Surveillance: Russia's Off-Ramp with CSIS's Jones

Mr Putin calls it, operation. We've been honored with a guest we've had, starting with Angela Stent, General Hodges, General Kimmitt, and now Seth Jones. He's with a Center for Strategic and International Studies and in America. He is our definitive expert on guerrilla warfare. Seth, thank you so much for joining us. General Kimmitt was chilling as an infantry officer

describing the guerrilla war to come in urban Ukraine. Describe what we will see well, I think what we're likely to see is Russian forces continuing to push into urban terrain in Ukraine, into cities like Kiev in particular. It's the capital and the Russians to be met with fire from the top buildings, snipers fire from inside building, fire from around buildings, as the entire Ukrainian population rises up

to attempt to pick apart Russian forces in city. So it's those kinds of campaigns destroy cities, So we're bound to see sad destruction in Ukrainian cities. Does Russia have the material or critically, do they have the will to make Kiev look like Aleppo? The Russians do have the ability to use our tillery, to use aircraft and to drop both dumb and smart bombs in Kiev and to turn it into Aleppo. What they don't have is, uh the ability to to to hold the territory. The Russians

didn't have to do it in Aleppo. They had the Syrians, they have Lebanese has Blah hold the territory. The Russian forces will have to do it, and I don't know that they will they'll be able to stomach the bloodshed that has I mean, they've already lost more soldiers in two weeks in Ukraine than the US lost in twenty years in Afghanistan. And so that we have from the U S authorities the threat of possibly biological or chemical weapons being used on Ukraine by Russia. This according to

statements over the weekend from this administration. What would the US response be to something like that, Well, I'll tell you what it should be. I mean the I don't know why the US is now holding back on providing aircraft, including ME, to the Ukrainians. The Russians are willing to ramp up this war right now, and if they use chemical weapons, I mean this, We're we're in a very different ball game. I mean this, These are war crimes. So the president of Russia should be treated as such

if that's what he uses. So you said, if that's what this is. And I do wonder because right now we're hearing so many talks about talks, possible negotiations, some possible optimism. Do you hear any optimism from the developments on the ground and from the intel that you're getting that there could be an off ramp to this conflict. I think it's always important to talk about off ramps

and to look for them. I do not see the Russians at this point looking for an off ramp that is acceptable to the Ukrainian population or NATO right now. That is my worry is that we can talk about off ramps, but an acceptable one. We'll have to see, Seth Jones. Over the weekend there were just terrific articles, thoughtful articles by experts. I'll lining the failure of the political and military leadership in Russia to put together the kind of legitimate force that you served under, an advised

to How weak is Russia? Do we are? Do we deceive ourselves? Well? I think what we've seen with the Russians right now is they have been entirely incapable of putting together an effective ground invasion in Ukraine. They haven't done much of that in the past. They've also entirely misread and this is part of it, is partly an intelligence problem. Entirely misread both how the West was going

to respond as well as the Ukrainian population. So these are huge strategic miscalculations by senior Russian government officials, and I haven't seen them improve that much over the last three weeks. How far away is a sniper? This is the core of your work, and this is really difficult work, folks, said Mr Jones. Does Dr Jones excuse me? Seth Jones? How far away is a sniper? When a snipe? Very

sniping well, you can be at very close range. Uh, you know, you can be a hundred feet, you can be uh much further than a football field, much further than a hundred yards. You could be over a thousand depends on the type of weapon that you have, the type of sniper rifle, as well as how how accurate and good you are. So you've got options, which is

the point. That's the urban warfare seth. I'm looking at the situation shifting further west over the weekend, as you saw, and I'm sure you're more on top of than us. We saw a strike on a military base and you crained fifteen kilometers away from Poland. And we saw a language change from the Russians as well, when they declared the convoys of military surprise from NATO to Ukraine were

now seen as quote legitimate targets. So can we just start with how you reacted, how you're thinking about that quote legitimate targets on the backs now of military supplies from NATO to Ukraine. Well, I'm not surprised at all that that the Russians are starting to conduct these kinds of attacks. I mean, the reason is very straightforward. Is the Russian ground force are getting hammered right now with javelins and stingers, so both good the ground and air elements.

So this is an attempt because the supply is coming into Ukraine have been so successful at hitting Russian forces, they're now trying to interdict and destroy. So I'm not surprised at all. The concern is how close they're getting to the Polish border. And one stray missile that goes into Poland and hits eighty second airborne forces puts this

ward a very different direction. Well, says, can you talk to me about that, because for myself, certainly not an expert from the outside, looking again, just how far is fifteen kilometers in your world? It's not very far at all. I mean literally, one cruise missile or even a ballistic missile that's uh guidance package is off kilter, doesn't amount functions, and that's that's not a very long distance for that stray missile to go in a different direction. It's happened

with US cruise, ballistic and mortar shells. So again, hit hitting eighty second airborne soldiers near the border would would would kill the US and suddenly we'd be in a different world. Well, and That's where I wanted to go. How high is the threshold for US military for frankly European troops to fight directly with the Russians. Are we

getting closer and closer to it? Well? I do think we are getting closer, and uh, you know, the the US has to has to now begin to think about what war would look like if that's the direction the Russians take this. I think the US at this point does not want to get directly involved in the war. But if US soldiers are killed by Russian missiles, um, coming off of aircraft or maritime vessels in the Black Sea, um, you know, that's gonna that's gonna be a very difficult

decision for the US. I mean, the population is going to want a response. Yeah, and that's actually what you said. Also with a strong response to war crimes as you called them, with a chemical attack or a biological attack. What would that look like if there were direct combat between US and Russian troops? Well, uh, the question is is whether if Russian and US or other NATO troops were engaged in direct combat, could you sort of contain it. I think the issue is, uh, you know, it might start,

for example, with aircraft striking various targets. Uh. You know, large numbers of of US forces crossing the border would probably be not the first option. It would probably be air air assets being used and the possibility of having US aircraft taken down. But I think that's sort of inching towards you know, broader ground engagements. Ground engagements would

be a very serious concern. Seth a clinic as always and we're lucky to catch up with you, you know that, Seth Jones there of C S I S. This is a great joy in studio where this is someone with a rarity of rains within England, which is what I call the triangle degree from Cambridge Oxford in the London School of Economics. Also Lignozed with their service to Europe and her Britain, a global head of Foreign exchange strategy

at RBC. Thrilled to have you in studio today. Euro came at one sixteen gyrations down to eighty five gyrations up that Germany didn't like as well. Where is fair value on euro war or no war? It's a great question because actually when we updated our forecasts following the

invasion of Ukraine, we didn't really change them. We kind of nudged the short term marked market, but left the year and forecasts and change because a lot of what I thought was going to drive euro dollar this year is actually playing out what John just mentioned around you know, resetting terminal value for the FED. It's that difference in

policy does in folks. We're talking to someone here with physics and economics, so we're gonna go all x X sign even though we usually don't do that on Monday. The terminal value is not only about the magnitude of the value, it's about the win of it out the X axis. Do we extend our view in lar or do we come in closer? A great question, and not one I think which anybody can answer at the moment, not least of which policymakers. You know. I think we've seen it both with the ECB last week and with

Chairman Pale in his testimony. They're trying to maximize their optionality for that precise reason. So we know that finance ministers are meeting in the euro region in order to determine what the fiscal spending plan will be going forward, how to support the region, what's currently baked into the euro, how much fiscal support, there's a little bit in there.

But traditionally people have been a little bit skeptical that the Europeans will really deliver because of the opposition from the core, from Germany, the Netherlands, you know, the more hawkish, fiscally hawkish countries. And yet in this crisis we've seen previously unthinkable things have So I wouldn't rule anything out, certainly, not when you have the escalating situation between Russian and Ukraine.

All right, but if we do get some sort of fiscal response, do you expect some upside surprise to the euro And I asked this because there seems to be a lot of bad news baked in and this divergence between the US and the euroregion, and some people say it has a lot further to go to punish euro However, if we do get this fiscal support, that could be a game changer. Do you agree. Look, I think it's

definitely a game changer in the yields space. From the currency point of view, this is not going to be an easy economic environment for Europe, and the kind of conditions under which we would get that big fiscal support would be the more extreme crisis conditions. You have to balance one against the other. So, you know, don't get me wrong, We've definitely found opportunities to be tactically long euro.

We were longer a spelling last week. It worked out very well, But as a core position, I'm not looking to get long euro, you know, targeting the kind of one sixteens, one eighteens that a lot of people had at the start of the year. Is this a Euro story or is this a dollar story? And I asked this because the dollar has been behaving and continues to be amid this turmoil. Is that really what we're seeing

and we'll continue to see going forward. We have seen a lot of independent euro weakness, and last week was really a story of independent euro strength and more just short covering rather than some fundamental shift and outlook. You know. So, yes, the dollar has been acting as a haven, but there's been a lot of very specific euro weakness. Look at your card, your asy, you're a quwie. It's not just

been about the dollar. Tell me about the Pacific rim in turmoil today, COVID, the war obviously Russia, China, and just as a general measure, when you wake up in the morning and look at you three bloombergs, how do you measure stress on a Pacific rim in the old days dollar? Again, it was a simple answer. I don't buy that anymore. What's the measurement we should use? Yeah,

Dollargan is going through an interesting transition moment um. I think the Australian dollar for a lot of people is still that proxy your Chinese growth, and you can look at it against the U. S Dollar, you can look at against the euro. It depends what you're trying to measure. You know, are you trying to measure kind of Russia Ukraine risks against what's going on in the Pacific rim? Euros is a good way, you know. Okay, this is fascinating.

Ossie ran Minby, is it? Is it worth looking at for listeners and viewers again trying to get a Pacific riom gauge. So the remember is a tricky one only because it's manipulated. It's not kind of clean mond So you know, when when you look at sing dollar, another one which is which is managed. But the end I think is actually more interesting than we give it credit for at the moment, because it comes back to something

you guys were talking about earlier around regime change. And the fact is that depending on what happens to bonds and equities, the combination of the two, we could see dollar yan higher or we could see it quite a lot lower. And I don't think market should be certain yet that dollar yan is just what is your call

on you in here? I mean it's stunny. I was I mentioned David mal past years ago with bear Stearns now at the World Bank looking at one twenty or even one thirty week week week end, but that was a long time ago. What is the RBC call on yen? I mean, we do have a call for dollagan trading higher into the end of the year, towards one twenty. The fact is, though there are a lot of dunsaid risks that that make it very difficult to put on

long term positions in the end. Clearly, if equities roll out of bed, you'll get yea and going up against everything bother us. I like that, John, instead of saying plunge, we can say roll out of bed. I mean, it's it's the same thing till it's same think I said in US thank you the global ahead of ex strategy at our VC looking at some of the dynamics in this f X market this morning. This is a joy. Megan Green has put together a Princeton, Oxford Academics of

exceptionally thoughtful and transatlantic essays on economies. She now has to confront war. She is global chief Economist to Krall, but far more at the chad a mouse and truly are transatlantic source Megan Green, I want to discuss today Germany. And at the bottom you go all Patrick O'Brien, I mean Napoleonic wars, and you say time is of the essence. What is the time is of the essence for the

new German government? Well, I think for the new German government time is of the essence mostly applies to the policy mix that they're going to be applying to what's going on um and with respect to the economy and also the conflict between Russia and Ukraine. And and by that I refer to the policy mix between fiscal and

monetary policy. The e c V came out last week pretty hawkish, accelerating their tapering process so that they can start hiking rates um if they actually stopped buying bonds, though the ECB won't be able to reduce yields from

creeping up, particularly in peripheral countries. At the same time, the EU is recognizing it needs to become a big spender on things like defense, subsidies for energy, the Green Transition UH, and so the EU is trying to come together and figure out some way to raise money for that um. The time is really crucial, though, because the E s P will stop its asset purchases in the

third quarter of this year. It could take that long for EU leaders to act really put together some kind of package so that the reduced its its energy depends on Russia and other things. The nightmare scenario is that both sides fail, so the ECB stops buying bonds and the EU doesn't pull it together, and then Europe's really in a vine. Are you optimistic they can go all Conrad out an hour. At the beginning of the German post World War two experiment, they didn't have a choice.

They had to rebuild. Is that enthusiasm out there, Is there a Conrad at an hour out there? Well, there is enthusiasm for that, surely. But we just of course had the pandemic and the EU came together and issued debt jointly to fund or response to the pandemic. I'd say that crisis was probably a bit more acute than this one, and so there is a question about whether they can do it this time. The new German government's coalition agreement for bids any more recovery funds. The German

Finance minister is pretty set against it. There are other frugal countries in northern Europe that are also aren't interested. So, as always is the case with the EU, time will tell, and they'll probably do something at the very last minute. But in the past the ECB has always had to be the one to step in uh and and be the only game in town, and so that may well

happen this time as well. Of course, they don't have that much ammunition megan, So I do wonder whether a recessionary environment in Europe is not a given, but seems much more of a certainty to you. I think stactulation is very likely in Europe. I'm not sure that they'll go into recession, but certainly a scenario where you've got virtually no growth across Europe and really high inflation. That's my base case scenario at this point, and and that

of course is the ECB is absolute worst nightmare. So in my view, you know, the FED is taporing first and then we'll hike rates. The ECB has been intent on taking the same path. I think actually the ECB is making a big mistake and should have done it the other way around, played with rates while continuing to buy assets, because that's going to keep borrowing costs low so that European governments can borrow and spend in the

very short term. In the US, given the fact that there does seem to be a similar reliance the FED to try to equalize some of the inflation, how realistic is that? I mean, if the US doesn't see stag inflation, how concerned are you about other economic ramifications, particularly when it comes to inequality. Well, so, you know, I think that the US is further away from stagflation than Europe is.

Our recovery is much further ahead. Um. But you know, the FED absolutely has to start hiking, if not for any other reason that it needs to maintain some credibility, keep inflation expectations grounded in terms of inequality. Actually, you know, I think the FED gets a worse rap than it probably should. The FEDS winding down its bond buying purchase purchases program, So it's finishing tapering, but uh, you know,

and that has really boosted asset prices. But we don't know the alternative that if the FED hadn't stepped in to make markets in March, unemployment would be a whole lot higher, and that would have implications for inequality as well. So I think the role of central banks in in driving inequality higher is more ambiguous than most economists really jest. I think, you know, we don't know what the alternative scenario might have been, but it would have been lower growth,

and that might have been worse for low income families. Megan, you mentioned earlier Europeans frugal countries. Is America a frugal country? That's a great question. Um, you know, our debt burden would suggest not really. Uh, we did spend really big in the pandemic. That's partly why we've seen broader based inflation,

uh in the aftermath, and say Europe for example. Um. That being said, it's it's become really difficult for Congress to pass any kind of fiscal spending package, and so the US is getting more frugal than it was, certainly, But you know, I think I view it as us taking our foot off the accelerator a little bit rather than slamming on the brakes. In terms of fiscal stimulus, I think we could still get more pieces of the

build back better. Legislation passed through Congress is kind of one off pieces of legislation, So there might be a bit more spending ahead, but it will be you know, over ten years and largely backloaded. Um So, I think the brunt of the fiscal stimulus of the US has

to provide us probably behind us. What might come up now is support for Americans who are paying really high prices at the pump, and so we might get some sort of alleviation given the spike and energy prices that we have seen and are bound to see going forward. Looking for something similar out of Europe too, Megan. Wonderful to catch up with you, especially on Europe and the Anatist states. Macan Green that of the Crawl Institute, all spani in time, Kene, Let's get right to it with

Sea Bree's done in Florida. Doug cast joins us this morning. Doug, you and I remember when Bolivia, in a bunch of banana republics, said we're gonna lose our shirt and tin, and they forced Lamy to shut down the tin market so the tin cartel could be restructured and saved. We've got this. I had Chrysler debt, you know, with Rattner two thousand nine. Same idea, where a market maker takes over and says you can't make money going the other way.

That happened the other day in Nickel in London. Did they do the right thing to shut down the London Meadow Exchange or should they have left the lungs prosper. That's not my area of expertise, to be quite, but you've come on, but you've been doing this for years. Believe I believe that they should have kept the market open, and uh, I believe more of the lazy fair attitude towards these exchanges. I think it's more dangerous when you close markets. I agree. And now we've got a well,

we got a close Russian market right now. What does that signal to do? When they yeah? You know, I think it was Benjamin Disraeli, who was England's Exchequer, once famously said, what we've learned from history is that we haven't learned from history. All these things rhyme um, and we lived in this flat, interconnected world um, and contain

contagion is is omnipresent um. To me, what it's what you're saying is that we should have a sense of history, We should read books, We should go to our library because it gives us hints having they have to navigated this market which has seemingly no memory from day to day. You know, Doug, that's kind of where I wanted to

go here. I mean, there's so much geopolitical risk out there that I think a lot of investors really having a hard time pricing in irrespective of what the Federal Reserve is going to do, irrespective of what corporate earnings are going to do. What do you tell your clients when they call up saying, how should I price in the risk of Russia or with China still having lockdown discussions here and key industrial parts of the country. How do you kind of walk them or talk them off

the ledge. Yeah, I think that as we um as we exist today in mid March, to quote, uh A credence clear award is John Fogetty. There's a bad moon rising. Um. I spent the last few months saying that I'm selling with their buying. And it's clear to me that in looking at the massive declines of all these speculative jew jaws and now the broader market, that the that the era of irresponsible volitionists is now over. And the probability is that early January late uh December marked a very

important broad and distributive market top. So I expect that will see more fragility, more volatility, and less and less liquidity in the markets and months ahead, much like we've seen recently. And the risks have certainly been skewed to the downside and they remain so in terms of I mean, the critical question poland Tom is is how to navigate

a market with such volatility and such uncertainty. And as I started by saying, I go to my library and there's one book that answers then answer to me the question of how I should be navigating a period of uncertainty. And it's contained in a single book. Um, you guys have probably not even read the book, but it's SETH Clarmen's Margin of Safety, which was written in I believe, and the book costs about forty dollars. You can't buy

it now. Unfortunately, it's very expensive. If you go on eBay or Amazon, it's almost three thousand dollars of copy. And as Buffett said, prices, what you pay value is what you get. And my advice is to read the book borrowed from a rich friend, so you can learn a couple of lessons. The first lesson is that Clarmen makes the case that US value investors always make that investors are too often lawered by the prospect of instant millions.

And the message should sound familiar to investors in arc um in looking at her constituent holdings and looking at many of our you know, Seabreeze, Shorts, d n A s, Sleep Number one, like Berkeley, all the carve Anna, all that. But but the second thing, and the most important thing to specifically answer your question, Paul Um, how do you? How do you practically and tactically guide yourself through a

difficult market filled with uncertainty? And I'm of the basic view that we're in this opportunistic trading and not investing buy an hold market. And he tells this great story and it's just been It's brief, uh set does He talks about an old story about the market crazy and Sardine trading. When the sardines disappeared from their traditional waters in Monterey, California, the commodity trade has bid them up

in the price of the Cannas sardine sword. One day, a buyer decided to treat himself to an expensive meal and actually opened the canon started eating. He immediately became ill ill and told the seller the sardines were no good. The seller said, you don't understand these are not eating sardines, that you're trading sardines. So I basically have adopted an approach of a trading sardine, not at eating sardine approach.

Keeping my var loan something you discussed on Friday on the show Tom, value at risk, and we were up in January at sea breeze. We're up in February and month to date we're up as well in March. Can you measure or find cover in persistency of revenue growth, persistency of iba margins, persistency of net income? Does that a value here? It has less value in a rising

grain environment? Tom, I agree that, so, Doug. I mean, you know a lot of our listeners are looking at their apps, of their brokerage accounts because we all now have gone digital and everything financial services. Nobody goes unto a branch anymore, and they're seeing their SMP index funds down. Is the SMP gonna be higher at your end on a year over year basis? Do you think? I have absolutely no clue, but I will tell you that you know I'm I could comfortably give you the bear case.

But on the positive side, let me explain what temper is my negativity. UM. The SMP is down by eleven point eight percent in the first forty eight trading days of the year. It's the fourth worst start of the year in history, the worst five starts prior to this. We're in two thousand nine with COVID the depression thirty three thirty five period. They mounted tremendous comebacks to in the year in a strong positive territory. And secondly, UM

bonds are down five percent. That's not taste, believe it or not, for the worst year in history, and the second worst was under three percent. Finally, it feels much worse tom but the SMPS max draw down this year was thirteen and that's right in line with the median intra year to draw down since night. So these factors keep me from getting terribly barrel. And we haven't seen the Catharsis yet earlier. Speaking of Catharsis, Dog, we didn't

want Jon for investment, Like, come on, the Yankees. Take the big guy from Minnesota and the Twins is a game changing for the dreaded Yankees. I direct message you and I'll repeat what I said. I hate Sanchez. I literally think he's the worst base center in baseball. He's certainly the worst defensive catcher. I'm gonna miss Geo. Um Josh is great. Had to be done. Now we need a first basement or a center fielder. Very good Dog cast. Thank you so much, Mike d I lights it's cast.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg. M