concerned.

What does that mean? Are we prepared to go to war with China over Taiwan and will they be with us? So we have to get more clarity in terms of exactly what we're prepared to do. Is it just helped provide defensive equipment or actually go to war should China try to attack Taiwan. So this confusion that needs to be clarification, and that's something I would think that speak of.

Pelosi has talked with the administration, has talked obviously to the military, and I think during this trip she needs to talk and we'll talk with all of our allies in the Asia Pacific region because they have a lot at stake in terms of what we'll do and what will fail to do should there be a conflict, Secretary as at tensions begin and continue to really escalate in a new way between China and the US. Is the US dealing with a weekend or an emboldened Jijian paying

a strength in Jijian Ping then perhaps a few years ago. Well, I think he's much stronger than he's ever been. I think that he will not be contested in the so called election coming up. I think you'll have a third term. And I think the Chinese will regard this, even though we've tried to persuade them that this is something that we do. We defend democracies, we defend human rights, they will see this as pointing a finger in the eye

of Titian pay. And I think when we talk about red lines, going back to red lines with Russia, for example, going back as early as two thousand three, Bill Burns, our current CIA director, wrote to the Bush administration said Russia will see any move on the part of Ukraine, Tornado or EU as a red line that they will not allow Ukraine to cross. Well, that was twenty years ago.

I think from what my travels in the entire region China will see this as a red line and they will find a way to take reaction to the United States that will in some way impact negatively upon the US and our allies. So it's one of those issues the Chris Christofferson song is the going up worth the coming down? We will have to decide is going up in terms of ratcheting up the attentions with China with China worth coming after that? What will be the nature

of the relationship. Will we still be engaged with China or do we want to follow a policy of decoupling. Can we pull our economic engagement with China out? And if we pull out, will the European allies pull out? Will the Southeast Asian allies pull out? So these are all issues tied up with our relationship with China. So it's not easy. It's very complicated. Secretary, just quickly here. Do you think that this trip by Nancy Pelosi is advisable or a grave mistake? I don't know the answer

to that. I would think that one option would be to um say that you will visit Taiwan, but perhaps at a later time. That would be one option. But she may feel that she's compelled to do so now, but understanding what the risks are. I think it's going to be complicated again because of expectations that she's being pushed by Republicans and Democrats to go. I think the administration slashing a warning sign without telling her not to. So the decision ultimately will be up to her, but

I think it does. It certainly has some grave dangerous involved. There are many who feel China's bluffing. I don't think China's bluffing. William Cohen, thank you so much. We looked forward to speaking to you again, particularly on the US military. In a in a fract just two thousand and twenty two, Laura Ram joins US right now FS Investments with a really really sharp note about what to watch as we vault into August. Let me take you back to March

of the beginning of the pandemic. Claims exploded higher five point nine million. I believe that number is. It's a huge statistic, and we've come down to the glory two years later of a hundred and seventy one thousand with a survey this Thursday of two hundred and sixty thousand. Laura, good morning. You say it is these statistics that matters, and you benchmarketed two hundred eighty thousand, how close are we to get into the rum two hundred eighty thousand.

Still think we're about a quarter away from getting to a level that much more clearly predicts a recession as defined by the body that really is the arbiter of this, the official referee um. You know, claims typically bottom about nine to twenty four months ahead of a recession, and they bottomed back in March at a very historically low level, but they've been slowly creeping up, and there's a seasonal

component to that. I think that's why I'm watching something a little bit higher, more like two eight, to try to differentiate between something that's more cyclical and something that's just easy. Does the FED weight is the fed ex post where they just have to wait for the lower rain to or the act before so that you know

they're acting. And I think this is the big you know question that we saw after Wednesday, right, the markets are now really pricing in rate cuts and it's caused the FED funds futures curve to diverge significantly from the dot plot um, which you know, I grant you the FED really has removed there forward guidance piece of this, but I do think that that is going to be at the core of FED speak this week. FED speakers are looking at the market reaction and the higher inflation

is a game changer. You cannot price in the same FED that we had in two thousand eighteen. You can't price the same reaction function at the first sign of weakness. And we're already seeing that the FED is not gonna be able to come in and ride to the rescue with rap cuts with the same speed and flexibility that they would have, and we have inflation a super second. What's driven you crasia the recession debate or the interpretation

of that meeting last week of this FED. I think the recession debate, to me, is really taking the oxygen away from what we really need to be focused on, because the start date of the recession at the end of the date is really only good for years later when we're comparing it to other recessions. The reality is the economy is weakening, It's probably going to weaken further. Job losses are the hallmark of the classic definition of recession that or they're a hallmark component of that, and

looking forward there's more, probably more weakness ahead. And you know right now Q three GDP is actually shaping up to be positive, a small positive, But I think we really need to wait. That there's another shoe out there to drop, and it's the jobs. And the FED probably said that about ten times that to them, they're really going to continue to address inflation primarily until they see problem with the jobs. It's in the first line of

the statement. You can see in the first paragraph they reference the jobs market, writes the question, what do you expect to see that weakness bleed into the labor market? It's Friday too soon? Is next month too soon? Yeah? It is too soon. We've seen this consistent strength. We still have the job openings. It's not it's something that I don't really affect to materialize until the fourth quarter

or even early in the first quarter next year. Which raises a question, Laura, about whether the dual mandate of the Fed comes into question at that point, whether inflation starts to become less of the obvious goal if the labor market is also struggling. Do you think that when we get there, inflation will have come down significantly to a level where it will be a more comfortable discussion

for the Federal Reserve to have. No it's so much has to go right to get inflation back down to anything close to where the FED can plant a flag in a clear victory. You need either deep energy price deflation, you need rents to turn around, and you need durable goods price deflation. All those three components will be required. And right now I'm looking at your end g d P, it's hard to even get it below seven percent UM.

You know, my forecast still is around six percent, but that's looking increasingly optimistic with every month UM where you just get these reports filled with upside surprises and inflation bubbling up from virtually every quarter of the economy. So it's a lot of economic uncertainty over the next year. And this is something that traditional you know, equity markets just haven't wrapped their head around. They're looking at a more classic V shape recovery, and I would argue we

still have an hit the bottom of that yet. Just quickly here, Laura, given the fact that FED Chair J. Powell came out and said that we are getting closer to neutral, and that Larry Summers came out and said that that was indefensible where do you see this idea of neutral kind of evening out? You know, the their estimates of neutral are so based on their Phillips curve related models, and they really take for granted this deep durable goods price deflation that we've seen from China in

the face of the globalization. Neutral is likely higher. Their models haven't caught up to that yet, and I think that's what so many of us are sort of pounding the table about. It's going to have to be a higher terminal rate. It may even be three and a half percent, but even that, I think would require a hawkish pivot from where markets are positioning today. Right. Thank you of FS Investment. This is a joy Edward Moore's defines a global oil and on analysis. He's how to

come out of his research at City Group. Let's get right to it, Ad Morris, I want to talk about demand responsiveness or demand elasticity nation to nation. Is the demand dynamics of less demand in the United States the same as the demand dynamics say in Germany or Singapore. Absolutely, European economic conditions are worse than they are in the US. Compound that with the higher price and yes, we're not seeing any demand growth in Europe. We're not seeing very

much demand growth around the world. It's just two prices are too high, and even though they've come off, the gasoline prices have come off, the continued strength of the dollar, even they'll use you noted, it's weakening, and just the sheer high price is to turn people from using the car as much as they were in the past. Do you assume out of the bulls and you've been right, right right in the last number of months, add morse, do you assume the demand clicks in if COVID is

solved in Asia? Well, certainly there's one level where demand will absolutely kicked in, and that's jet field demand. China is a very large user of jet fuel. They've shut down international travel, so they've they've they're down about a million barrels a day from where they've been just on the jet fuel side. So yes, we do expect a year from now all our sequels that we're going to see significantly more jet field demand. We don't see that happening,

by the way, in the other transportation fuels. We think gasoline and diesel are likely to remain weak unless for some reason there's going to be a rebirth of global trade um and some shot in the arm to to get people driving again. If this is the case, side, why are we not seeing inventories build more? Well, we are seeing inventories build. The problem is I've been such at such a low level. That's one of the problems.

The other problem is that when we look back at the second quarter, there was a good inventory build, but most of it took place in China. We had a month and a half in which demand, real demand was down about a million barrels a day a little bit more, and we had inventories building because there was another million barrels a day of imports coming out of taking advantage of the low price of Russian crude and actually stock building.

They We had a lot of imports of Saudi crude, up around seven hundred thousand barrels a day alone one month after the other. So the inventory building Q two, which is unevenly distributed, we're seeing actually an inventory build west of Suez right now, which is not seeing it in the US. The US is in this bizarre position of being not one market, but three or four different markets. We are an open market. We can't export other than by pipeline, and I used the word to export euphemistically.

We had export from the Gulf coast to the East coast. Um uh. We can export to Europe and other places. The turning away from Russia by European countries and companies have had them turning to the United States. But last week the data from the A had US exports that are record high of ten point nine million barrellars a day growth ten point nine million of of of including well over four million barrels a day of crude oil.

So we're having the kind of this discontinuities in the market, pulling oil out of the US going into other parts of the world. But there definitely is weakness on the inventory side, and we're seeing that in the level of backgradation. Prices have gone down. PROMP prices are going down when it comes to crude at a faster rate than deferred prices. The difference between the prompt month and the second month is narrowing, and we're seeing flows coming out of commodities.

The liquidity of the market is low UH, and it's getting lower as people are abandoning commodities for other other assets. At the moment, one of the reasons why the oil picture has been so complicated at it is because of how much it does hinge on the zero COVID policy in China, how much it hinges on whether that Russian oil ill can actually move around more consistently or actually

not at all, whether it's restricted more. How much do you change your parameters, how much do you change what your base case is for the price if say China does reopen, or if we do get some sort of continuing of a studying in the global economy, well we do have that as a as a contingency. We think the bigger risk on the upside at the moment is not a change in the economic situation globally, but rather

we understand the fragility of exports in some countries. It's not just Olivia, which has gone up by the way by seven or eight hundred thousand bars a day in the last couple of weeks. How long will that last is a barris factor of the market. Will we be seeing disruptions to supply there? Again? Also in Nigeria, uh we're noticing that the Iraq has not yet had a government since the elections of last October. We've had the Parliament house occupied twice by protesters worrying about a government

that's going to be too moose to Iran. The the likelihood of disruption risks in both Iran and Iraq is not exactly zero. Uh So there are bullets factors that are hanging over the market. And I don't want to caut you on awares on this. And if City Group has a banking relationship, please speak up and I apologize. Moments ago we have a headline that a Ramco will

take out the global products division of Velvioline. Folks Ed Morrison are the only ones in financial media that actually used a can of velvoline in the first car we are allowed ever to do an oil change. And there's a romance here of the troops from Lexington, Kentucky discussed that the synergies of a giant like a Ramco was something that's so absolutely iconic in America. UM, I can't

speak to the synergies. I can speak to a company that, as our own my own college, who report on a rampo of noted is a wash in cash uh and is under pressure to spend it uh. And there are market niches that are highly profitable that companies like that go after so, without speaking to product issue, I think it's just has to do with what the extraordinary cash flow and cash position of that company is looking for good investments to make. And do you see this to

continue across all of big oil. I mean, we think of x On and XTO, But is this the future of an oil a washing cash? Well, the question is how long will oil companies be a washing cash. We've had very unusual cracks friends. At the moment, A significant amount of that profitability doesn't come from the price of oil itself. It comes from other things in the market, and particularly the strength of the product markets. The strength of the product markets is very unusual. China has a

massive role to play in it. China, as I noted earlier, was building inventory. They not only building inventory, but at the same time they've cut out exports of product and particularly diesel. A year ago they were exporting seven hundred thousand barrels today of diesel it's now zero. That's seven hundred thousand barrels a day. If it were in the market, and if there were some other adjustments, would bring that cracks and the refinery margins the profitability of reviding down significantly.

And before I let you go, what's your base case for how low oil prices could go in the next six months. Well, our base cases for oils to continued to drift downward is seeing rent in the mid eighties and w t I in the low eighties for year end. Uh, and then continuing on that path into the months into the eighties. Low a t C around at Molsa City. Thank you, what a move we've had in July, the biggest month of gangs of the SMP bats in November.

Off the lows of June, the June sixteenth closing low on the NASTAG one hundred, we have round eight more than sixteen percent. Stewart Kins was waiting for that move. The head efectuity thrivers. This research at ups joins this right now, Stewart, Is it too added to take a

victory lap? I don't think there's any victory laps in these in these markets, John, But uh, look, I think I think the big picture here's expectations just got you know, so extremely low that it didn't take a whole lot to kind of surprise sentiment to the upside, especially given more positioning. Is But yeah, I think any any victory laps are short lived these days. I look, Stewart at the move we've had. When you synthesize all of UBS research,

can you say it is a bull market? Can you say, as we've heard from a number of other guests, optimistic guests like you, that is a bottom um. I think we do see some room for the market to continue to move higher in August. I don't think I call it a bull market. You know, when when the how do you know when it's a bull market? I mean, that's a great question. I think for us, we'd like

to see some follow through. I think if you look at performers in the equity markets the last five months, winners have outperformed underperformed losers that the following month for five consecutive months. So basically, people have been aggressively selling winners. And I think if we could see some a little uh, you know, follow through in August, we probably see that

as a as incrementally positive. But look until until the Fed seems comfortable that inflations under control and they're willing to sort of back off a little bit of these hard landing outcomes, I think it's hard to really call for a bull market at this point, Stuart, understanding technical versus fundamental underpinnings of the rally that we just saw.

There was a story that caught my attention on Friday that QUANTZ sold a huge amount of their barrished positions they had to close out over the past few weeks and that that was fueling the rally. How much is that the main factor that's really been driving a market that's been operating in thin liquidity and very uncertain economic outlooks At least, I think it's actually a pretty big

part of it. If you look at the performance of hot short interest stocks, they they've rallied considerably in July, and I think that's evidence of what you've been seeing on the quant side. But you know, I think that just speaks to bigger picture that that positioning and sentiment had been so washed out that you've got a relatively solid earning seasons, certainly not as as strong as we've seen the past couple, but a solid earning season, and

the FED that just sort of stayed on scripts. So didn't you know, provide an additional negative catalyst into the market, And and that's you know, hasn't to your point, I don't think it's drawn a lot of new investors into the market, but I think it's scared a lot of the shorts out. And and that's kind of what we've seen in July story your response to when we tried to give you a victory lap spoke volumes, it was just sort of this exhaustion from this whip saw action

that we've been seeing in the uncertainty. What's your compass when you try to get a gauge of what's to come? Is it the economic data? Is it the prognostications for FED officials, or is it the line by line reports that we're getting from a lot of companies as they report earnings. I think right now it's it's the earning

side of it. But just because expectations, especially from the more barre side of the of the ledger, have been so negative on earning, so I think you know, about a five percent upside to EPs has really helped in

terms of the feed. Look, I mean the feed as a dual mandate, and their view, I think has been that the the tail risk on the inflation side of their mandate was was so far off and so huge that they had to prioritize that, and they frontloaded high makes and and to their credit market based inflation expectations have come under control. What they've sacrificed there is they've sort of introduced a tail risk on the growth side

of the market. So it's going to be that back and forth between how the FED is managing, you know, inflation risk in the face of declining growth. And I think the real challenge is going to be if we see weakness in the labor market, how will the FEDG communication evolve. I think from their perspective right now, the tail risk on the growth side is smaller and further in the future, so they're gonna prioritize inflation as that

growth tail risk gets closer. How does that communication of office that's going to be I think the number one focus for us as we get through earnings is is how the fact communicates that balance. I'm asking for a friend, but for people that have missed the equity market completely, I mean, just you know a few people that have actually completely missed the equity market, how do you begin to get on board? Do you do you plunge in? Is it you have such an enthusiasm that you dive in,

or is it the proverbial dollar cost average. Um, you know, we're not in We're not in the diving camp at this point. I think if if the FED is focused on growth and is willing to allow hard landing outcomes, I think you need to enter this through higher quality, you know, larger market cap type companies. And I think that's frankly why large cap tech has benefited, because they

fall into that category. So for us, it's you know, I think you want to be careful legg again here, it's hard to recommend to buy value and cyclicals at a time when the FED seems comfortable, you know, causing a recession. And look at the investor conversation is not if there's a recession, right, it's when and how much? And if that's the case, I think you need to be pretty cautious about how you add risk at this point. So it kinds they're also going to catch out with

you as a wise here in New York City. Steve, thank you said, 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, bomer dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomer