Surveillance: Russia Sanctions with Singh (Podcast)

to make it simple, you still like ankuties why? I think you know, we've covered a bit of the central land landscape here and uh, I agree with a lot of what has been said. Um, I think we end up living with more inflation uh than the rhetoric is suggesting. Um. You know, at the end of the day, we're only talking about normalization of policy the FED. I don't think despite the talk, the hard talk, the tough talk, I don't think they will really go beyond neutral, at least

for now. They're not intending to it really. I mean, if they were, they would show unemployment rising from the unelty level that it currently is at. And so given all this, I think we see a bit of excessive hawkishness, um, you know, being uh being driving markets at this at this juncture, and so we think we're gonna be uh at the end of the day. Uh, I see a rate background that's gonna be a somewhat more conducive or supportive of of equities. And it's a relative call, right,

I mean, its environment. The place you don't want to be is in fixed incomes. So I think on the right of the basis, equity do look a lot more attractive than chicks incoming and enclachery environment. John, we're looking on the Bloomberg terminal. A little bit of unraveling and emerging markets is indicated by currencies. There's other tea leaves as well. You grew up with a PhD at the House of Bernanke at Princeton, where he believes financial stability

is everything. From your view at black Rock, how financially stable is e M right now? So e M is a is a big space, right. I Mean, I'm sorry to to state the obvious at the outset, but it's partically important this juncture because we have a very complex story playing out in the m over the course of twenty two Uh. There's a commodity story that is playing out. So we've seen that in America been performing fairly well.

Uh during appeard we have a China story, which we think, you know, it's not necessarily e M anymore, but as part of the D index. And then you have the fallout from Russia and it has been that has been affecting especially in European emerging markets. So these are very distinct forces. I think overall, we it turns out where in an environment where rates are still pretty low, and and e M world has been earlier on in trying

to normalize policy. I mean they've started earlier. I think they were ahead of this, uh, and I think that provides a bit more resilience. And so that's why we we continue to be overweight, you know em local dead for instance, We think that continues to be attractive in

this environment. So how can you look at sectors at a time when so many people are talking about specific idiosyncratic stories within emerging markets or within the equity markets if you're looking for example oil versus financials or versus consumer discretionary, And how are you surgical as a very big firm at a time when so many people are talking about security selection. So this, you know, this environment is one where beta is uh, is not gonna be

your your friend. Uh. I guess you know. There's uh, there's gonna be quite a bit of challenges, which we've already talked about, and so I think that makes security selection potentially, um environment more conducive for security selection. UM my team is responsible for broad asset allocation. So I'm not I'm not the one that's going to be very surgical on this, but certainly we have, you know, a large set of teams here that are, you know, seeking

opportunities into this environment. I think at the broad micro level, I mean things like I mean the comedity story I think has a lot of as a lot of security selection implications. The climate transition high it's playing because that's not a straight line, and that's another big team I

think on security selection. And I think a third big one is making sure that the read true from the rate adjustment the scount rate now that are going up into the earnings potential of companies that connection is not misread. And I think there's a bit too much of a mechanical read through that higher rate is back for protect for instance, we think it's it's a lot more nuance than that, and that's where the opportunities will will arise

of blank Rock the investment Institution. Great to catch up with you, sir, as always, Kelsey Barrow with us right now with Bob Michael, JP Morgan on yield with an exceptionally smart note that pushes against step in the bonds. Now, Kelsey, thank you for joining this morning. You use this phrase over soul. Let's be clear, yield that's price price down, yield up, and you say price can stay down and discuss that. Yeah, so oversold markets can stay oversold. We've

seen a massive rise in yields. It's been globally oriented. You have the two year German booned above zero for the first time since UM and we think that this hawk ish rhetoric from central banks around the world is not going to stop anytime soon. I heard you guys discussing inflation and inflation expectations rising. Well, the flip side of inflation expectations rising is that front end real yields

are still falling. So right now you have the two year reel ye old debt minus one point eight percent. That's almost four hundred basis points away from where we got at the end of the last cycle. So this tells me that the Fed still needs to push on this hawk is rhetoric. They're going to need to tighten policy a fair bit in order to pull back on the economy is John Farrell, is Kelsey, Barrow, Moura, Hawkerston Summers.

Perhaps perhaps they're on the same page, but counts, see, what you think they should do and what you think they will do can be two different things. Um with you when that should given what the market is telling us at the moment, what do you think they'll do? What kind of numb are you looking for on the FED funds? Right? Sure? So I think that they are definitely comfortable doing fifty basis points at the at the

next meeting. I think that they would ideally like to be above two percent by the end of the year, and I think that the economy will work with them on that. We do still see the U S economy as fairly resilient. There's a lot of pent up demand for spending, particularly on the service side. People do want to get out there and they do want to travel. So this long awaited move back from the good spending the pandemic winners, to the pandemic the reopening winners, that's

still really happening right now. And given the fact that we just are rising in the savings rate is low, you know, this is still an economy that's operating above trend that can be resilient to some shocks. So Kelseye. That's the reason why I know that Bob Michael likes credit. And I'm looking right now at how your bonds. You know, at six point six percent, they have been climbing dramatically.

We've also seen investment grade credit yields rise dramatically. How much do you parse out the value that you're getting by just buying and holding and clipping coupons versus the potential rate shock. Should the Fed go much more aggressively to gertail inflation. Yeah? Absolutely. I mean we've seen a massive repricing in yields. You have the high old index above uh six point seven percent in an all in yield.

You have investment grade credit with yields that are nearly double what they were just six or nine months ago um. And so there's a lot more value to that credit now than we had before. And at the same time, the corporate fundamentals remain strong when we look at leverage ratio, as we look at the cash that they have on hand. UM. When we look at their ability to maintain their margins by raising prices. This is not an easy time for corporates,

but they're coming from a very strong place. So we've got a rule framework of bear markets in equity, in a bear market in bonds priced down, yield up? Can there be a Catharsis selected people on load bonds in a panic? Is there a history of that? Well, we are seeing a lack of of of buying right now, I think, particularly from the foreign base, and I know you watch the spread between or the currency pair of

the US dollar and the yen um. One of the ways that we're seeing this translate um into the bond market from the currency market is that weakness in yen is driving us selling from the Japanese investors selling their foreign foreign treasury bonds or their treasury bonds um and that is putting further upward pressure on yields when there just isn't a lot of people who are comfortable stepping into this market right now and trying to catch that

falling knife. So Cassy, just explain this and let's finish it. Why you and the team, along with Bob still so constructive on credit, given everything you've said about core government bonds. Yeah, so I think right now what we want to have is we want to have that credit exposure, but we want to get it in structures that are shorter duration, um that are floating rate, that protect you from what we do believe is still going to be higher yields

for now. Cassy Barrow awesome. As always, nobody's like Jeffrey you. Jeff you is from another planet and I'm lucky that he comes down the planet Earth to catch up with us this morning, Senior and mea market is trying to just a being white man and Jeff great to catch up with you. Buddy. Let's get to the heart of the city, and that's foreign exchange sterling. A lot of weaker off, some really really weak data in the UK.

Asked this if Jane Foley earlier this morning, Jeff, what's the lesson we're learning from the UK's experience with the hikey cycle very early, very early on in that hiking cycle and a week of data that started to come through. Well, the be a lesson here is stagflation has two parts of it. You've got to focus on the stag nation as well as the inflation. And now as far as the UK is concerned, looking at the retail sales numbers, are looking at the gas bills, which is what everyone's

doing probably ten times a day right now. Absolutely, you know stagnation is coming for the UK household, Jeff, you so importantly. There are leakages within our sort or two. There are things that react and change the story. What are you watching is the metric that will change the story out pairs July. Is it dour dynamics or is it something e M developed nation dynamics. I think we're going to see quite a bit of chop and change

in e M right now. What has been the theme stagflation again, So how do you play that through e M? You want to own commodity block currencies. In our positioning indicators in eFlow, every single Latin American currency was overheld, was well owned in the first quarter, but now that's starting to change. We've seen the Mexican pacer starting to fall back, so that inflation protection trade, especially within an emerging market. If you look at the rand that's probably

to come off now. Are people now looking to go back to Asia ex China? Exactly? Exactly what do we do about Pacific rim X Japan at a one after one thirty? What does sing dollar do? Just as one example, so you you look at where dollyan is right now, people are thinking, okay, are the German car manufacturers telling the ECB to call the b O j No, this is the wrong continent. Places like you know, Taiwan, like Singapore, Thailand.

You know, these are areas where every one percent move in dollar yen high actually offsets any benefit they get from dollar stronger as well, so we and hurts them arguably more certainly more than the US and the Eurozone. So this is where the intra region dynamics are in play. But we like Southeast Asia potentially as Thailand continues them to open up, but also in your places life, time, career, the tightening places. You know, these two economies really pushing

forward right now. You want to own them, Jeff, A lot of investors have been tying at Japan and some of the dynamics. They're into the US bond market saying they're the biggest buyers of US treasuries and this is because of the currency adjustments over history, this dynamic of a weaker yen changes that dynamic dramatically. How much do you think that's going to influence the long end and

send yields higher. I'm actually not too focused on the treasury market, but you're absolutely right in saying Japanese and also add Taiwanese and Korean investors, you know, those big Asian savings pools. It's not the treasury market you should look at. It is US high yield. You know, these are the areas where Asian investors have been picking up cooper but have been picking up coupon over the last

few years. Now we're seeing spread widening if they begin to exit, if they begin to repatriate to stabilizing them to some extent, and then the widening that we're seeing due to the FED right now in US corporate spreads,

that's going to accelerate because the Asian bid is gone. Jeff, Let's sit on this for a minute, and are you saying that basically, the stronger that the dollar gets, and the more you see yields continuing to climb and the opposite happening elsewhere, you're going to see more and more weakness in the credit space that perhaps isn't fundamentally driven but simply a supply demand mimic because if you look at say career, if I'm a career on a time

on ease investor, and right now, finally I'm seeing some movement in my own yield cup while the dollar is strong, while I have good total returns. If I had my coupon, my my duration plus my ex it's looking pretty good right now. Let me get out, you know, while the five FED is still not, you know, really pressing the pedalants into tightening and capture some of my own yield on shore where I don't have to take into count

the f X risk. For Japanese and pension investors, maybe they can take into account that the higher yields that same dynamic. They're not getting tightening in Japan via rates, but they can top that up with a higher dollar. And at the same time, so that flow moving out of US treasuries for sure, but also corporate high you're going back to Asia while they're taking profit on a

very structural multi year total return trade. That is something that could exacerbate tensions in the US credit market if this is potentially a massive shift. One thing we haven't mentioned is what you think this means for the US secretary story. M H, Well, the U S security story. I think you know that if I look at the what what eyebox high yield, it's underperformed their SMP by that I think six percent six percentage points this year already.

So but this wasn't always the case. You know, this has been more recent, so the two were working in lock lock steps. So from point of view an international investor, now you're seeing differentiation. So now that the tightening and US financial conditions is finally moving from equities to corporate spreads, you know that is the fourth shooter drop. Basically, I think they're going to be more attuned to that, So I would expect corporate credit to underperform equities much more

up ahead. Your final question from me, have you got a number in mind for the peak of the FED funds right in this cycle? Do you have a number in mind? So I would actually put you pick a number where terminal rates So we're sorry when neutral rators say you want of three, then you add potentially a

hundred hundred fifty basis points above that. That's where it is absolute basis absolutely true, but on a relative basis relative to neutral, FED will be restrictive to bring down inflation, and that number is the one that you need to have in mind. Jeff, you if we and White Manager, Jeff, thank you, sir. As always, we will stop here with the student of this nation. He is without question the most articulate conservative economists we have. Glenn Hubbard joins us

from Colombia. His service there is dean of the Business School, former chairman of the Council on Economic Advisors, and I really can't say enough about his book The Wall and the Bridge, where he leads off, where the walls come a tumbling down and Mr Gorbuschev tear down this wall, and how we have circled around to the chaos of the day. Glen Hubbard, I want to go back to your Florida and my western New York, long ago and far away of where Milton Friedman just simply said, what

is the right policy? Now? The policy showed up one year later in the form of Paul Voker. Where is today's Paul Woker? Well, I think the FED has now understood that it's been behind the curve and needs to step in. I do worry that the period from five to three is more instructive than people might think. For today, I think it's a little naive to think that the FED wants to crush inflation. The two hundred ish faces points in the FAD funds rate is going to do that.

So we'll have to see. But I do think that Fed has the courage to act, and I don't think the market should take comfort in that. I'm not gonna jink you, but I'm not Gonnam mince words or the Republican president. You're shortlisted as chairman. There's no other way around that, Chairman Hubbard, let me make it clear. Volker had twelve percent yields or whatever they were. Powell has one percent yields, two percent yields. We can't do what

Voker did. Canley, Well, it's difficult, and I'll tell you why. Not so much about the fence courage, but about other things, for example, fiscal policy and the budget. As the FED titans, the federal deficit gets a lot words from shorten the maturity the debt. We have a very large debt today relative to what Paul Volker faced. There are also issues of how much of a recession the FED is willing to tolerate. If the FED wants to get back to two percent inflation, I find it hard to believe that

the soft landing is possible. Glenn, What does that mean you were saying? And I want to pick up on this, this idea of the fact that there seems to be complacency in certain risk assets. Where is that complacency? How disruptive could these tightening cycles be for markets? Well, it depends on how far the FED feels it has to go. You you mentioned before about the possibility of several fifty basis point hikes. I think the FED will take a look and see what's happening in the economy. But I

don't think we're in stagflation right now. I think we're in an inflationary boom. I think there's a lot of wind at the back still, So I do think the FED is going to have to take fairly bold action, Not like Paul Volker, but pretty bold. Do you believe that Bill Dudley is correct that we're going to see four percent FED funds rate over the next two years. I don't think you could rule it out. I think it depends obviously on geopolitical events that none of us

can sit here and forecast today. But I do think that the FED should be prepared to do what it takes, and if the market believe that, it will do what it takes to put the inflation genie back the bottle. Glen Hubbard moments ago a world class economist Nglist of Sweden and the Stockholm School just came out with a stunning headline which directly addresses this scene. Demon Hubbard uh Vis of the Rights Bank says, not a period of normalization,

but a new policy. Is that really what we're talking about here is we need to make up a new policy original economics. I don't know that it's a new policy as much as going back to being serious about the factors that cause inflation. We got this inflation because the man was growing too fast relative to supply. It's not even that complicated. It's not all Ladimir and it's not all supply chains, and so I think it's more matter of getting back to bases, to be honest. Okay,

so we had a big, big fiscal inpust. What is the Hubbard prescription, away from the politics of it all, to diminish this inflation down to say three or lower. Well, we don't. We will already see a winding back of some of the fiscal impulse simply because we won't see additional stimulus on monetary fault policy. The FED has to follow through that. It's very serious and then it's not simply underwriting a put for the stock market every time

financial markets have a hiccup. We're speaking with Glenn Hubbard of Columbia University, and we're talking about the new dynamic and what the FEED is looking at with respect to inflation. What about the labor market? You write about economic bridges and the economic bridges at a time when participation rate remains well below where we were pre pandemic. How does the FED effectively curtail inflation while allowing that participation break to get back to something that is more representative of

a robust economy. What's a good question. Participations are critical social issue. I don't think letting the economy run hot it's going to fix the participation problem. There are things that can training, education, a lot of fiscal interventions, but they're really not in the FEDS tool kit. The labor market has the FEDS should see it is actually running quite hot. It would be better if the administration focused

more on participation, but so far not. How much has the FED lost credibility and trying to address issues that really are only addressable on the fiscal side. Well, I think the FEDS still has abundant credibility with the public. I I really do. I think the feds conversion recently has helped that. But I think the FED does itself no favors when it tries to widen its role in

issues that are really more for fiscal policy. If members of Congress and the administration won't do the right thing, that's not an excuse for the FED to step Onack. We had an interesting debate yesterday with Claudius some out of the Michigan academic assets and Matt Shapiro, Old Kimball and the most of them out there, and and she was really quite heated about the policy gloom of stagflation. Now is is it precisely Hubbard economics? No, it's not.

But what does the stagflation gloom get wrong? Well, I think if you start up where we are now, I think we're in a classic inflationary boom. We've seen fairly good numbers for output for jobs, we're running ahead of potential growth. We're in inflationary boom. We're not in stagflation. So Glenn, this is critical. Do we underestimate grossly Republicans, Democrats,

economists of all persuasion? Do we just simply miscalculate the technological impulse that's making this so difficult right now, the benefits and the the hazards of technology revolution over decades. I think we did. Tom. I think the technology has been an enormal source obviously productivity growth. I'm very optimistic for that growing going forward. What makes me worried is

not science or economics. It's politics. Whether we figure out how to help everybody get involved in the games from technology, that's really where the political disruption is coming. Yeah, John, I think this is so important, this idea of the political disruption of technology. It's something Glen's written about for years.

And to meet John Across is all politics. Just wonderful to catch up with Glenn as always, and Glenn we have the Colly So thank you, sir, as a white Glen Hubbot of Columbia, fantastic on the Federal's and beyond. If long ago and far away you are an Asian and you come in through Ellis Island and end up in Stockton, California, and if you're possibly better than good at mathematics. Maybe you go to Washington and it was not. Mr Smith goes to Washington as Mr Sing goes to Washington.

Dolly Sing's great grand uncle was the first Asian in Congress back in nine seven. It is a heritage of academic excellence. Doaldson joining joining us now from the White House is Deputy National UH, Deputy National Security Advisor on International economics. Your title is bologny. What you really are is the most knowledgeable person about the sanctions that we have on this war on Ukraine. Give us an update this morning, our our sanctions working against Mr Putin. Yeah,

you've ever sold me toma. Thank you for that introduction. Yes, the sanctions are working. But let me let me explain the objectives. We had three going into this invasion. One is leave Russia. Uh, leave the world knowing that this invasion by Russia would be a strategic failure, galvanize and unify the West, and have Ukraine emerges this sovereign nation. Now the sanctions, UH, they're having the debilitating hit that we expected. The economy is going to contract by double digits.

Inflation in Russia is at seventeen and a half percent. Uh. You have more than seven fifty companies that have already fled Russia. More than of Russia's best and brightest have exited UH. The countries on the cost of default. The country is becoming isolated into a pariah state. If this is the end game that Putin wanted, I think he

was a big miscalculation. It was just saying, you are front and center, and particularly with your family's heritage, of the need for the White House in America to convince India to hold back from the behavior maybe of the last number of weeks in February twenty four, What does the Biden administration's plan to convince India to support our sanctions to support this allied effort. Well, India is a friend and a partner. I have deep personal affection for India,

as you're alluding to. Um. But but look, this is not about the unilateral exercise of American financial force. Our conversation with India is, Look, we're trying to uphold and defend the core principles that underpinn peace and security for all of us. That's a shared interests with India. We've also pointed out that as Russia becomes UH, China's junior partner and uh and and as Beijing has more and more leverage over Russia, that's not going to play to

India's benefits. So we want to step up for India, help it diversify away from Russian defense equipment. We want to help India diversify away from Russian energy sources. The amount that India imports from Russia in terms of crude oil is a very small percentage of the total one too, just like we're doing with Europe, we want to step up for India and be a friend and a partner.

And I think if we do that, and we work together on the spillovers from energy and food and migration and and anchor the economic relationship we have with India over time, we think if we play the long game with India, it'll accrue to our advantage. Delepe. Is it the same story with China, Well, look, China has a choice to make if it's serious about upholding the principles that it espouses sovereignty and territorial integrity. This is the

moment to show it. Europe is watching, the US is watching, the world is watching. Are they serious about these principles? Uh and and do they care about the spillovers, the global spillovers from Putin's war and energy markets and food. You know, they already have a homegrown supply shock from the zero COVID policy. Do they want to add to that shock? Um, So we're watching very closely. We have options in case China actively attempts to undermine our sanctions

or back fill those measures. What are those options to leave? Well, I don't want to specify what those are. I think you know what they are. We have a range of tools, including secondary sanctions. We always carry that stick, but we don't wave it around. So that that's the key, and

you don't wave it around. You carry that stick. But there's this debate going on whether to ease Chinese sanctions to actually uh or Chinese levies anyway in order to reduce the inflationary pressure on one hand, while also threatening sanctions on the other. If there isn't a more active pushback to what we're seeing in Russia, how does that balance get adjusted? How active are those conversations at the admitt station is having with China right now? You're asking

about the Russian sanctions right, Well, we'll try. Secretary Jenny yell And actually talked about the potential for putting some restrictions even on China, should they not come out more actively or undermine the allies efforts. And I'm wondering how much those are discussions right now. Well, look, our our our first and best option is diplomacy. So are our efforts. I think as Secretary was alluding to or to broaden the coalition of countries that are applying the sanctions. That

increases the direct impact. It also increases the indirect signal that this is again not just a US effort, this is a shared global desire UH to impose costs on a country that's brutally invaded forty four Millionais and people. Now, she mentioned a range of options that are at our disposal if if China or any other country attempts to undermine our efforts or tries to backfill the export controls. But I don't want to go any further than that. It's just saying thank you so much, so much to

talk about. We hope to speak to you again soon. Dalip Singh is the White House Deputy National Security Advisor, and I kid you not, folks, he is arguably the number one person we have on the many nuances of these sanctions. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg