Surveillance: Russia Invades Ukraine

and of course on the Bloomberg Termainment. We're thrilled to bringing out the perspective of someone out of Florida and West Point who has a commanding understanding of Europe, working with Admiral Stevitas at NATO, and of course his leadership as former US Commanding General in Europe for American troops. Ben Hodges joins US today. General, thank you so much

for joining us. I want you to convey to our listeners and viewers across this nation right now, what is the number one thing our military can do to assist NATO and to assist you, Krane. But the present time of American soldiers is always such a powerful message of assurance to allies and also of warning to the Kremlin. The Kremlin does not want to take on the U. S. Army or Air Force or Navy, especially either alone or

as part of NATO. So the deployment of American troops to the eastern flank of NATO, I think was a good move uh and a strong signal if we further deploy army to Lithuania, which you know encyclopedic, or we deploy navy through the Bosphorus into the Black Sea, as Ukraine begs Turkey to shut down the Bosphorus to Russian military. Uh ships, If we do that, how will that change it for Ukraine? What is its signal now for Ukraine? Well,

of course, Ukraine is not an island. It's strategically important for all of us, including Russia, because of where it said on the Black Seat. It's why Catherine the Great um stole Crimea back at the end of the eighteenth century. Uh So Turkey, our ally, could really change the calculus for the Kremlin. If Turkey were to close the Straits, which it's entitled to do because of its sovereignty to Russian navy, that would that would make a significant impact

on Russian thinking. What the United States and our allies are doing by reinforcing NATO's eastern flank, of course, tells the Russians do not let this get out of control, did not let it spill over into a NATO country, because then that will also completely change the situation. What will you listen for from General Austin now holding court a Secretary of Defense at the Pentagon. I would like to hear him say that we are accelerating the delivery

of weapons systems that Ukraine needs. I mean we need something like a Berlin airlift in terms of UH quantity and speed to get more air defense systems specifically. Well, this is in general, this is critical. Do we need to put US troops into Love right now, to go across from Poland a NATO country X number of miles in the Love and set up camp in western Ukraine to say enough? No? I agree with the President here that um that we don't need to have NATO soldiers

American soldiers inside Ukraine. UM. Well, what we can do is working with our Polish allies, establish a line of communication. That's that can send what we call white convoys, non military convoys, carrying all the stuff that Ukraine needs towards Lviv and then the Ukrainians would distribute it. Howard I think, But we don't want to get to a situation where by our actions we end up with Russians and Americans

fighting each other. Ben, just to give you a sense of the US actually just put out this headline coming across. No new troop deployment is currently planned, but possible. Why is it so important to not have troops necessarily in Ukraine from the United States? Why do you think that that is a tactical misstep. So let's let me capyat that.

I was disappointed when the one d and fifty National Guardsmen from Florida actually were pulled out of their training mission that has been going on for six years there in Yavaief. I wish that they were all still there. But when you bring in additional troops, uh this, this then looks like escalation and keeping all of our allies together is an essential part of our resistance, and so I think that in this case, we want to avoid a situation that ends up with NATO forces going against

Russian forces when it's not in a situation of Article five. Ben. There has been discussion from European nations about contributing more troops to NATO in the surrounding nations not necessarily directly coming into conflict with Russia. What's your view on their capacity to increase troops, specially given the non military action that you've seen from the likes of Germany post World

War Two. Well, it's a fair point. I think what we're gonna see is NATO reconsider our compliance with the so called NATO Russia Founding Act and that we will go to permanent basing in Estonia, Latvia, Lithuania, Poland and Romania of US and or other NATO troops. We have not done this, uh in a good faith effort that even though Russia had abrogated the NATO Russia Founding Act, we were complying with the provisions that say no permanent basing.

I think this is going to change. I think we will see more NATO troops, particularly in the Baltic region. We really need to improve our air and missile defense in that region. In Germany and the Netherlands have to have a lot of capability where they could help here in general. Can I work through that line from the Ukrainian Leadia with you in real time? When you hear a line like this, Russian occupation forces are trying to seize the Chernobyl power plant, defenders of giving that life

so that the tragedy of will not be repeated. We've reported this to the Swedish leader. This is a declaration of war against the whole of Europe. Can you help me interpret that? General? What does that mean? That last line when they go to somewhere like Chernobyl and you know the history that what does that mean? So? Um two, two or three aspects of this. First of all, Ukrainian forces are achieving a lot of technical successes against Russian forces.

You he won't get much coverage on this from Moscow, but for sure lots of the Russian aircraft, helicopters are being shot down, tanks are being destroyed. We're gonna start seeing more and more video and reports of Russian losses. I think as the situation becomes more clear. So that's important.

And when President Zelinski, who I met three weeks ago and Keith a tenacious guy, when he talks about declaration of war, of course I don't take it in the in the means of a US legal definition of declaration of war. But without a doubt, Um, this is it is time for European leaders to be open eyed and talk clearly about who we're dealing with. For sure, sees this as war, whether it's with ships, tanks, nuclear weapons, disinformation. Cyber Russia is always in a war state of mind,

it may not always involve weapons. In this case, I think President Jelinski is exactly right. General Hodges, I want you to speak to the American people right now. And this is so urgent out of Vietnam of the certitude of technology in military and General Powell of course was steeped in that that it didn't work and that military was a tough thing with maximum force applied when needed.

You're an infantry guy. When there's a silly phrase boots on the ground you lived at, tell me, as an infantry guy, how we apply a power like force against

Mr Putin? Uh, thank you Tom Well. Of course, future future war, which we're in already, will involve everything from drones, artificial intelligence, UH, the advantages of quantum quantum computing, but the disadvantages if our adversaries are using that, because that will break down the security of all of our I T systems are communications networks, so this is this is going to change things. And of course their ability to disrupt our GPS targeting and navigating UH systems. So that's there.

But what did we watch for the last three months endless video of rail cars carrying tanks and artillery and armored fighting vehicles, big steel Russian ships, submarines. So it's you get more uh new technology, but you still are going to have people in trenches, people still fighting with rockets and artillery. That's part of it. In Russia, clearly uh IN tends to use blunt force. They're already employed this, but with more electronic warfare, they really have keepbility to

jam that we have fallen behind. General Hodges. We appreciate your time, sir, and thank you for being with the spend Hodges there, the former US commanding General in Europe. We're looking for some kindance now. Peter Roppenheimer of Goldman first on equities. I want to get to you first, Peter, and thanks for being with us, just a simple one of us so many people. You've done the research, you've got an outlook, all your suggestions. What changed this morning?

What did you have to rip up after what we've seen play out across Ukraine? Hi? John, Look, I think that the markets respond in real time, and the most obvious impact of what we've seen in this escalation is just a rise and uncertainty, and that means a rise in risk premier. We estimate that each twenty basis point rise in risk prem and knocks around five pc off the ecty market, and we've seen something about twice that, which is quite large relative to historically what we've seen

with political events. And it should be said that generally speaking, political events, as long as they don't have big macro spillovers, tend to fade and you tend to get some kind of rally. Now, obviously this is a very uncertain situation and there are some major political and economical implications, not least of which of course is via energy prices. We were already seeing a fairly decent correction in most equity markets because of the fears of higher inflation and interest rates.

Those that were more defensive and perhaps more value orientated, particularly those in Europe and now Fermian Correction territory as well. But I would say that if we look at our tactical indicators, our risk appetite indicators, for example, the markets are now really pricing quite a big slow down and position has become quite negative, and typically from these sorts of levels in that indicator we do get a rally.

So just a couple of days ago, I was speaking with a portfolio manager who represented a sea change, basically saying, go toward Europe, go toward European equities and away from the US because of the hiking cycle. Has that narrative completely got shifted though on its head, even with the valuation story, just simply because the risk is that much

higher in that region. Well, certainly Europe is much more exposed, both economically and of course in terms of proximity, but I don't think it really changes the fundamental underlying issues. First of all, the European economy is actually pretty robust at the moment, much different to the situation say after the financial crisis. To your point, the policy cycle is

less aggressive in Europe. In fact, fiscal policy is still easing, interest rates are likely at least in the Eurozone, to be rise at a much slower pace, and we've got strong private set to balance sheets in Europe. We have more exposure to value too, energy stocks and to other areas of the market that investors been tilting towards. And

we should also recognize that valuations are reasonably good. I mean, if you take the stock six for example, it's trading on a peeve about fourteen times now having pezzed around eighteen much cheaper than the US and pretty much in

line with its long run average. So in the short term, of course, uncertainty is going to be a big drag to this market, but fundamentally it looks reasonably sound and we do remain actually overweight on a on a one year you, Peter, in your geography at the London School of Economics, which folks, is world class, even long agoing far away, when Mr Appenheimer darkened the door, there's an

idea of the European experiment. It is under threat today, Peter, is you and I have never seen, even with a collapse in n one frame for us this moment and how Europe must adapt. Which institution do you look for, Ernest Goldman Sax looks for to provide a new stability for Europe. Well, it's a great question, but we should emphasize that the institutional framework across Europe has strengthened dramatically since the days of the financial crisis and the sovereign

debt crisis. Obviously, we've had a ramp up in the available instruments that can be used on the europe wide basis to deal with any systemic shocks, and that's that's a significant positive. And we should note that, for example, while sovereign spreads have widened a little bit in places like Italy, it's been very modest relative to what we've seen in previous periods where they've been heightened uncertainty. Uh and uh, And I would say that from that perspective,

things are looking a lot more robust. That being said, one of the critical issues for Europe, of course, his

energy security. Europe has been ahead globally in terms of its focus on decarbonization and ramping up investment in things like renewables, and I think this adds a new degree of urgency to that program, because that's what Europe is going to have to really agree on in order to become more independent in terms of its sources of energy and paid a greater catch up with you, sir, as always a difficult moment for the continent and for the

people of Ukraine. Thank you. Peter Rappenhammer Goldman. When I first read Timothy Ash many years ago, I'm gonna guess at bear Stearns, but I really can't remember tim And the answer is it jumped off the page. Tomash is one of the most acute writers and thinkers on Europe and strategy. He has senior e M Sovereign strategy is a blue bay. On this historic day, Timash, thank you so much for taking time with us today. I want to focus on the e M of Eastern Europe. Take

us from Estonia down to Poland. What is your biggest worry as Putin attacks? Well, the biggest worry for the market is Russia itself, right, I mean I think we're as has been mentioned, I mean this is the biggest It's a systemic geopolitical events in Europe, the biggest one in Second World War. Remember we had the fall of the Building Wall, which was a positive. This is a big negative. And I think you know those countries surrounding Ukraine and Russia, you know the Baltics, Poland, Romania will

be very worried. Now. I don't think Putin is going beyond Ukraine, but I think this is a game change in terms of European security. I mean, NATO has got a really set up its act. We're going to see a big increases in defense spending because of this. But at the moment, it's they focus really is on Russian markets and they've been collapsing today. I mean, you know, lots of talk about Fortress Russia interest in. The Russians themselves didn't see this coming, and I think they've been

panic selling across the board of Russian assets. Russians didn't believe their own leaders on this one, which is why Russian assets have been been falling so so aggressively today. It's him. We worked through this together eight years ago over Crimea when I was in London, and to him, this is different, and you know it's different. And as you say, Fortress Russia, a lot of people have talked about that recently. The President Putin prepared for this moment.

There was trying to insulate the economy, run a budget surplus, raise capital. It's him, just how insulated are they? Well? I was the first person to coin the phrase stans Russia back in and Putin has been planning this. This has been all about building those balance sheets. He has been determined to go into Ukraine for a long time. I've written it, I argued it back into fifteen fifteen. There was likely to be a defining want to be rushing the grain, and this is it. Unfortunately, now Russia.

You know, it has the balance sheet, but the level of sanctions were likely to see because of this, It's going to be pariah Russia, pariah putin uh and it's gonna be very difficult to do any business with Russia. That means higher borrowing costs, less investment, less growth, lower living standards, and Russians already and not really happy with their lot in life and memory. Kazakhstan we had some social arrests recently because of precisely that point. So this,

this makes Russia weaker. This and likely if it's regime change in Ukraine, what's likely to happen is that any new government that emerges in Ukraine will be sanctioned by the West as well. So Russia, Russia will have to pay the costs of rebuilding Ukraine and Belarus, and its economy is going to be in a pretty die state

because of sanctions. Tim what's the fallout for the broader emerging market complex, given the fact that food prices are likely to surge, given the fact that weak production could be disrupted, all of the potential commodity complex eruptions that we're seeing today feeding out into the importers in the emerging market world. Look, I mean the market was so sanguine about this, right, I mean it assumed it wasn't going to be a globally stemic event. It is right.

I mean, this is about hardcore European security, It's about energy, It's about you know, heating European homes. And I think the fallout as we've seen today is very very significant energy prices, higher supply disruptions. Are there going to be disruptions in manufacturing production in Europe because of this? In emerging markets, you know, it's it's about energy importers versus energy exporters. Place slight Turkey, he sent eu Rope, Asia.

You know they import a lot of energy. They're going to be hit by you know, higher inflation and globally it's stagflation. I guess is the fear here, Timothy ask what is the power of I'm going to say, dominant, more visible, more stable emerging market nations. What is the power in place here of say India or Indonesia or to bring it over to Europe, m Latvia? What are their power right now? Well? I said not much. Unfortunately, a lot of the energy markets have have lots of

structural issues. Reform issues. I mentioned winners and losers into the energy bounce. India is a huge energy importer as it's Turkey, So I think, you know, people are just waiting to see how this pans out, what it means for global commodity prices. You know you mentioned already global central banks. How are they're going to respond to this? Uh, you know, pretty uncertain, but you know, duo politics matters and it's here to stay. And as I said, this

is a game changer. It's him. You used the stagflation word moments ago. Who's that for the whole region or one particular country, Well, globally right. That means you think a global story and that's your stagflation. That's the ultimate story now, not just the toros. Is that your base case stafflation is lower growth, high inflation. The risk here is that we see further supply disruptions around energy and that hits global growth. And it's I mean, inflation is here.

That's the reality. As consumers. We know that central banks might be trying to sell us a different story, but we're all we all see inflation and it's if it's hard to see it falling quickly, and certainly this episode will not hold up Tim wonderful to catch up with your Tim Ash there of Blue Bay Connor he joins US now head of Research and E D and F Man Cornor we know Chicago Board of Trade. We do not know Novo East Spot. How critical is the wheat

dynamic for Russia right now? It's huge. Russia, together with Ukraine, they can't for global wheat exports. So at a time when global wheat market is already pretty tight, fundamentally, we can't really afford to see a big player come out of action. So supplies are tight, demand is inelastic, and the world does heavily rely on this region. Black sea

export are absolutely critical for world supplies right now. Do you believe that soft commodities led by Russian wheat will be part of sanctioned announcements today and indeed in the coming days. This is where I have my doubts, because unfortunately food inflation is a growing story around the world. Um the Middle East, North Africa in particular rely heavily on Russian Ukraine for their wheat imports. If there were to be a spike, and we're already seeing wheat is

one of the best performing commodities, so far um. If that were to lead to further hikes in prices, then I think food inflation could be a political politically, you know, really really challenging situations. So I feel that that is one area where I think sanctus might be not might not not take place. If you look back into a thousand fourteen, when Russia annex Crimea, the exports of week continue to take place. So I'm hoping this will be the same this time around. A lot of nations have

imprepared paring for this. We've even heard from Germany talking about how they will be able to be independent of Russian oil and gas, should that be necessary. Have you seen anything on the ground, any types of diversions in terms of some of the important export pathways in response and in preparation for this invasion. No, so um. I mean certainly on energy. I know that, for example, Germany um has diversified quite a bit away from Russian oil.

You know, they've got quite a bit of windpower themselves. They are using moral and g um. Luckily, Europe is a big agricultural producing themselves, so they don't actually import um, so they won't be relying on Russia for any of their imports, although they do rely a little bit on um Ukraine for their sunflower oils. So vegetable oils right now, cooking oils if you like, are extremely tight globally. Um,

so there's no room for slack there. But I think energy wise, yes, natural guests of a sale the European zone is basically dependent on the region. Um, it's going to be extremely costly to divert that away into llergy and other resources. How much have you revisited your expectations for oil and gas prices? What your base cases? Now that what as John said, the tail risk has become the base case in Europe. Yeah, So I think hundred dollar was a hundred dollar about for Crudel was given

just based on fundamentals. Now there was there was this potential geopolitical risk periment which now, as you mentioned, is now becoming no longer premium but has to be actually priced in now. So the worst case for scenario has actually come to fruit. Um, maybe we started hundred dollars. I think hundred twenty is probably a given now from

here on. Again, similar to what I'm seeing in the food exports and retex what I'm not entirely convinced that there will be embargo on US energy and sorry, you're Russian energy because Biden in the USA, I was just trying to control prices at home. Europe needs lower fuel bills. I think it would be political suicide if they were to put sanctions on UM Russian oil. It would be it would just cause them massive spiral and therefore more invitation. Corna,

you are a grizzled pro at this. And of course the joy across the economy is always comes back to the discussion of oil. When an amateur like me says to you, can the US come to the rescue? Can we move ships across the Atlantic to bring hydrocarbons to Europe? How do you respond to such foolishness? No, it's just on afraid basis. It wouldn't work. The US had been enjoying almost self sufficiency in terms of oil. They used to be that important. Then Shiloh came and they became

a net exporter. But the shale oil production is plateau in UM and if anything, they now have to tap into their own oil reserves, the government strategic reserves, So the US can't come to the rescue. UM for guess you've got the likes of Qatar and might try and help in but for crude opening themselves are sitting on not too much bad capacity. Um, so what hundred or hundred twenty even dollar oil will tell you is that

we need to Russian demand. So what will happen eventually is you're going to see some kind of economic growth stalling and ultimately demand will come off because there isn't so much slack unless we're got to deal with Iran. Iran, may you know with the nuclear deal that may lead

to some more bows coming out. Kind of thank you, as always, kind of there a d F and man, we adjust, as does Morgan Stanley Economics, Robert Rosen joins US now senior US Economists Robert Steve Anglinder over standard charter has been resilient before this historic moment of the five six seven rate high team, maybe a little bit off the mark. Do you adjust back down to three rate hikes this morning? Well, thanks for having me, Tom.

We still see the Fed on track to raise interest rates in March by twenty five basis points, but of course there are now an increased degree of uncertainty in the economic outlook, so the Fed has to weigh what they're seeing in terms of domestic economic conditions, the strong labor market, the resilient consumer uh and in the inflationary backdrop. The FED has to weigh that against the potential risks

to the economic outlook going forward. Let's go back to mc chesney, Martin and Truman and Eisenhower of the Korean War. Is this a point where the White House says to Chairman Powell, Look, we really need your help. This is what we'd like you to do. You know, the FED we will maintain its independence in Monterrey policy, of course,

but the FED has to ask important questions. And this is not the first time that the FED has had to grapple with domestic economic conditions that might call for rate hikes, but international conditions that present some potential risks to the economic outlook. So that's a lot to weigh there. It does make a case for caution, so it helps the FED with the debates we were having in recent weeks about fifty basis points or twenty five basis points

in March. It makes that decision a little bit easier, But the FED doesn't want to get caught that back footed. Uh IF risks to the economic outlook don't prove to be as significant, and they still have to deal with inflation. Will be you ready to use the s witch yet? Stagflation? Are you in the team there? Yeah? Is it part of the conversation for you? I don't think we're there yet. This is certainly a type of financial condition shock that

pushes inflation and activity in opposite directions. Oil prices are going to put upward pressure on headline inflation. That adds to the multitude of inflationary shocks that we've been seeing in recent months, and of course it can have a negative effect on economic activity. But you look at the

way the labor market is today. I know that can turn, but I think we've been surprised time and time again about the resilience of the labor market and the resilience of the U. S. Consumer, as as remaining the heartbeat really of this economic Expand what's the red line though for oil prices? Do you have a sense rob of how high oil prices can get before you start talking about a material downshift in the pace of economic growth. We are certainly seeing the effects of oil prices on

consumer wallets. We're looking at you know, every ten cent increase in retail gas prices is about a ten billion annualized hit to consumer budgets, and that has been adding up. It's been stacking up, and it's been stacking up with other inflationary pressures. We've been seeing real wages in the red for most groups save for the lower end of

the wage spectrum. If energy prices keep creeping up and they keep real wage growth in the red, then I do think that's where you start to have to get a little bit more concerned about the pace of consumer activity when we're looking at the second half of the year. Is there a precedent for how quickly the economy can shift in response to a shock like this given all of the dynamism, all of the strength that you've been

talking about that we're seeing in corporate balance sheets and beyond. Yeah, absolutely, I mean things can certainly turn fast. But again it comes down to where are the fundamentals and where is the heartbeat of the economy, and that's the labor market. And we've seen job growth with incredible momentum, aggregate incomes growing strongly, ways growth at the individual level still growing strongly. So there's still a lot of positive tail winds in

place to keep the domestic economic expansion going strong this year. Um. But of course things can turn fast, and when they turn fast, it tends to be transmitted through those financial shocks through uncertainty. UM. And we've seen how the FED has been responsive to developments like that very quickly in the past. So uh, you know, pivoting, that pivoting style that we've seen from Chair pow Um likely to remain

in his tool kit. Do we rationalize, Robert Rosener that if inflation is a hundred basis points higher than expected, are critically the timeline is extended out of a longer inflation. How do the PhDs at the out adapt to that.

It's really tricky question, Tom, because you know, typically the knee jerk reaction as you look at an energy price shock and you think that that that that that might be the t word transitory, right, But it's occurring against this backdrop of a multitude of inflationary shocks, and we do have to start to get concerned about what that

could mean for the path going forward. But again it pushes the dual mandate in opposite directions because you have energy prices now lifting inflation, but also you have to be watchful for the downside, risks for activity that could potentially have down the line. Rob Wonderful has a waste diffic moment for you to same. And I'm actin'ly gonna be talking all morning about well this makes for next month. Rob Rosen that of Morgan Stanley. 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 n's. 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