Surveillance: Russia Talks with Trubowitz

and of course on the Bloomberg Terminal. Now a definitive conversation with Peter Tribowitz, Professor of International Relations at LS of course iconic at University of Texas, and it's important group group effort the retreat of the West, which was timely, to say the least, over the past twenty four at months. I want to take it the other way, Professor Trubowitz,

and say the advance of the East. If I look at Putin and I see him, and this is a phrase from you, of the power, power and partisan ship that we can see. How much power does Mr Putin hold and what partisanship can he look for? Is the East advances? I'm good to be with you. So, uh, Putin holds a lot of cards and he's displaying them. He's been using them and playing them. Um, they're mostly hard power cards, deploying troops, running exercises, moving his ships

through the Dardanel Straits and so forth. He doesn't have much soft power, and there's a lot of opposition uh in Europe to what he's doing, and the closer you get to Russia, the more opposition there is if you're talking about in the Baltic States and obviously in in Ukraine.

I think he's gotten himself to a point now where he's I mean, he's laid down a lot of demands and I think we're now kind of a crunch time where we're to see whether or not he gets traction on his main demand, which is that the Ukraine not joined NATO or not. I think that's where the game is right now. We're in the eleventh hour or whatever you know metaphor you want to use. There's some hopeful signs,

but this could easily go south. What will you listen for from the new leader of Germany and the coming hours. I think that's is a very interesting trip that he's making because first, as you know, he stopped yesterday in Kiev and had a conversation there with Zelensky, the Ukrainian leader,

before moving on to to Putin. I think the question here is in my what I'm looking for is whether or not Zelenski's comment yesterday about NATO being his country's desire to be part of NATO being more a dream in quotes than a realistic goal is somehow the basis for private negotiations, stuff that we're just not privy to right now and arrangements that are going on, And whether or not the announcement this morning that Russia was pulling back some of its troops is in response to that

unclear reading tea leaves. Um, but um, that's that is where I think they you know, the discussion and the negotiation is right now, Peter. Usually it is reading tea leaves. And yet we've gotten an unprecedented amount of information from the US administration in real time about what they believe to be happening. How do you read that? I think there are multiple audiences there, Lisa, that's a great question. One of them is to underscore to the Ukrainians how

serious the situation is. The second is really or maybe it should be. The first is to deter putin they're getting information, it's coming from close to Bolton, it would appear, and uh, and to really raise in a sense his understanding or the stakes that are involved, and that the US is is in a sense trying to get out

in front on the narrative or the information game. But I think the third thing is to try to demonstrate to the American public that it's all they're on game inside the United State, that Biden administration is managing this much more effectively than let's say it managed the Afghan pull out. Peter Trubowitz to go back to George Kennon and the founding of all this, is this the new containment? Are we searching for a new Western strategy to contain the leader of Russia? Well, I think the West is

searching for a strategy. I don't think that this is our primary Western states like the U S and Germany and UK and others. I don't think this is what they had imagined. And but ironically, what is going on here thus far is it putent. Efforts to change the European security structure have actually um I think given native given the Western Alliance kind of new purpose, something that really hasn't had as your question alludes to since the

Soviet Union collapsed thirty years ago. It's led to the deployment of more US and other troops in Eastern Europe as well as the delivery of thousands of anti tank missiles and other weapons to the Ukraine. Putin has managed to get everybody's attention in the West, but the results are not all favorable to him. Whether or not this is what takes form as kind of on a Western collective strategy is unclear. Remember what Joe Biden would like

to be focusing on is China and East Asia. So every day that he is in his team is investing time in Europe, is the day really that they're not getting the message out as much with respect to East Asia and in China. And I say that despite the fact that the Secretary of State is in East Asia right now. But that story is buried below the full Professor, what a great point. This tritey was a clinic and I'd love for you to come back soon so we can extend that conversation to the second chapter of this

which I believe is a discussion about China. Peter, Thank you, Peter Tripu. It's that of the London School of Economics. Gabriella scientist joins his global market Strategies that JP Morgan Asset Management. She writes one of the clearest, most detailed notes on the street with a real sense of international affairs. Gabriella, thank you so much for joining us. I love what you say. Throw out the blueprint, Okay, brilliant, what's the

what's the replacement? What is the new blueprint that matters? Hi? Tom, good to see you. So I think that's ultimately what we're trying to figure out this year as investors. Right, the market is pricing in today what's going to be a transition year for the economy from pandemic recovery to post pandemic expansion. It's one where we have more optimism about growth, but we're also a bit more concerned about inflation. So it does mean a different withdrawal of liquidity than

we had post financial crisis. That's not the blueprint. Now, we need to figure out what the new blueprint is, and I don't think investors have a clear reading that, and neither do policymakers. They're trying to figure that out real time, out loud with several FED speeches. Uh. And there's so many permutations we can come up with right in terms of rates and balance sheet timing, pace endpoint. So ultimately we do think volatility is going to stay

higher for longer. That means making big outsize bets on a tactical position is really difficult this year, Gabrielle. I know you speak four or five six eight language, jas. I mean that's what you do with Pennsylvania. But the answer is you speak Greek. Let's go alpha beta right now? You say, within investment in finance, alpha matters? What does alpha and why does it matter? Now? So beta is just really the kind of return you can get just

by being invested in the market. Alpha is the kind of excess return you can generate by focusing on the kinds of companies you invested. And I think for the last fifteen years or so, it's been a cycle of beta. I was all just about being invested in writing um returns of of indices, right, and you could have generated a six and a half percent annualized returns just from

a very simple sixty four portfolio. But going forward, because the market has recovered already so quickly post pandemic shock, we only project beta returns going forward of four point three percent annualized, So we gotta work harder to generate the same returns as the last cycle. And that's where alpha comes in, you're starting to see a turn and hedge fun alpha. That could be a sign that really this is the dawn of alpha. There's a lot of

valuation dispersion beneath the surface. There's a lot of value to add by focusing on stock pick and going forward. How much of the alpha Gabriella comes from China. So China is a really important piece of this puzzle because you can add alpha in Chinese markets, and you can also improve the sharp ratio of a portfolio by adding

Chinese onshore assets um SO both stocks and bonds. We projected for China to have the highest returns over the next decade, double for Chinese A shares versus the US and double for Chinese local currency government bonds versus U S Treasury. So there's a lot of improvement that can happen on returns by adding Chinese assets, and you also get a diversification kicker from those markets. They really beat to their own drum. You're seeing that in action this year. Santos,

thank you so much. With JP Morgan Asset Management, Mark McCormick here Global Ahead a foreign exchange strategy TV Securities in Canada. Mark McCormick joins us this morning, Mark, I look at the continuum of your note and it seems like it's a McCormick see change here off of your wonderful call on dollar resiliency. Are you ready to make, as Bullard would say, a regime change call in the

land of McCormick. Yeah, I think we're getting closer to the top and the dollar in broad terms, but I do think what's what's kind of interesting is there's still some more dollar resiliency ahead. So I know there's like kind of a big shift in the market in terms of how much expectations are going on the Euro, but I still think that there's room here to trade euro from the downside. Um, so we're kind of thinking a bit about a V shape bounce in the Euro. So

we see another move maybe towards one twelve. We bought them out there around fed fed liftoff time, and then we're basically off to the races in the back half of the year, looking for kind of a revisit around one twenty toward the end of You do a great job on the currency wars, and a currency wars are usually ascribe to race to the bottom of weaker and weaker currencies to boost exports. But you take it a different way, what does next year's currency wars look like?

So we're basically living in it now, which is a race to the top where essentially policymakers prefer currency strength because it's a way to limit inflationary pressures. And I think, as you mentioned, you noted Swiss frank and that's a that's a clear story here that the central bank, the SMB, has allowed a little bit more currency strength and more

people wouldn't have anticipated. And Swissy has been much stronger than more people would have expected in this environment of higher global yields, largely because they're allowing the currency to do some of the work for them. So stronger currency, lower infreation. And now every central bank around the world, all policymakers actually are looking for stronger currencies. They're not telling you that, but you can see it based on

what their actions and what they're doings in. The preference now is for stronger currency um and that's helping to work off some of the inflationary pressures we have mark In the past decade, we've really talked about rate hikes or rate cuts really dictating the moves that we've seen in currency markets, and that's shifted over the past year to a growth outlook over the next twelve months, do you think it's going to primarily be driven by growth

and not necessarily rate moves? And I point to China for example, where you see the one actually strengthening despite the increased support and the potential rate cuts coming up. Yeah, it's an important question because what I think is most important, and our work shows it, is currencies are multidimensional. So I know we're kind of focused on central banks and geopolitics right now, but if you look at what factors have been making money the last couple of years, it's value,

it's growth, and it's also terms of trade. So I do think growth is also it's it shows on our back test it's the most important factor through periods of time, and I think it's it's one of the things that will matter most, especially on COVID reopenings. You know, if we're moving in a world where we have since we have synchronized policies that are kind of allowing everyone to reopen, growth is gonna matter and we're going to see growth diversions.

But I think when we think about central banks, growth, commodity, terms of trade, and value, and I think one of the most important things we have to think about our equities. But on the rate side, where we're going now it's really about terminal rate pricing. It's kind of like the first ones in are now kind of the countries are at a big, big disadvantage. If you look at the Canadian dollar and the BOC started to move last year and it's kind of one of the least exciting currencies

now in the central bank trade. But there's a moment in time here for probably the next three to six months when we think about terminal rates and figuring out who is the highest terminal rate will help the currency. But if we step back from that, growth, terms of trade and commodity exposure, equity momentum, and value are the critical drivers for currencies moving through this year and probably

into next year. So if we connect this mark with this idea of the currency wars that you're talking about, where nations want to see stronger currencies to fight off inflation, how does this factor into the Fed's calculus. Does this actually encourage them to be a little bit more hesitant to raise rates or be more aggressive in order to allow, ironically the dollar to strengthen more because it will increase

growth prospects. Well, I think part of it is they want to essentially, I wouldn't use the words shock the markets, but essentially what they want to do is kind of get ahead of expectations. And I think what we're what US is worried more so than any other country in the world, is that ranted wage pressures are starting to rise faster than other countries. If you still kind of strip out your diffusion indicators for inflation in Europe, there's still definitely a focus on energy and that's a big

driver of inflation. But US is starting to see um expectations around longer term projections of inflation starting to rise potentially uncomfortable levels. So I think there's a component here that what the fence trying to do is really they've got a little bit too far behind the curve. They're trying to get aggressively in front of the curve, but

they're also wary that growth is also slowing. So they have a moment in time here where they can hike, and they can hike aggressively because they actually might be hiking into what is very slowly slow down in the economy next year. So I think they're definitely just trying to get ahead of things and anchor longer term inflation expect Here, you're gonna revisit Swiss franc Here you're a swissy and one oh four eight seven five and one oh five print would be weaker Swiss franc We're not

there yet. You've been doing this for years. Mark watching Swiss National Bank. We're talking about balance sheet dynamics in America. They own a truckload of Apples, Starbucks and other selected equity shares. What is their vulnerability is they make a potload of money and in Apple's shares. I just don't understand that. Well. It's quite interesting too because it goes around with the global growth momentum stories. So if you think about kind of a big driver this moving markets around,

you know what's underperforming? US equities are underperforming because they are highly leveraged to growth. Growth is highly levered to real rates, and so not not only are U S real rates rising now, but global real rates a rising.

So the concern from that trade is that they're going to be owning underperforming sets um And I think what's what's a very interesting is that when we think about the growth to growth to value rotation, which I think is going to occur in equities, but the sequencing is too quick to trade it now because ultimately we need higher real rates, which means we need fed terminal priceing to go up. But the concern for that moment for Swiss franc is Euro offers a tremendous amount more value

than the Swiss Frank. And then if you kind of again think about the performance of the balance sheet or having exposures to those equity markets, those are the gonna be the equity markets that are underperforming probably over the next six months, over the next twelve months. So this is where Euro Swiss is gonna be very interesting. Is that Swissy was allowed to kind of again control inflation a little bit more than anticipating you didn't need that

from the Euro. You also got again the balance she's kind of leveraged these global growth stocks or there are leverage real rates, But the value in the equity store is really in the Euro, not in Swiss frank. As we move forward, and Mark, I'm going to ask you a question and if you don't want to answer it, you can just pretend you can't hear me, guy, and in Canada right now. Yeah, So in March, the central Bank is going to rate and that's exactly what I's got.

Mort Away, thank you, Mott, m Security, thank you very much. Na marcsca joins now chief Financial A constant Jeffreys Ania. The inflation reports plural that we've seen signify more sustained inflation. Do you need to take a terminal rate year end or end of first quarter two thousand twenty three and bring it up. I would say, you know, we should

certainly be pricing more hikes um into the curve. The question is should be pricing more in the next six months, And I think the answer to that from my perspective is no, because although inflation has you know, persisted a little bit longer than expected, we have some forward looking indicators that's still suggest that within the next few months,

you know, it will peak. And the fact is that we just don't know at this point how much of this will self correct versus how much will ultimately have to be squeezed out by the fact. Well, what are some of those points? Are those points in c p I or are they in PPI? The business inflation index. What are the tea leaves that give you confidence inflation

abbs after the two sets of data we've received. So, look, one of the things that drives inflation is product shortages, and we've clearly seen that kind of build and and intensified through the course of the last year. But those supply demendant balances, at least in the consumer product space, actually peaked around October November December. Imports surged tremendously at

a time where demands sort of plateaued. As a result, we've built some inventories in the retail sector in particular, where inventories are at the highest level they've been since April of twenty twenty. We're also starting to see some signs that inflation expectations on the part of consumers are rolling over. That was the case with the New York survey that came out yesterday. The three year I've had inflation expectations. The climb pretty sharply, also two levels not

seen since April of twenties. So I think that you know, consumers are recognizing the product shortages are not as acute as they were, um say, in September October, and it seems like that's what they're responding to that where does inflation have to come down to make you comfortable to feel like the Fed can hike less than seven times

and still be complacent. I think if we see um the month over month trajectory kind of recre get down two point three type readings, I think that will be enough to sort of stabilize expectations at the front end of the curve. Um, you know, when we're thinking about the longevity or sustainability of this tightening cycle, and it's the curve price for enough in twenty three and twenty four. I think that's more of a question related to the

labor market in the shape of the Phillips curve. And I do think that, you know, those pressures will persist. Right now, it seems to me like the labor market is going to put a floor under inflation at around three percent, just given where we are right now in terms of wages, unit labor calls, so um, you know. So, so I do think that there is a piece of this inflation story that will have to be squeezed out by the FED, and and probably a two percent terminal

rate is not enough to do that. But I just I just don't necessarily think that we need to be pricing any more than seven hike into and at what terminal rate is possible to keep the economy from tanking? In other words, how much can the Fed hike before it curtails any kind of recovery and goes in the

opposite direction. I think it really has to do with that kind of speed and how they distribute those hikes, right, because if they get to the neutral rate of two fifty in one year, uh, that's gonna knock off a lot of you know, from growth next year and could put actually took us into the recession um if they had seven times this year, which is our base base and from which is what's priced into the curve, that's gonna take off just under one percent from growth momentum

in twenty three um, which is obviously a sizeable drug, but not enough to put us in a recession um. So it really depends on how quickly we get to that neutral rate. Does someone want the meeting room at Jeff Ferrance is not what the banking is. Apparently there's construction going on above this. We go Aneta will let you go. Thank you so much for being with us, Anna marksca of Jefferies. We appreciate it. 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 In. This is Bloomer